Who would have thought investment ideas would come from the 1970s television series Green Acres? However, it looks as though Eddie Albert and Eva Gabor may have been well ahead of their time when they left New York’s Park Avenue for greener pastures.
That land is far more complex and valuable than plain dirt was one of the central themes of FC Business Intelligence’s “World Agriculture Investment USA” conference in Chicago on May 9-10, 2011. As CAIA was the educational sponsor, I was able to attend and gain some interesting perspective on this emerging alternative investment topic. FC held a similar conference in London, Singapore in June is next.
Though other related variants were addressed, including sustainability, aquaculture and social impact considerations, most of the discussion and analysis at the conference focused on the different farmland markets by continent/country; how to invest (direct vs. private equity, for example); and how to manage these investments on a pro-active basis from owner-tenant relationships to using satellite intelligence to boost agricultural yield.
Farmland – Noise and Signals. Is the investment a trend or fad?
While it is not a unique asset class, farmland bears consideration as a complementary or substitute holding for timberland, according to the conference presenters. Though commodity derivatives are considered indicative to some degree of farmland pricing, the conference generally agreed that commodity positions are not the same as owning land.
And while available for thousands of years and subject to previous periods of intense interest – such as the Oklahoma Land Rush – what has changed, perhaps, is that farmland is now becoming more available as a widespread investable asset as capital responds to the business opportunity.
The investment case for farmland is driven by an attractive, inherent logic, according to its proponents. Frequent mentions are made of a “paradigm shift”, borrowing yet again from the scientific theory work of Thomas Kuhn.
Indeed, Jeremy Grantham’s April 2011 letter to investors was noted at the Chicago Ag conference, in which he unequivocally states that the startlingly rise in commodity price trends since 2002 is not a fad, but a marked new trend and that it is, “Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever.”
Similarly, the Economist “On Feeding the World” special report from February 2011 was referenced, in which the august publication declares that the era of cheap food is over and the agricultural industry is in crisis.
Many asset managers, analysts, and media observers are reviving and referencing the century-old thesis of Thomas Robert Malthus: “The power of population is indefinitely greater than the power in the earth to produce subsistence for man.”
Henry Wilkes, CEO of InvestAgsavills projected that the world population increase will be 2.7 billion by 2050, a 40% increase over present. Consumption will also increase as wealth spreads. And the supply of food will be finite.
Keeping in mind that the data to back up the following assertions is limited, aged, and not independently verified, farmland performs as follows:
- High risk adjusted returns that are stable and consistent over the long-term. For the time period of 1991-2009, HighQuest Partners data seems to indicate no other investment in the U.S. has been producing a better risk-adjusted return (exceeding 8%) than farmland. Similarly, let land in the U.K. over the past 15 years has performed equally well.
Pittman Farms, which also presented at the conference, stated that it’s obtained 18% – 20% unlevered returns since 1997 on its 10,000 acres of agricultural land in the U.S.
- Low correlation to other asset classes
- An inflation hedge
Institutions and Farmland
The question of an appropriate or recommended portfolio allocation for an institutional investor to consider seemingly varies greatly. At the conference, in response to a question, a 1% allocation was suggested. In later discussions, a private office indicated that as much as 40% of their holdings were in direct farmland at present. So, not much guidance from the conference, which had more sell-side than buy-side participants in apparent attendance.
Certainly, institutions do have allocations to farmland, just not explicitly stated as such. The University of Oregon Foundation, for example, has a 10% allocation to real assets and 24% to private capital. CalPERS has had an IPS customized to agricultural land investment for a number of years now.
Sovereign Wealth Funds have also been active and remain so. Beyond the Chinese, most recently, according to the Financial Times, the SWFs of Saudi Arabia, Singapore (Temasek), and Qatar (Al Gharrafa Investment) have been investing in Latin American farmland and bio-fuels.
According to a 2010 OECD working paper, limited survey of 54 funds, again with an assist from HighQuest Partners, “endowments and wealthy individuals and family offices were cited by respondents as historically being their principal source of funds. There has been a noticeable shift in recent years with hedge funds and large institutions, including endowments and pension funds, entering the asset class by investing in existing funds, in some cases sponsoring their own vehicles to attract funds for the sector, as well as investing in publicly-listed companies active in the sector.”
Passport Capital, identified by Michael Lewis in “The Big Short” as being among the few astute hedge fund investors who anticipated the collapse of the sub-prime mortgage market and profited accordingly, was at the World Agriculture Investment USA conference. This time, instead of being short, Passport Capital gave a long-oriented presentation on farmland.
Accessing Farmland and Valuation
At the present time, there are a limited set of choices for directly investing in farmland without having to acquire large amounts of expertise. On this basis, one of the most prevalent and common choice at present is private equity, with close to 200 funds according to research group Preqin.
The funds and presenters at the Chicago Ag conference invest in big corporate farms and buy farms from individuals. Either approach works, so long as management expertise to obtain top yield from the land is going to be available for the investors to rely upon. In typical private equity fashion, some funds are comfortable in being hands-off and leaving land management to their underlying holdings. Other funds are more pro-active, hiring land management expertise directly to join their firm and run or carefully oversee the farmland to maximize yield.
Certainly one of the premiums for this expertise should be determined by the manager’s ability to choose the best land markets to invest in at a fair or undervalued price. There is certainly some concern that the U.S. market is overvalued, a concern that has been in place for at least the last three years, when Barron’s weighed in.
To help banks foresee possible credit portfolio problems and probably driven by a competitive impulse to appear more publicly cognizant of emerging risks and to secure future congressional funding, the FDIC held a seminar in March of this year on U.S. farmland valuation.
As referenced at the Chicago Ag conference, the FDIC noted that since 2000, U.S. farmland values have roughly doubled in nominal terms and have risen 58 percent after inflation.
However, the FDIC conference speakers did not identify a bubble in U.S. land prices at the present time.
Joseph Glauber, Chief Economist at the USDA, stated at the symposium, “I would think that the increases appear to be generally consistent with the rise in farm income and the low interest rates that we have seen… net income has been quite volatile over the last five years and I think that could lead to some volatility in farmland values if we see some downturn… we’re looking at some rise in interest rates although it looks like a small increase, at least at this point, so I think that’s certainly supportive of some of the increases that we have seen. And then the long-term factors for farming I think remain positive. We have very strong foreign demand, very strong domestic demand. Certainly if you look at the USDA baseline or others, I think we’re still seeing very, very tight markets for a number of years to come and continued very strong growth in world demand.”
Further, placing farmland valuation in a global context might be helpful in gaining secular perspective.
How One Manager Analyzes the Market
Given the complexity and information asymmetry in direct farmland investment, investors are likely going to seek a manager with a well-developed investment strategy. In that regard, one of the more interesting and robust presentations was provided by Detlef Schon, CEO of Aquila Capital Green Assets.
As the below slides from Schon’s extensive presentation indicates, Aquila has “immovable guidelines” and well-defined and comprehensive selection criteria to guide the firm’s capital allocation to farmland investing.
Equally reassuring, the criteria readily admits that management knowledge is the key and Aquila itself may not have the expertise for all sectors in favor during different market cycles.
In sum, for investors with the time to allocate to manager selection and due diligence, farmland is an interesting corollary to timber in a well-diversified institutional portfolio with a multi-year investment horizon.
Access all slides and audio from the Chicago Ag invest conference. To complement the slides and audio, FC Business Intelligence, the conference organizer has produced a case study / opinion-based overview on latest Ag opportunities, strategies and risks, available at $1,295.