BACKGROUND INFORMATION

Acquiring farmland

Acquiring farmland is complex because the market for cultivated land has a very different structure than markets of other asset classes. While for most asset classes central spot markets (and derivatives markets) are available, to provide detailed information about price and quantity, land does not have this market structure and is transferred by the following market channel structures:

1. Land transfer within existing network of owner.
2. Land brokers; often operating locally
3. Public auctions

A large part of land is transferred within the existing network of the landowner. In some cases land is publicly auctioned. Local land brokers (realtors) do play a role when the landowner is unable to find a good offer within his network.
The land market structure in the U.S., Europe and Latin America is not transparent and causes the land market to be relatively illiquid. Price information is not readily available and transaction costs when compared with other asset classes, are relatively high in terms of bid-ask spread and execution costs.

Selection of farmland

The selection of farmland is driven, amongst others, by the objectives of the investor (long-term. vs. short-term; conservative vs. speculative etc.). Farmland has three value drivers:

1. The present value of the cash flows by agricultural production
2. The present value of land developement1
3. The “security asset” property; land as an asset is relatively safe compared to other asset classes (because the supply of land is fixed while demand increases).

Managing Farmland Investments

Managing farmland investments is crucial for long-term performance. The key choice that defines sustainability is between active or passive management? Several options exist, for example:
   - Lease (fixed price lease or crop share lease)
   - Farmland management by farm management company
   - Partial or full ownership of farm operation
The way farmland is managed has significant impact on the return and risk-return behavior of the farmland investment and hence on the total investment portfolio of the investor.

Legal Policy, Tax and Country Information

If you want to learn more about legal policy on farmland investing and/or country and tax information about Centrale Eastern Europe, please contact us