Updated on July 23, 2024
Commodity trading is one of the main ways investors grow their money steadily. Although the definition ‘commodities’ represents many different natural resources, there has been a lot of debate on whether land fits the bill, with many investors asking: is land a commodity?
Land is a fixed resource and has been utilized by human beings to satisfy various needs since the beginning of time. It is one of the world’s high-value assets, and this is especially true owing to the ever-increasing world population. This article explores land as a commodity, the merits associated with investing in it, and how one can get a piece of the pie.
What is a commodity, and how does it relate to land?
Before we dive into the other aspects regarding land as an investible commodity, let’s begin by understanding the definition. A commodity is a raw material manufacturers use to create products people consume. Commodities fall into two major categories: soft commodities, such as coffee, corn, cotton, cattle, beef, and milk, and hard commodities, such as crude oil, natural gas, gold, silver, and palladium.
Commodities trade on stock markets and commodity exchanges, with the forces of demand and supply determining their prices. In the United States, land investments are typically made through investment products like Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs).
Human beings in the developed world purchase land for personal, recreational, and investment purposes both locally and through foreign investment. Due to the relatively high buy-in, land purchases are thought to be the reserve of wealthy people. However, there are still opportunities that make it possible for modest income earners to invest slowly the local market. Here are some examples of land commodification in the local market:
Real-estate property development
This refers to all business processes and activities performed to increase land values. Real-estate property development activities include:
Renovation.
The re-lease of established buildings.
Raw material purchase.
The sale of developed land.
Real-estate investments are typically undertaken under two broad categories: residential property development and commercial property development.
Residential property development: Residential development involves the process of developing land, buildings, or structures purely for residential purposes. These properties could be developed into apartments, semi-detached houses, ancillary residential units, townhouses, and others.
Commercial property development: This encompasses buildings and land developed for commercial purposes. Examples include shopping malls, hotels, industrial facilities, and others. These are typically leased out to third parties at an agreed rental fee.
Row crop land
Row crops are laid out in wide rows during planting to allow for easy tilling and cultivation by agricultural machinery. Examples of row crops include potatoes, dry beans, sunflowers, cotton, and other agrarian commodity crops. Land resources applied for this purpose is usually used for large-scale agricultural production.
Livestock-raising land
Depending on the scale and purpose of agricultural production, a farmer might need huge tracts of land or simply a small farm to raise animals. Farmers who opt for subsistence farming typically own a couple of acres or less of land on which they raise animals strictly for their personal needs and not for sale. On the other hand, commercial farmers invest in huge pieces of land on which they can raise thousands of cattle, pigs, sheep, and other animals. These farmers sell milk, meat, and even hides from their animals.
Timberland
This refers to privately owned forest land typically producing over 20 cubic feet per acre per year of industrial wood crops under natural conditions. Owners of timberland grow forests to supply valuable lumber and even Christmas trees. This is usually done in rural areas.
Mineral extraction land
It is a known fact that certain land has valuable minerals such as gold, diamonds, oil, cobalt, and others that are important inputs for various industries. As a result, governments either undertake to extract the minerals themselves or lease out mining rights to private companies.
Vegetable farmland
This is land used for growing vegetables for human beings to consume. Vegetable farming operations can either be small and subsistence in nature or large-scale and highly mechanized. In either case, the land is usually privately owned or leased by large companies.
Vineyards
A vineyard refers to a plantation of grape-bearing vines primarily grown for winemaking. Although vineyards are mostly known for their wine, they also harvest raisins, table grapes, and non-alcoholic grape juice.
Orchards
This land farmers dedicate towards the planting and harvesting of nut or fruit-producing trees. Although small-scale orchards exist, most orchards worldwide are large-scale commercial farms. Commercial orchards usually specialise in a single variety of fruit and indeed create their entire reputation on the perfect growing and harvesting of that fruit tree.
