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Big Pension Fund Investor Wants Mix of Row, Permanent Crops

November 7, 2012
By: Boyce Thompson, Editorial Director google + 
Soybean field

One of the world's largest agricultural land holders takes a different approach to farming

Because it plans on holding it for up 30 years, TIAA-CREF, one of the largest owners of agricultural lands in the world, sometimes approaches farmland differently than the average farmer.

For instance, TIAA-CREF, with $3 billion farmland investments, seeks to put 70% of its assets in row crops and 30% in permanent crops, explains Justin Ourso, agricultural portfolio manager at the Teachers Insurance and Annuity Association, who spoke at the Future Farm Americas conference last week in San Francisco. "It’s a nice way to diversify," he said.

Permanent crops such as wine grapes, nuts, citrus, apples and cranberries take three to seven years to mature. But in the meantime, vines and trees can be depreciated. Moreover, mechanical harvesting of permanent crops removes some labor-supply risk for an institutional investor.

Row crops, on the other hand, produce more stable income over time because planting decisions can be adjusted annually. And it helps that several row crops—corn in the United States, sugarcane in Brazil—can be used to make alternative fuels in addition to feed for livestock.

TIAA-CREF also seeks to obtain the highest and best long-term use of its land assets. Rather than planting whatever crops could make the most money in a year, the fund does a thorough review of soil conditions and topology. It may wind up planting something different than was grown on the farms it buys.

That was the case with a vineyard in California with high water quality the fund bought a few years ago. A portion of the flat land was leased to strawberry growers, since that was determined to be the best use. Avocados were planted on the steep slopes, where they would do better than grapes. A consultant was brought in to help start the crop.

Since it knows going in that it will lease the land to famers, TIAA-CREF may look for land that isn’t "encumbered" with grain storage, sheds and houses. It counts on tenant farmers to have those facilities, particularly in the Midwest.

By leasing farming rights, the pension fund gives up some potential returns, but it also insulates itself from downside risk. "We prefer to get lower risk-adjusted returns," said Ourso.

The fund is willing to take risk on foreign investments, though, given the opportunity to secure high returns. Its portfolio of more than 400 properties, totalling more than 600,000 acres, includes farms in Australia, South America, and Eastern Europe, in addition to the United States.

That includes more than 130 farms in Brazil, where TIAA-CREF looks closely for opportunities where new roads might open up agricultural land. As Brazil’s infrastructure improves, "spreads will close between prices off the farm in Brazil and the prices at the Chicago Board of Trade," said Ourso.

The fund continues to find ripe opportunities in Australia, which hasn’t seen the run-up in farm prices that have occurred in other countries. But there’s added risk to an investment in Australian farm land--water rights trade separately from land. "You need to figure out what your risk profile is."

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