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Funds Enter Farmland

July 28, 2010


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The air fairly vibrated with energy and optimism at the Global AgInvesting conference this past May as 400 farmland investors and managers met to enthuse about their new asset class, discuss where the best deals can be found and trade business cards. The suits in the ballroom of New York City’s Roosevelt Hotel—built in another gung-ho era, the Roaring Twenties—represented $4 trillion and 20 million acres under management worldwide.

Strong fundamentals are the engine behind the interest in farmland, according to Hunt Stookey of HighQuest Partners, co-sponsor of the event with Soyatech. Income is driving growing demand for protein and the feed to produce it, while biofuels play an increasing role as well.

An additional 120 million to 200 million acres of net new land are needed to meet future demand, Stookey says. That’s 50% to 80% of the land planted to the eight major crops in the U.S. this year.

If anything, the global economic crisis has fueled new interest in farmland. "Many traditional asset classes have shown a new level of vulnerability that has caused some investors to look for new ways to grow and preserve wealth," notes Josh Waddell of Martin, Goodrich & Waddell, based in Sycamore, Ill.

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Agricultural farmland is unique among asset classes in that it has demonstrated great resilience in the face of global economic turmoil, Waddell says, while at the same time historically providing a relatively high rate of return (in many cases, 4% to 6%), as well as hedging against inflation.

"The traditional farmland investors, who have long-term goals and who may have been in the market for decades, are still active today," Waddell adds. "However, as the crisis has worsened, we’ve seen a steady increase in ‘first-time’ investors entering the land market, and we have seen steady activity from foreign investors as well."

Historic Returns with Land. Returns to investment in agricultural land generally average 8% for passive leases to 12% when operating the land, including yearly return and appreciation, according to Jose Minaya, who runs the direct private equity program in agricultural investments for TIAA-CREF, which manages pension funds for teachers, health care professionals and others. "They usually also are very stable," Minaya says.

Farmland returns have a standard deviation of about 10% per year, whereas stocks are in the 20% to 25% range, adds Jeff Conrad of the Hancock Agricultural Investment Group, which has $1.3 billion in farmland under management and is on the way to 200,000 acres, mainly in the U.S. in permanent crops (see graph). "Yet farmland’s annual returns are comparable to the S&P 500," he says. "Many investors also like the fact that land is tangible."

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Many of the companies represented at the Global AgInvesting conference are seeking an internal rate of return between 25% to 30%. "We attain such levels by bringing technology to operations, improving output," explains Miguel Potocnik, a retired Monsanto Company executive who is now a consultant.

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FEATURED IN: Top Producer - Summer 2010

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