The consequences of South Africa’s recent ratings downgrades are reported by the executive director of Agri SA, Omri van Zyl, to have an adverse effect on agricultural production in the country and ultimately food security. The lack of rain in the Western Cape and other parts of South Africa will also play a part in adding to the cost of food production - something South Africans have become all too familiar with in recent years.
But it isn’t just South Africa that is wrestling with a food security issue; according to World Bank 2016 estimates, one in nine people across the globe suffer from chronic hunger. Climate change and irresponsible land usage are among many factors that are having a negative effect on food production while the demand for food worldwide is anticipated to rise by a minimum of 20% over the next 15 years, this, as the global population ticks up to unprecedented levels.
Last month, 37 countries (of which 28 are African) were identified as currently facing national food security issues and the problem is only due to intensify going forward.
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Dr. Michael Burry and the water bet
Highly correlated to the food security issue is the underlying concern around clean water reserves and the dwindling rainfall in many regions around the world. You may have heard that over 70% of planet Earth is covered in water, but the problem is that only 2.5% is freshwater, the type humankind needs to survive. Then, consider that only 1% of the entire freshwater resource is easily accessible as 99% is contained in snowfields and stuck in glaciers.
Once you have considered the math, the fact that water usage has grown twice as fast as the world’s population explosion over the last 100 years, the projections become very worrying. By 2025, up to two- thirds of the world’s population could be living in water-stressed areas.
Dr. Michael Burry, famous for betting against the housing market that in 2008 eventually collapsed, has been concentrating for some time now on one commodity... water. However, unlike other commodities like gold, silver, cotton, oil and soy beans, there just isn’t an established market to trade water. Nevertheless, when someone like Dr. Burry, who bet big and won even bigger (to the tune of almost $1 billion) for his clients, on a trade that the banks were laughing at, one would be well-advised to sit up and pay attention.
So then, how could someone possible profit from an investment in water?
Buy the real estate
One option is to invest in agricultural land, specifically, water-rich farmlands. In an interview with NY Magazine in December 2015, Dr. Burry shared his thoughts on a water-themed trade when he said "Transporting water is impractical for both political and physical reasons, so buying up water rights did not make a lot of sense to me... What became clear to me is that food is the way to invest in water. That is, grow food in water-rich areas and transport it for sale in water-poor areas. This is the method for redistributing water that is least contentious, and ultimately it can be profitable, which will ensure that this redistribution is sustainable. A bottle of wine takes over 400 bottles of water to produce - the water embedded in food is what I found interesting."
If you subscribe to his logic, you will the notice that water and the food security issue are intertwined. With the demand for agricultural produce on the rise and the access to water, ever more difficult, it will be the farms that have onsite water access that will fare best and in turn survive/thrive.
Now, most people don’t have the money to buy a property outright, never mind a functioning farm. However, if you have been following my posts over the last three months, you will know by now that an investment in REITs or a fund of REITs is far friendlier on the pocket. Enter Gladstone Land Corp.
Gladstone Land Corp (NASDAQ: LAND)
Gladstone Land is America’s first publicly traded farmland REIT. It rents its farmland to tenants (farmers) and owns 59 farms located in California, Oregon, Arizona, Colorado, Michigan, Nebraska and Florida. As described above, the bit that grabbed my attention was that Gladstone concentrates on acreage with on-site water sources.
As an added bonus, Gladstone is also expanding its organic profile which puts the REIT in a good position to benefit from increased household demand for organically farmed produce. Management expects the organic trend to continue for at least another decade. Gladstone have indicated (in March 2017) that currently over 35% of the REIT’s farmland is either already organic or in the transition of becoming organic.
David Gladstone, founder, president and CEO of Gladstone Land, along with his team, have also been very busy adding more properties to their farmland portfolio.
In 2016, farmland that focused on producing organic potatoes was purchased in Colorado, and earlier this year, the REIT signed its biggest ever deal when Gladstone purchased $54 million worth of organic farmland in Florida. In total, since the REIT listed in 2013, it has acquired more than $350 million worth of agricultural real estate.
David Gladstone has indicated that there is still more cash in the war chest and that they are still looking to add to their already sizeable assets.
Over the last four years, lease renewals have grown in excess of 17%, this while land becomes scarcer and demand for crops increases. The value of the land itself has also shown good growth; where in California for example, irrigated cropland has increased by just shy of 120% over the last 15 years.
While most certainly not the only way to play Dr Michael Burry’s water trade, it is a viable consideration. More information about Gladstone Land Corp. can be found on their website at http://gladstonefarms.com/.
Investment Specialist at Discovery Invest
Mark graduated with a Business Science Degree from the University of Cape Town in 2007. He then joined Sharenet, during which time he also completed his B.Com Honours through UNISA. Mark has helped to build, launch and manage derivative and share trading brokerage businesses. He is also a JSE Registered Securities Trader, and has worked on the trading desk at Sharenet. After seven-and-a-half years at Sharenet Mark then moved to Reitway Global (a specialist Global Listed Property Fund Manager) where his passion for property was further kindled. Mark currently works for Discovery Invest as an Investment Specialist on their Investec Managed fund offering. He has over ten years of experience in the equity and asset management sector and can be reached at: firstname.lastname@example.org
The views and opinions (where expressed) in this article are those of the author and do not necessarily reflect the official policy or position of Discovery Invest.