The Key To Maximum Farmland Value: Connecting To Markets

One of the key factors in any farmland venture is sales. No matter how good your production might be, if there isn't a profitable market for your farm's products, you're going to go nowhere fast.

But finding these sales channels can often be a major expenditure and time sink for farmers. Farming is hard enough as it is, and if farmers have to bounce around looking for a place to sell their goods, it becomes all the more difficult.

That's where offtake agreements come into play. Common across the agricultural space, offtake agreements bring in crucial consistency and predictability, allowing farmers to focus on what they do best - farming. But what is an offtake agreement exactly, and how does it add value to farmland?

The Offtake Agreement

An offtake contract is an agreement between producers and purchasers where the latter commits to buying all future products from the producer once or even before the production company has begun operation. There are many different types of offtake contracts, such as take or pay, take-and-pay, or throughput to name a few, but they all create a mutually beneficial relationship for the grower and the buyer. 

In terms of agriculture, a retail or wholesale company agrees to buy all the food and other products that a farm will produce in the future for a set period of time, creating significant benefits for all parties involved:

For Landowners: Offtake contracts ensure a consistent revenue stream for owners,  and can facilitate lines of credit if they become necessary. 

For Buyers and Consumers: Buyers, and ultimately consumers, receive top quality products at consistent prices. 

Here are the many benefits of offtake agreements:

• Guaranteed market: Whether it’s a startup or an established farm, the market is there even before the food has finished growing. 
• Higher quality products: The farmer can spend more time focusing on growing and less time on marketing
• Predictable income: Every farmer can rely on a stable revenue stream
• Guaranteed minimum profit on investment: Every investor can see exactly how much each piece of land will produce
• Lower investment risk: Since the market channel is already there, investors don’t have to worry about their products not making it to sale. 
• Future capital investments: Offtake agreements are often a decision point for many banks, creating more attractive financing options.
• Long-term: Many offtake contracts can last for decades
• Market and revenue security: If the prices are locked in, buyers are protected if prices drop due to supply-demand or other concerns of the international market

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In essence, investing in land that already has an established market connection is about creating a secure future for everyone involved. Farmers have a secure market for their crops, investors have a secure investment, and buyers have a steady supply of high-quality products.

And on top of offtake securities, there is an added bonus when investing in turn-key operations! But offtake contracts provide one more very important benefit: increased land value. 

The Added Value of Market Connections

There are two widely accepted ways to assess the value of land:

1. Market Value: This is the value of the land as determined by the market price. It is based on comparable properties in similar locales, but it really comes down to what a buyer is willing to pay. 
2. Intrinsic Value: This looks at the land as an asset, and its value is measured as the “fundamental value of an asset based on its underlying characteristics and properties”. In essence, the value of a piece of land is determined by the net value of all future cash flows which that particular property will bring in. 

With an offtake agreement, the value of land goes far above its market value. Not only is the land valuable in and of itself, but it is a consistent source of future income. 

And investing in the land can increase the value even further. It has been documented that non-farmer investors positively influence land prices, especially in situations where they expect a strong return, which is just one more reason why farmland with an offtake agreement is a stable, profitable, and sustainable way to add value.

Farm Offtake Agreements on Foreign Markets

The Global Food Institute proposes that offtake agreements are the way to create a robust and reduced-risk environment for farm owners looking to start out, and this is especially true when connected with foreign markets.

Farmland Value In A Globalized World

In recent years, cross-border costs have been decreasing as the world becomes more connected due to trade and technology. This has a huge positive effect on farmers and landowners as offtake agreements create further stability in the ever globalized world. Establishing a contract with foreign markets at the start enables farm owners and investors to tap into a quickly expanding global marketing opportunity. The U.S. alone has seen export growth rise from $66 billion in 1996 to $196 billion in recent years, and other countries show that improved access to foreign markets are partly responsible for increased farm income.

When establishing an offtake agreement on the global market, exchange rates can have a huge impact on the farm revenue. A healthy offtake agreement with a foreign market at a good exchange rate can mean increased revenue for a farmer.

And as concerns for the environment and global warming continue to mount, it is suggested that long term offtake agreements are essential for farm owners and operators to transition to net-zero and regenerative agriculture goals. Offtake agreements also have the potential to bring relief and food security to farmers all over the world who are struggling. In early 2023, Kenyan livestock farmers have been devastated by severe drought to the point that their animals are dying of starvation, not only causing financial crisis but fear for malnourished children. Offtake agreements, where sick and starving livestock are bought by the government, has become a lifeline for many in the area.