Recreational land
This refers to land utilised to build or create activities and services of a recreational nature. Examples include theatres, bowling alleys, wildlife reserves, and local parks. Private companies or even local government organisations are usually responsible for reserving land for these types of social amenities.
As seen from the examples above, land is the basic raw material for many activities that create economic value. Consequently, in certain aspects, people treat land as a commodity. However, this belief is still subject to contention because not every landowner uses their property to earn or derive economic value.
The pros and cons of treating land as a commodity
The raging debate about the commodification of land goes beyond economic reasons. For some, the finite nature of land makes it an invaluable resource that should be treated as a human right. For others, it can similarly be argued that the finite nature increases land value, which should be sold to the highest bidder. As we’ll see below, there are pros and cons to treating land as a commodity.
Pros
Developmental considerations
The laws of capitalism dictate that scarcity increases the value of a commodity or service. Therefore, because the land is a finite and fixed resource in an ever-shifting global environment, many consider it as highly valuable. When land is treated as a commodity, it attracts money in the form of investments from people interested in developing it. This is because developing land by constructing buildings, roads, schools, and other infrastructure only increases its value. This is only possible in places where people can buy and sell land like other commodities.
Economic growth
The other advantage associated with treating land as a commodity is that its development has a multiplier effect on the economy. For instance, if a developer invests in a piece of land and constructs commercial properties, this activity dramatically improves the local area by providing locals with jobs and stimulating economic activity. For this reason, large-scale investment in the infrastructure of a city or area is a sign of good things to come.
Capital
The government can benefit greatly from treating land as a commodity, which in turn benefits the country as a whole. Through various property taxes and capital gains taxes levied, the government can earn money necessary to support social welfare programs, healthcare, education, and other services that are important for societal development.
Increase in land value
Although land is a fixed and finite resource, the value of land can be artificially increased by treating it as a commodity. For instance, land in areas with great infrastructure and ever-increasing real-estate developments receives higher value than places without infrastructure.
Promotes efficiency
In the past, when societies were led by monarchies and land ownership was a given, the value placed on land was quite low. During those times, people often left huge pieces of land underdeveloped or only utilised a small portion of the land they owned. All this changed when property laws and taxes were introduced, making it more valuable to utilise the resource fully. Consequently, treating land as a commodity forced people to think of creative and efficient ways to utilise their land for the greatest benefit of themselves and their families.
Cons
Population displacement
When land is treated as a commodity, its ownership goes to the highest bidder regardless of the social cost. This is especially true for natives who find themselves stripped of their land rights. It usually happens if the land is believed to have natural resources such as oil, gold, or diamonds. In addition, land and other property taxes make it challenging for people below a certain income level to hold on to their land.
Gentrification
Gentrification is a process where a poor neighbourhood is systematically transformed to cater to the needs of wealthy people moving in. Consequently, those who cannot afford the new property rates are denied their land rights. They are then forced to vacate their homes in search of more affordable housing elsewhere. This process not only increases the social divide between the wealthy and the poorer people in a community but also leads to the erosion of cultural identity, important community landmarks, and social cohesion.
Environmental degradation
Capitalism advocates for the maximum utilization of every resource in service of the level of demand at whatever cost. Treating land as a commodity means little to no thought is given to the effect certain activities would have on the natural environment. For example, mining negatively affects the natural environment, but it receives little to no attention. In addition, agricultural practices that elevate the pursuit of profits over the health of the land lead to practices that degrade the soil quality.
Inequality in land ownership
In countries where land is a commodity, there is a clear disparity in land ownership between wealthy and poor citizens. In certain instances, one can clearly see affluent neighbourhoods with houses built on huge acres of land. On the other hand, poor communities have people living in small and over-congested homes.
Wealth accumulation
When a country treats land as a commodity, there is a higher likelihood that only the wealthiest individuals will be able to accumulate large amounts of land. On the other hand, economically disadvantaged people will be continually excluded from the distribution of this valuable resource. Consequently, the income inequality gap between the rich and the poor will continue to increase dramatically.
