In a market dazzled by the surge in the gold price it is easy to overlook another nice little earner: farmland.

In a market dazzled by the surge in the gold price, it is easy to overlook another nice little earner: farmland.

There might, however, be a potential regulatory fly in the ointment. On this, more later.

There is nothing original about the insight that farmland can be a smart investment – there has been a spate of news articles about farmland’s attractions lately, although media coverage is not proof of wise investing, of course. It is, however, worth repeating the point that, unlike gold, farmland delivers an income (one can grow food or breed animals on it). As with gold there is a relatively limited supply, at least not without heavy reclamation efforts, such as in the Netherlands of centuries past, or the clearance of the North American prairies or more recent efforts in countries such as Israel. And in a world where money is chasing hard assets, such scarce resources appreciate in value. So farmland's charms are easy to see. And there are more ways to tap this sector beyond the direct route of buying land, donning some overalls and driving a combine harvester.

A number of firms now operate “agri-funds” – portfolios holding shares in food businesses, agriculture supply firms and direct stakes in land. Examples of wealth managers working in this sector include Sarasin & Partners, while there are exchange-traded funds, such as from PowerShares, that track the agriculture sector.

In the UK, for example, farmland values will rise by 37 per cent by 2016, outperforming not just gold but 10-year gilts and residences in London's swankiest neighbourhoods, according to figures from Oxford Economics and Savills (source: Reuters). There are other benefits to owning a farm in the UK, for example. Such farms, so long as they are genuine commercial businesses, gain tax reliefs on levies such as inheritance tax and capital gains. (On the downside, of course, land is a relatively illiquid asset and not portable.) There are other reports of robust farmland price gains seen ahead in countries such as the US.

What is driving some of this price pressure? Besides a desire for hard assets, pressure comes as demand for food is expected to rise over the next few decades. The UN has estimated that the world will need to boost cereals output by 1 billion metric tons by 2050 to feed a population projected at 9 billion people, up from 7 billion today. Several renowned investors, such as Jim Rogers, have been strong bulls on agricultural commodities for years.

JPT Capital

This publication recently caught up with John Paul Thwaytes, founder and chief executive at JPT Capital, a UK-based firm that rolled out the JPT Capital Agrifund in 2011. The fund gives institutional and retail investors exposure to wheat farms and associated land in Western Australia. As of 31 December last year, the fund had made net returns, on an annualised basis, of 12.55 per cent.

“We started the fund partly because I wanted to invest in food, but after some research it seemed to me that the only way I could invest was in commodity derivatives. I wanted to own an underlying asset.  That’s how it started and then we decided, why don’t we widen it out to other investors?” he said.

“You are buying wheat farms in Western Australia and there is nothing more complex to it than that,” he said.

The fund is regulated in Mauritius by the Financial Services Commission and listed on the Mauritius Stock Exchange. It has an open-ended structure. The minimum investment sum required from investors is £2,000 (about $3,100); investments can be held in various tax advantaged wrappers such as ISAs and a SIPP (Self Invested Personal Pension), for example. (Examples of the latter are structures, among others, provided by Irish Life, Suffolk Life and Canada Life.)

“We have had a few English farmers that have invested in this fund. This is pleasing as they can understand what we are trying to achieve,” he said.

The fund gains exposure through a number of routes: direct ownership of farms; shares in earnings from farmers, and leaseholds. This reduces risk. The fund doesn’t seek to juice returns via the commodities derivative market, other than for basic hedging, Thwaytes said. “We want to keep this fund as straightforward as possible.”

Thwaytes has extensive experience in building and managing global financial trading firms. In 1994 he co-founded ODL Securities, one of the largest independent market makers in foreign exchange, derivatives, fixed income products and capital markets with offices in London, New York, Chicago, Tokyo and Monaco. As Chairman and President-Director General of ODL Securities he was principally responsible for the firm’s strategic development, new business ventures and regulatory compliance.  Previous to that, Thwaytes served as chief trader at Mees Pierson ICL and Baring Securities, and as senior trader at Baily Shatkin. That's quite a resumé.

Excessive regulatory zeal?

There is, however, an issue that bothers Thwaytes, although as yet he is not overly worried. This concerns the fact that his fund might fall foul of the UK regulator’s recently-stated concerns about the marketing of products to retail clients if they are felt not be suitable to clients. The FSA has warned about a variety of products, such as traded life settlement policies, on the grounds that they might not perform as expected. (To view a recent WealthBriefing editorial on this issue, click here.)

As far as Thwaytes is concerned, the potential risk that marketing of agriculture funds might be hit by the FSA “hasn’t come up for us as an issue yet”. He continued: “I don’t think every product should be branded in the same way but rather, products should be looked at on a case-by-case basis,” he said.

“Where I get aggrieved is that, five years ago, they [regulators, policymakers] were suggesting that investing in banks was a low-risk strategy and that, of course, has been blown out of the water,” he said.

With any such investments, so long as potential clients know the risks and perform the due diligence on the managers and associated parties, it would seem folly to spurn what is, after all, one of Man’s most ancient sources of wealth – a farm. As always, however, there can be dangers when a relatively finite resource is boosted by a flood of money to produce a bubble. As the science fiction writer Robert Heinlein and later, Milton Friedman, put it, there's no such thing as a free lunch.