Skip to main content
PGIM LogoPGIM Logo
    • Megatrends
    • Annual Best Ideas
    • Quarterly Market Outlooks
    • Market Events
    • Thought Leadership
    • Events & Webinars
    • ESG Investing
    • Investing in Alternatives
    • Reaching for Yield
    • Clients We Serve
    • Defined Contribution
    • Institutional Relationships
    • Advisory Solutions
    • Global Locations
    • Contact Us
    • Overview
    • Leadership
    • History
    • Inclusion & Diversity
    • Global Locations
    • Jennison Associates
    • PGIM Fixed Income
    • PGIM Private Capital
    • PGIM Real Estate
    • QMA
    • PGIM Investments
    • PGIM Global Partners
    • Contact Us
    • Subscribe
    • Request for Information
    • Careers at PGIM
    • Job Opportunities
    • All News
    • Press Releases
    • In the News
    • Facts & Figures
    • Media Contacts
Investing in agriculture
Blog

Investing in Agriculture – Wedging the Yield GapInvestinginAgriculture–WedgingtheYieldGap

By Dr. Harsh Parikh — Sep 16, 2020

4 mins read

Share
  • Mail
  • LinkedIn
  • Twitter
  • Copy URL

Share

In the recent IAS "Investing in Agriculture" webinar, we discussed many ways to invest in agriculture. In public markets, investors can invest in commodity futures – grains (e.g., corn and wheat) and softs (e.g., coffee and sugar) – and in publicly-traded agribusiness equities (market capitalization of $417 billion, as of Q2 2020).[i] In private markets, investors can invest in farmland, private equity and venture capital asset classes. Today more than $100 billion is invested in private agriculture funds.[ii]

Not surprisingly, the main driver of returns in agriculture are commodity price returns. Investors can access these returns directly by investing in commodities futures markets. Historically, investing in the grains sector has returned 2.2%/year but experienced a greater volatility than equities (20.1% vs. 14.4%).[iii] While commodity futures give investors exposure to grains and softs commodities, they do not offer the opportunity for exposure to many permanent crops (e.g., pistachios and almonds). 

The second driver of agriculture returns is farmland real estate value appreciation, which has been 4.6%/year from 1980 to 2018.[iv] Investors looking for exposure to the real estate value component of return may purchase a row crop (e.g., corn and wheat) farmland and lease it to a farmer for two to three years at a fixed cash rent. While such an investment has limited exposure to commodity prices over the short term, rents will fluctuate with the broader commodity cycle over time. In addition, the investor has exposure to rental delinquency.

The third driver of returns is total factor productivity in agriculture, which historically has been 1.4%/year.[v] Total farm output has increased 1.5%/year and in contrast, inputs have increased by only 0.1%/year, mainly due to reduced labor demand (-0.5%/year) and innovations in farming production which have limited the growth in intermediate good inputs (0.6%/year). While yields have grown over time, the growth trend is too low to double crop yields by 2050 to meet future demand from population growth. Today, food security is a major concern and total factor productivity needs to increase to 1.75%/year to meet future needs.[vi]

Active farmland management – adopting sustainable farming practices such as precision and regenerative agriculture and other innovative technology – is needed to increase total factor productivity.[vii] This is especially important for owner-operated permanent crops as their yields are more variable and a greater share of their returns is from operating income.

An example for decreasing the yield gap (the difference between current and potential yield) is the use of sensor technology for:

  • Pest management – to detect and disrupt female pheromones
  • Frost protection – to turn on wind machines and overhead sprinklers
  • Irrigation – to monitor moisture in the soil

Investing in public or private agribusiness equities (i.e., companies involved in food production, processing, distribution and technology) may provide investors with access to agriculture across the entire food supply chain and to the potential rewards from productivity improvements. 

Given all the various ways to invest in agriculture, how might institutional investors approach this asset class? A correlation analysis (using 1-year returns) for grains and softs commodities, row and permanent crops, and agriculture equities suggest a significant diversification benefit (average pairwise correlation = 0.14, January 1992 – March 2020) by investing across the various asset classes and sectors within agriculture.[viii]

Previously, we have discussed how farmland can be included in real assets strategies meant for diversification, inflation protection or stagnation protection. For institutional investors with a well-diversified portfolio of stocks, bonds and alternatives, allocating to agriculture may help improve outcomes in scenarios of concern such as low economic growth or high inflation. See "The Diversity of Real Assets: Portfolio Construction for Institutional Investors."

Learn More
IAS Real Assets Research Program
Real assets can play a vital role in institutional portfolios.

Learn More

  • By Dr. Harsh ParikhPrincipal, Institutional Advisory & Solutions, PGIM

You may also like

Opportunities in Sustainable Farming Practices
Blog

Opportunities in Sustainable Farming Practices

By Dr. Harsh Parikh — Aug 3, 2020

PGIM IAS uses the example of alfalfa to show how farmland, can provide an answer to reducing greenhouse gas emissions.

Customize Benchmarks to Fit Investors’ Investment Objectives, Not the Other Way Around
Blog

Customize Benchmarks to Fit Investors’ Investment Objectives, Not the Other Way Around

By Dr. Harsh Parikh — Jul 13, 2020

Consumers expect customization, and asset allocators are no exception.