Abuse of rights
When a country treats land as a commodity, tenants often face a constant threat to their land ownership rights by wealthier players in the market. Wealthy individuals and huge companies can lobby for changes in property laws and evictions by aligning themselves with those in power. This leaves little leverage for tenants who might need more financial muscle to fight off these attacks.
The question of whether it should be treated as a commodity or not can be analyzed further by looking at whether it is indeed sustainable. The supporters of capitalism will have us believe that treating land as a commodity will benefit everyone in the long run. However, is this at all sustainable, given the ever-increasing global population and the demands it places on this fixed resource? Let’s dive in further.
Is investing in land sustainable or not?
The sustainability of investments in land is a divisive issue. It is influenced by many factors, such as the uses the land is put to, the location of the land, and the general political and economic conditions. Investing in land is both sustainable and unsustainable, depending on one’s perspective. However, let’s compare the pros and cons of investing in land to settle the issue.
Pros of investing in land
Fixed supply
As you already know, land is a finite resource. Therefore, although developers put it to different uses to increase its utility, it cannot physically increase. This fact plays a vital role in securing land at an ever-increasing value. In other words, there will always be demand for land. This protects its market price from experiencing the level of volatility often seen in other commodities such as gold, oil, and others.
High barrier to entry
Investing in land takes a large sum of money. The high initial investment required to buy and develop land creates an artificial barrier to entry. This eliminates many of the issues that plague other markets, such as high speculation and volatility. It also ensures that only those who have the resources to see an investment through can participate in the market.
The high capital investment needed to develop land also ensures that only long-term projects are undertaken. This cleans out the competitive landscape making it easier to strike deals and spot opportunities.
Autonomy
Land investors in the United States enjoy a flexibility and autonomy that eludes investors in other fields. This gives investors the opportunity to structure deals in a way that suits their resources and timeline. Additionally, unlike other real-estate investments, land investment prices are relatively low because you don’t incur utility bills, mortgages, or repairs.
Tangibility of land
Land is a tangible asset that presents a huge benefit. This is especially when compared to other investments, such as mutual funds, ETFs, and other derivatives in a market economy. This makes investment in land less risky than other investments. Interestingly, there is no better representation of this fact than during times of financial crises when the value of other investments is spiraling out of control.
No risky government legislations
Investments in land do not suffer the same level of government scrutiny and legislation imposed on other financial markets. This makes it easier for investors to focus on planning for and developing their land.
Cons of investing in land
Low liquidity
Land investments are highly illiquid, which forces investors to hold their investments for much longer than they might have intended. Consequently, during times of economic upheaval, investors need help finding a market for their land. This is also true when trading land on stock markets.
High capital investment
The high initial capital investment required to invest in land hinders competition in the market. Many people do not own land simply because they cannot afford the initial buy-in. This not only widens the gap between the wealthy and the poor leads to land accumulation in the hands of the few.
Land sustainability concerns
There are many factors to consider when discussing the sustainability of land in a market economy. However, for each factor decrying the current land usage, there are counter perspectives that answer those concerns.
Environmental impact
The first and arguably most important sustainability concern is the environmental impact of current land usage and consequently land prices. Studies indicate that the current rate of population increase far outpaces our capacity to feed, house, and generally take care of an ever-increasing population. This places immense pressure on the land. Whether for agricultural purposes, housing, or extraction of minerals, scientists insinuate that our way of living is largely unsustainable in the long run.
Those interested in investing in land must be aware of the far-reaching implications of whatever purpose they put the land to. For instance, a real estate developer might opt for more environmentally sustainable real estate designs as their contribution to mitigating the environmental impact.
Economic sustainability
The economic sustainability of land focuses on how various economic policies influence land usage and whether they are sustainable in the long run. Hyper capitalization has rendered some agricultural land barren. Without a fresh approach toward land utilization, it is unlikely that the returns will be the same or higher over the long run. Governments and corporations must consider how their policies and practices affect their ability to generate consistent returns over the long run. Like any other resource, planning land usage is necessary to avoid over usage.
