Funds Aggressively Scooping Up Farm Land
Jan 31, 2011
Hedge Funds, Pension Funds and Investment Bankers seem content on swapping out their Jaguars for John Deeres. I was talking with a good client of our's the other day who is not only a large producer, but also active in the Agricultural Banking sector about the continued interest from the "funds" in farmland...and you thought you only had to deal with them in the markets. From what I have been told, the "funds" have been aggressively buying farm land not only globally, but in big chunks right here in the US as they continue to bet on rising food prices. It is now believed that over 50% of all farmland is owned by individuals who do not farm any ground. Most investors and fund managers believe it offers them a terrific inflationary hedge and a very stable income. If you believe past performance is an indication of future results then they are definitely on to something. A look inside the numbers will show you that the returns to direct investments in farmland have exceeded stock and bond returns over the last 5, 10 and 15 years. Investors are seeing cash returns of between 3-5% each year. It’s certainly enough to allow the "big-boys" to sleep easy, especially if you factor in the overall appreciation in the land values. Land values for years had grown in the mid-single digits, but now the percentages have advanced into the double digits, depending on land quality. There are a few surveys out there that show Illinois farm land in many parts has grown by more than 10% in just the past six months alone. On top of that, the consistent returns have been much less volatile than investments in other areas. The question though is with prices significantly escalating will the volatility continue to remain low. If you figure the funds are looking for at least a 5% annual return to make the investment work meaning commodity prices are going to need to continue pushing higher. If the prices set-back and the farmers can no longer afford the high "cash-rents" the funds could be left holding a loosing hand. How long do the stay in the game before they fold their cards and look for the next bubble? I personally think we are aways from it, but with so many investment funds buying up the ground it wouldn't take more than a couple of back-to-back years of lower prices to flush them out. This would put a lot of acres on the market all at once and certainly cause prices to set-back. As long as global demand continues to surge I think prices will justify the rent's. If we start to see supplies consistently increasing it won't be long before the "For Sale" signs start going into the ground in record numbers. I have even spoke with a few investors who feel the risk to reward is starting to swing the wrong direction for some of the prime properties in Iowa and Illinois. Investors are now looking to "dry-land" ground in areas like Western Kansas, Eastern Colorado, the Dakotas, and now even aggressively into Canada. The Canada play is very intriguing to me, especially in areas of Saskatchewan or in other undervalued areas. I am certain I am not telling you anything you don't already know, but Canada has some very high quality farmland land that is still flying under the radar. You can find some very productive ground still in the $500-$600 per acre price range, making it some of the least expensive / most productive farmland in the world. Another reason I like farmland in Canada, over some of the emerging markets in Argentina, Brazil or Russia, is that Canadian farmland is supported by first-class storage, processing, and shipping infrastructure, and to me there just seems like a lot less "political risk". Though I have not invested in it myself, you could consider Agricapita. From what I am told they buy land in western Canada, primarily Saskatchewan, to take advantage of the large price differential which has developed between Sask and its neighboring provinces (up to 300% difference) and western Canada and the rest of the world, due to ownership restrictions that have largely been repealed. If your looking to invest in South American farmland you may want to check out Agrifirma, they supposedly purchase low cost arable, but non-producing land. Then they do the work to bring it in to production then either manage or sell the property for a profit. As yet there are no "real estate investment trusts" (REIT's) that I am aware of who deal exclusively with farmland, although I have heard a couple are on the way. Rumors are "Optima Fund Management" has said it wants to build such a REIT over the next three or four years with diverse holdings from Iowa soybeans to California vineyards. There is also some talk circulating that "Gladstone Land Corp." out of Virginia is wanting to start a farmland REIT at some point later this year. It looks like the funds are not only in our markets, but will soon be our neighbors as well.
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