This publication questioned Mark McLornan, head of agriculture at Valiance Asset Management, about the investment area of farmland.

Editor’s note: Here is an interview with Valiance, a London-based investment house that focuses on “real assets” such as agriculture, very much part of a trend as people have sought a refuge from more conventional assets in recent years. This publication questioned Mark McLornan, head of agriculture at Valiance Asset Management, about the investment area of farmland.

What does Valiance do? How old is the firm and who set it up?

Valiance is a London-based asset manager which was set up in 2008 by Jan Pensaert to focus on the real asset sector. Assets under management are $300 million.

What sort of clients is Valiance targeting?

Valiance clients include institutional investors, leading family offices and high net worth individuals.

What are your views on the farmland and investment sector? What are the different ways and structures through which a high net worth investor can own farmland (direct ownership, companies, funds, etc)?

Farmland has been one of the best, if not the best, asset class for the past 10 years. This has been driven by a structural change in 2000, when essentially the global demand for food exceeded supply. (Between 2000 and 2012, the global population increased by 1 billion, three times the US population.) We do not expect this imbalance to be resolved for at least another 10 years as supply side increases will be very slow to achieve, after decades of under-investment.

Investors can directly buy farmland in the UK, or buy a listed equity. However, with farmland prices in Brazil currently 20 per cent of farmland in the UK, and able to produce two crops a year, we decided to partner with the industry leader in Brazil, SLC Agricola, which has a $1 billion market capitalisation, to buy farmland with them.

Where can clients of your firm own farms? Is it just in the UK, or overseas, and if so, where?

We have chosen to focus on Brazil, where investors can get a 22 per cent annual return through farmland development. This is significantly higher than the UK or Europe.

In the UK, for example, there are specific tax reliefs in owning a working farm (as opposed to a hobby farm). Remind me of the main benefits. Also, are there similar reliefs on farm ownership in other countries?

In the UK farmland is exempt from inheritance tax. There are also agricultural subsidies; however, one has to question these in the near future with the current government debt problems.

Looking ahead to next year, how do you see the farmland and investment market shaping up both on the plus and minus side?

We continue to believe that farmland, if selected and managed correctly, will significantly outperform most other asset classes. One has to expect a continuation of the under-performance in the Western industrial, commercial and retail sectors as debt reduction forces further austerity. It would be quite possible to have record high food prices and a global recession. Farmland offers diversification and is a real asset which will protect wealth from inflation.

Commodity markets are obviously very important as a driver of farmland economics, both on the revenue and cost side (tractors, fuel, etc.). What is your commodity outlook?

Precise timing in agricultural commodities is difficult as the weather plays such a large factor. However, what we do know is that the global stocks of grains have collapsed since 2000 and since this point the prices have increased on average 14 per cent to 15 per cent per annum. We expect this trend to continue.  If any of the major grain producing regions have a drought in 2013, prices could easily double from here.

Given the benefits in some ways of owning farmland, what part should it play in a portfolio? What are its risk-reward characteristics?

Studies have shown that farmland has a very low correlation to most other asset classes, and returns since 2000 back this up - as such, farmland provides diversification. In addition, it is a real asset that will protect against inflation and thus preserve wealth.

Do you see any trend in the pattern of farm investment in your area and what do you expect in the next year or so?

Over the past few years more investors have begun to understand the benefits of farmland; however actual investment has been slow. We expect this to change in 2013 as more capital is allocated to the sector.