Ethical considerations
Investors must consider a multitude of ethical factors when it comes to land sustainability. They should consider activities like mining, housing estate planning, and agricultural methods from an ethical point of view. The focus must be on the people who stand to lose the most as a result of those activities. These are usually the lowest-income earners in society. Investors must factor in the cost of compensating those who lose their land as a result of the activities the investor has undertaken.
Here are different approaches to investing in land and their benefits.
Investors are always looking for ‘safe investments’ that can help diversify their portfolios while protecting them from market volatility. Consequently, many have turned to land for centuries and reaped big rewards. Here are the different ways you can get enjoy the benefits of investing in land.
Residential and commercial investments
One of the ways to get into land investing is to invest in residential and commercial developments. The main advantage is the fact that there are many different ways in which to structure property deals to match an investor’s capital and time limitations.
Small investors also have the opportunity to participate through Real-estate Investment Trusts (REIT). These companies own or finance income-generating real estate across a wide range of property sectors. For real-estate companies to qualify as REITs, there are a number of requirements they must fulfill. Similar to mutual funds, regular individuals can invest in REITs and receive dividend income based on total returns. However, just like other financial markets, there are risks associated with investing in real estate. You should thoroughly study the market before investing.
Row crop and livestock land
This is the perfect option for people who want to enjoy the pleasure of owning land or those who’d like to try their hand at farming. Farmers use row crop land for row crop farming and livestock land to rear livestock. Both activities can be undertaken at a subsistence level or for commercial purposes. Although this option is a fantastic way to generate a small income, it needs significant capital investment.
As a result, farmers interested in operating large-scale farms take on significant risks, and yet, some would argue that the reward isn’t worth it. Therefore, others advise small investors to avoid large-scale farming operations if they choose to go this route.
However, for large-scale investors with access to agricultural investment options, this can prove to be a highly lucrative venture. Many have established huge farms growing soybeans, cocoa, coffee, and rearing cattle on a massive scale.
Exchange-traded notes
Investors who lack the financial resources to buy farmland can instead invest in exchange-traded notes (ETNs). These specialize in specific traditional farming techniques. For instance, the iPath Bloomberg Agricultural Subindex Total Return ETN (JJA) gives exposure to soft commodities like corn, wheat, soybeans, sugar, cotton, and coffee. Similarly, the iPath Series B Bloomberg Livestock Subindex Total Return ETN (COW) gives investment exposure to cattle and hogs.
However, before investing in any of these ETNs, investors must understand that these products utilise derivative instruments like futures contracts to gain market exposure. Therefore investors must conduct their own due diligence before investing.
Final thoughts
In conclusion, the question of whether land is a commodity is divisive. Therefore, consideration of different perspectives is necessary to arrive at the answer: cultural, economic, and political. There are those who view land as a finite resource and, therefore, a basic human right. On the other hand, some hold the view that land is like any other commodity and should sale to the highest bidder. The article explores all these considerations so that you can make an informed decision before investing in land.
Frequently asked questions
Is investing in land sustainable or not?
The high initial capital investment required to invest in land hinders competition in the market. Many people do not own land simply because they cannot afford the initial buy-in. This not only widens the gap between the wealthy and the poor leads to land accumulation in the hands of the few.
Overall, investing in land is both sustainable and unsustainable, depending on one’s perspective. The pros and cons must be weighed against each other and a decision made.
What are the cons of treating land as a commodity?
Cons: Treating land as a commodity can lead to population displacement, gentrification, environmental degradation, inequality in land ownership, wealth accumulation, and abuse of rights.
What are the pros of treating land as a commodity?
Pros: Treating land as a commodity can lead to developmental considerations, economic growth, capital for governments, increased land value, and promotes efficiency.
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