If you are a struggling UK farmer, what do you wish for? A decade ago, it might have been more subsidies. A few years ago, perhaps it was planning permission for a housing estate. Now, it is pretty clear that the farmer's financial dream should be a wind farm.
Get approached by an operator hoping to use your land, and you can find yourself earning a fortune: a token sum while the thing is being put up, and then anything from £10,000 to £20,000-plus a year once the blades are turning. Put that against the average net farm income of around £20,000 in 2006-7 and you see the attraction.
One turbine would be enough to cover most of the financial problems of the average small farmer, five would be enough to get his whole family off to the Maldives for most of the year. The downside might be a falling out with your neighbours, but that might not seem too big a deal from a deckchair in the sun.
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Still, however much the government might dream of it, not everyone is going to get a wind turbine on their land. The rest of the nation's crop farmers will have to hope for rising grain prices.
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They might be in luck. Last year, agricultural commodity prices bubbled and then crashed by around 40% along with everything else. However, that doesn't mean that the sector should now be dismissed. Instead, say analysts at Gluskin Sheff, the Canada-based wealth management company, we should see the sell-off as no more than a "deep correction" in what is surely a long-term secular bull market for the sector.
For evidence, they cite the fact that "in the face of the most severe global recession in 70 years", most commodity prices hit their lows at higher prices than during any past recession. Over the past five recessions, the soyabean price has hit an average bottom of $5.05 a bushel, for example. This time it bottomed at $7.59. Why? Because the story that drove last year's bubble one of shifting supply and demand curves remains valid.
The demand story here is well known. The United Nations expects the global population to increase from 6.6bn to around 9bn in 2050. That means a huge increase in demand for food. The jump in population is expected to come hand-in-hand with a rise in the middle classes in India and China. That means a shift in diet from grains to proteins. And producing protein takes much more land than producing grain.
Producing 1kg of chicken requires 2kg of grain, while producing 1kg of beef requires 7kg of grain. Note that China, once a net exporter of grain, is now one of its largest importers.
Then there is biofuel. The ethanol craze in the US hasn't gone away. President Obama appears to be just as keen as George Bush was on it, something that suggests a certain amount of corn will continue to be diverted from the food market to the energy market. According to the US Department of Agriculture, ethanol production is expected to roughly double by 2020, from 6bn to 12bn gallons.
In fact, forecasts suggest that all agricultural output will need to double by 2050 to meet total demand.
The supply side is trickier to forecast but it is reasonably clear that it isn't going to rise at anywhere near the speed of demand. The rising population doesn't just mean more people eating more meat. It also means a possible fall in the land available for agriculture (all the new people will have to live somewhere) just as we are already losing land to drought, overuse of fertilisers and bad irrigation.
Productivity growth in the agricultural world already appears to have stalled as the much-maligned Malthus said it would.
Grain prices are now well above their lows and, like all assets, they will be vulnerable to a correction this autumn. But, given the fundamentals, this is still a market to be in for the long term.
An agriculture fund worth looking at might be Sarasin AgriSar which holds agriculture-themed investments across the world. A cheaper option is one of ETF Securities' exchange traded commodities (ETCs). I'd be loath to invest in just one grain too volatile so the best is probably the ETFS DJ-AIGCI Agriculture, which tracks seven soft commodities including corn, coffee and soyabeans.
The other option is to buy farmland. This is an expensive task in the UK given the lifestyle premium attached to it. So, if you do buy here, make sure you get somewhere very windy and relatively ugly that should up the odds of getting your hands on a few turbines. Otherwise buy abroad.
This article was first published in the Financial Times
