Investments not guaranteed to last long
There’s a new land rush going on in this country and abroad. Institutional investors have settled on agricultural land as a lucrative, relatively safe investment vehicle. But what kinds of returns do they seek and obtain?
A panel of deep-pocketed investors shared their return expectations and results at the recent Farm Futures Conference in San Francisco. While returns on U.S. farmland investments were astounding in 2011, in the 15% range according to one index, it would be a mistake to think they will stay that high.
"This is a 10% to 12% return business in row crop," said Paul Pittman, who used to work on Wall Street and now owns Pittman Farms in Illinois, Nebraska and Colorado. He compared returns on farmland to those on inflation-adjusted bonds. "You need to look at it as 5% to 6% cash flow and 5% to 6% appreciation. You might get 8% in cash flow one year, but it’s not realistic to expect that over the long term."
USDA’s Economic Research Service documented that between 1970 and 2009 agricultural land value grew by an average of 10.25%. During that time, farmland outperformed domestic stocks (6.25% for the S&P 500) and government bonds (7.3% for 10-year Treasuries). Farmland investment stacks up well against the stock market.
Until recently, institutional investors had trouble gaining access to farmland, which tended to be sold in private transactions, with limited reporting and research. TIAA-CREF, a pension fund with a $3 billion agricultural land portfolio, estimates institutions own only about 1% of U.S. farmland.
But in recent years, funds have popped up that provide access for outside investors. Ceres Partners, for instance, oversees a portfolio of 104 farms totaling 25,000 acres in the Midwest. President Perry Vieth said the portfolio has produced a 16% annual return since January 2008, shortly after it formed. The fund looks for undervalued properties that can produce strong cash flow.
"We look for cash-on-cash unlevered return of 6.5% to 7%, and we get that. That’s our buy signal. We try to add value by making improvements. We might buy B-plus land but add irrigation or grow specialty crops to increase the value."
Hancock Agricultural Investment Group is the largest institutional farmland manager in the U.S., with a $1.7 billion portfolio that includes 275,000 acres of prime U.S. farmland; 6,000 in Australia; and 1,000 in Quebec, Canada. It deals mostly with pension funds.
The NCREIF Farmland Index, which tracks 541 properties worth $3.3 billion, shows that income returns have cooled. Farmland in the index is primarily owned by pension funds and high-net-worth individuals. About 80% of the properties are leased to tenant farmers; the rest are operated by institutional owners.
Opportunities Abroad. Some farmland funds have been set up to leverage foreign opportunities. South American Soy, for instance, was established in 2004 to buy farms in Brazil. Owned by farmers and real estate investors, it has produced phenomenal returns.
"The farms we bought in 2004 have gone up five times, and double that with currency valuation," says general manager Phillip Corzine. But lately, due to the difficulty of buying land outright in Brazil, the fund has switched its focus to leasing land, using Brazilian labor and a full equipment line.
Even so, South American Soy has produced a 12% to 14% return for investors for the past three years, compared with the typical 6% or 7% return, Corzine said.