Commodity prices make agriculture sparkle to investors
Since the 1970s, private equity as an asset class has grown dramatically, and with commodity prices soaring, agriculture has caught the interest of these investors. Private equity firms, in general, create investment funds and then open them to select investors—institutions, pension funds and wealthy individuals.
These funds typically have defined lives, five to seven years, and specific goals. For instance, a fund may be opened with the intent of investing in medium-sized manufacturing plants—ag manufacturers such as food, fertilizer and equipment firms—between $100 million and $500 million in the Midwest.
The private equity firm would then buy companies for the fund based on those parameters with the intent of growing the companies to sell for a profit later and returning the earnings to those who initially invested in the fund.
Private equity’s investments in agriculture are being made on a global scale. Factors driving interest in agriculture include surging commodity prices; speculation that food demand thus prices will remain high for the medium-term; sustained or growing demand for biofuels backed by government subsidies; and projections like the one from the United Nations’ Food and Agriculture Organization that 70% more food production will be needed to feed a projected global population of 9.1 billion people by 2050.
Opportunity Abounds. "Agriculture is a sustaining industry. Cable television can come and go, but we all need to eat," says Bill Goodbar, managing director of AgriCapital Corporation, a New York-based investment bank founded in 1983 that works solely with agribusiness. Goodbar estimates that between 10% and 20% of the entities AgriCapital deals with are private equity firms, and their share of its client base is growing.
"Private equity’s interest in U.S. agribusiness will only get stronger," Goodbar says. "Healthy commodity prices are here to stay because Asia can’t feed itself. Asian nations will get a lot of commodity products from South America, but they will also get a lot from the United States and Canada."
Some areas of agriculture offer more allure to investors than others. "Crop insurance is a great sector for private equity," Goodbar says. Other prime opportunities include crop improvement and biotechnology, fertilizers, infrastructure, irrigation technologies and machinery.
Private equity firm October Capital, Kansas City, is the largest investor in Kansas City–based MachineryLink. October Capital has invested in the company since it was founded in 2000. Based on a fractional ownership model, MachineryLink operates a fleet of more than 300 combines that it leases to growers in 28 states and three Canadian provinces as an alternative to ownership.
"Machinery is the single largest non-land expense a farmer faces, and a combine is the least utilized piece of farm machinery," says Jeff Elliott, chief financial officer of MachineryLink. "The support we received from private equity has allowed us to grow the business and solve this problem for the grower."
Investments in agriculture typically have a longer time horizon than most private equity investments, Elliott says. He expects the patience of the company’s investors to be rewarded in the next few years.
Land, particularly foreign land, is a trickier investment for private equity firms due to anti-corporate farming laws. Some of the large private equity funds, however, are buying land overseas, particularly in Brazil and Argentina. "You have to know what you are doing," Goodbar says. "There is a lot of interest in U.S. land, but it’s hard to pencil out—it’s hard to get big returns."
One U.S.-based fund, Chess Ag Full Harvest Partners, has been very successful investing in undervalued farmland. "Farmland pencils out if you aren’t expecting too much," says Shonda Warner, the firm’s founder. Her funds have realized returns from current yield and capital appreciation in the high single digits to low double digits. Warner’s unique background has played a big role in her success. A former grain trader for Cargill, she has also worked as a derivatives trader for investment banks Bear Stearns and Goldman Sachs.
"We buy farmland in areas we find with particular value in the United States and then we lease the land, sometimes for cash and sometimes for bushels," says Warner, who launched the firm’s first private equity fund in 2007. That fund closed to new investors in 2008. She launched the firm’s second fund this past summer.
Between both funds, Chess Ag Full Harvest Partners manages 45,000 acres of farmland throughout the U.S. that it leases to roughly 20 farmers who produce a variety of crops, including corn, soybeans, milo, wheat, cotton and rice.
Warner, who grew up on a farm in Nebraska, expects her buying opportunities to grow in the next decade. She recalls her father—like many farmers across the country during the 1980s farm crisis—telling her and her siblings that they needed to go to school and prepare for off-farm jobs. "That happened to thousands of [farm] kids in rural America," she says. Soon these "kids," who are now working in any number of non-farm professions and living in the nation’s cities, could inherit the farmland and some will choose to sell it.
Production Agriculture. While the majority of private equity firms are interested in non-production agri-businesses, a few are making investments in agricultural production operations, says Peter Martin, finance consultant with Kennedy and Coe, an accounting and consulting services company based in Salina, Kan. Martin suspects, however, that private equity’s interest in working farms will grow as consolidation continues to increase the average farm size.
"You get to a certain size and your farm becomes sustainable whether your family is running it or a private investor is running it," Martin says.
Selling to a private equity firm can benefit farmers. "They get to recapitalize their farm, take money out and diversify their assets," Martin says. "There are a lot of multimillionaire farmers who have little cash."
It also brings in a new level of management, as well as resources and, hopefully, business and management expertise. "But the flip side is the farm is no longer a family-run business," Martin says. "Things will change that will impact how the operation is run." A retiring farmer might be able to cash out by selling 100% of the farm to a private equity firm.
The more vertically integrated a production operation is, the more attractive it becomes to outside investors. Charlesbank Capital Partners, a private equity firm with offices in Boston and New York, has made several investments in agriculture, including one in production agriculture. Charlesbank owns a controlling interest in Aurora Organic Dairy, in Boulder, Colo., which operates five large organic dairies in Colorado and Texas as well as a fluid milk-processing plant adjacent to one of its Colorado dairies. "In 2003, we provided equity to fund Aurora’s organic dairy business and the construction of its milk-processing plant," says Charlesbank’s website.
Charlesbank’s other ag investments include GSI, a farm equipment company in Assumption, Ill., which it recently sold, and Texas-based Animal Health International, a veterinary pharmaceutical company serving both the livestock and pet industries.
If and when private equity investments in agriculture become more common, several impacts from the influx of capital could take shape. "In the U.S., there is lots of land that hasn’t been developed to its best potential," Warner says.
The added capital could help improve yields and increase efforts in research and development. For instance, Warner would like to see someone develop a solar pump for irrigation equipment. "That takes money," she says. "Outside investment can provide some of the needed capital for projects like that. "That’s exciting."
Substantial private equity investments would also likely result in an intensification of mechanization and escalation in the trend toward larger-scale, more vertically integrated operations.
Where Funds Want to Farm
Based on his experience investing in farmland with TIAA-CREF, Director of Global Private Markets Biff Ourso makes the following observations about fund intentions:
- In the areas where farms are larger and ownership more aggregated (such as the West, Delta and Southeast), the percentage of sales to non-farm investors is higher, perhaps as much as 10% or more.
- In areas where farms are smaller and ownership more fragmented (such as the Midwest and Northeast), the percentage of sales to non-farm investors is very low, perhaps as low as 1% to 5%.
- "If by ‘non-farm’ investor, you mean only institutions, the figures would probably be even smaller," Ourso says. "We prefer to source transactions through our local market contacts as opposed to participating in auctions." In the areas of the country where sales are larger and ownership more aggregated, processors and other end users (particularly for permanent crops) are generally in the "buyer" market, so it’s not just institutional investors, Ourso adds. —Jeanne Bernick
- Spring 2011