Market Volatility Has Declined – Is There a Case for Investing in Gold?
Blog

Market Volatility Has Declined – Is There a Case for Investing in Gold?

By Dr. Harsh Parikh — Jun 18, 2020

How might gold perform both during and after the dramatic increase in volatility experienced in March 2020?

Sources:

[i] Datastream. For agribusiness stocks, we include fertilizers, food products and agriculture machinery industries. Investors can also invest in Farmland REITs, however this market is very small currently (<$1b). 

[ii] Preqin, 2019

[iii] Performance from 1946 – 2015. A. Levine, Y. H. Ooi, M. Richardson, and C. Sasseville, “Commodities for the Long Run,” Financial Analysts Journal, 74:2, 55-68, 2018.

[iv] USDA Economic Research Service 2018, since 1980 nominal per annum growth rate in value of farm real estate.

[v] USDA 1948 – 2015.

[vi] “Tracking Productivity: The Gap IndexTM”, 2018 Global Agriculture Productivity Report.

[vii] Precision Agriculture includes techniques to efficiently improve crop yield while minimizing inputs. Precision techniques include use of wide array of technologies such as GPS guidance, sensors, drones etc. Regenerative Agriculture includes techniques to regenerate soil organic matter, increasing biodiversity, improving water cycle, etc.

[viii] PGIM IAS, NCREIF, Bloomberg, and Datastream. Agriculture equities are a cap-weighted index combining Datastream fertilizers, machinery – agriculture, and food products indexes.

This material represents the view of the author as of 9/8/2020 and is for informational or educational purposes only.

  • Insights

    • Megatrends

    • Annual Best Ideas

    • Quarterly Market Outlooks

    • Market Events

    • Thought Leadership

    • Events & Webinars

  • Investment Themes

    • ESG Investing

    • Investing in Alternatives

    • Reaching for Yield

  • Clients

    • Clients We Serve

    • Defined Contribution

    • Institutional Relationships

    • Advisory Solutions

  • About

    • Overview

    • Leadership

    • History

    • Inclusion & Diversity

    • Global Locations

    • Contact Us

    • Subscribe

    • Request for Information

  • Careers

    • Careers at PGIM

    • Job Opportunities

  • Newsroom

    • All News

    • Press Releases

    • In the News

    • Facts & Figures

    • Media Contacts

PGIM Logo
  • Terms & Conditions
  • Privacy Center
  • Accessibility Help
  • UK Regulatory Disclosures
  • Cookie Preference Center

Prudential Financial, Inc. and its related entities.

For Professional Investors only. All investments involve risk, including the possible loss of capital.

It is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation in respect of any products or services to any persons who are prohibited from receiving such information under the laws applicable to their place of citizenship, domicile or residence. PGIM, Inc., is the principal asset management business of PFI and is a registered investment advisor with the US Securities and Exchange Commission(SEC). Registration with the SEC does not imply a certain level of skill or training.  PGIM is a trading name of PGIM, Inc and its global subsidiaries.    

In the United Kingdom, information is issued by PGIM Limited with registered office: Grand Buildings, 1-3 Strand, Trafalgar Square, London, WC2N 5HR. PGIM Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) of the United Kingdom (Firm Reference Number 193418). In the European Economic Area (“EEA”), information is issued by PGIM Netherlands B.V. with registered office: Gustav Mahlerlaan 1212, 1081 LA  Amsterdam, The Netherlands. PGIM Netherlands B.V. is, authorised by the Autoriteit Financiële Markten (“AFM”) in the Netherlands (Registration number 15003620) and operating on the basis of a European passport. In certain EEA countries, information is, where permitted, presented by PGIM Limited in reliance of provisions, exemptions or licenses available to PGIM Limited under temporary permission arrangements following the exit of the United Kingdom from the European Union. These materials are issued by PGIM Limited and/or PGIM Netherlands B.V. to persons who are professional clients as defined  under the rules of the FCA and/or to persons who are professional clients as defined in the relevant local implementation of Directive 2014/65/EU (MiFID II).  

In Japan, investment management services are made available by PGIM Japan, Co. Ltd., ("PGIM Japan"), a registered Financial Instruments Business Operator with the Financial Services Agency of Japan. In Hong Kong, information is provided by PGIM (Hong Kong) Limited, a regulated entity with the Securities & Futures Commission in Hong Kong to professional investors as defined in Section 1 of Part 1 of Schedule 1 (paragraph (a) to (i) of the Securities and Futures Ordinance (Cap.571). In Singapore, information is issued by PGIM (Singapore) Pte. Ltd. (“PGIM Singapore”), a Singapore investment manager that is licensed as a capital markets service license holder by the Monetary Authority of Singapore and an exempt financial adviser. These materials are issued by PGIM Singapore for the general information of “institutional investors” pursuant to Section 304 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”) and “accredited investors” and other relevant persons in accordance with the conditions specified in Sections 305 of the SFA. In South Korea, information is issued by PGIM, Inc., which is licensed to provide discretionary investment management services directly to South Korean qualified institutional investors on a cross-border basis.    

Prudential Financial, Inc. of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. PGIM, the PGIM logo and Rock design are service marks of PFI and its related entities, registered in many jurisdictions worldwide.  The information on this website is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. In making the information available on this website, PGIM, Inc. and its affiliates are not acting as your fiduciary.    

©2021 PFI and its related entities.