Use Wall Street’s Money

September 3, 2014 08:25 PM
 
Use Wall Street’s Money

Why investor capital might be good for farm business 

Mark Twain might have unintentionally summed up the future of farmland ownership in his story, "The Prince and the Pauper." The plot is familiar: Two people from different backgrounds trade jobs, walk in the other’s shoes and return home smarter.  

Five years ago, farmers and Wall Street executives started doing the same thing. Instead of achieving mere understanding, though, relationships farmers and business executives form create returns for both parties—with potential for higher profits in light of lower crop prices.

"We’re still getting about a phone call every couple of weeks from someone who’s interested in starting a fund to invest in ag ground," says Peter Martin of Kennedy & Coe, among the nation’s largest accounting and consulting firms. 

Nearly two years ago, Westchester Group founder Murray Wise "speculated that as much as $10 billion in institutional capital is searching for a home in U.S. agricultural land," wrote Michael Fritz of the Farmland Intelligencer Blog. Westchester Group manages farm assets and is majority-owned by TIAA-CREF, a retirement fund manager.

Now, the time has come for top producers to think seriously about farmland investments, experts say. Many farms are on the verge of transitioning to the next generation. Others want to expand. Both can benefit from the strong suits of institutional investors: deep business knowledge of multiple industries, capital to sustain growing operations, and a commitment to furthering sound agronomic practices in addition to environmental stewardship. 

Worries On Both Sides. For years, investors avoided farmland investments because they didn’t understand the opportunities. The stock market crash of 2008, soaring corn prices and declining interest rates helped change their mind. 

Fear is a natural reaction to the unknown. For Shonda Warner, a corn and soybean farmer who founded agricultural investment company Chess Ag Full Harvest Partners, that emotion is among the greatest challenges she faces.

"People see someone from outside their community come into town, and the hair automatically stands up on their arms," Warner explains. "I think that response has to change. Rural America, more than any place else, is resistant to change. People need to begin to judge each other by who they are, what they’ve done and the strength of their character."

Understandably, many producers would cringe at a Wall Street executive marching onto a farm and dictating how corn is planted or when fertilizer should be applied. But professionals such as Warner say that mental picture doesn’t reflect reality. "We are happy to offer exchange knowledge with our tenants if they are interested, but I would never tell a farmer how to farm," Warner says. 

In addition to farmers, policy groups have expressed their concerns with institutional investors. In a 2013 report, the independent policy think tank Oakland Institute expressed concern that "absentee investor-owners" might buy farmland with ulterior motives, such as using hydraulic fracturing (more commonly known as fracking) to extract oil and gas.

"‘Institutional investors’—including hedge funds, private equity, pension funds and university endowments—have trained their sights on America’s agricultural infrastructure," writes author Lukas Ross. "If they succeed in consolidating control over our land and infrastructure, this new class of land barons could imperil our nation’s food supply."

Inside an Investment. The first thing producers must know about a farmland investment is the way in which it operates. Warner acknowledges there are as many bad apples on Wall Street as there are on farms. She says her company is focused on building close relationships with farmers to create a long-term and mutually profitable business for both groups of people.
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"Farmers are the most important people in this relationship," Warner explains. "Without them, the business doesn’t run and nobody wins. We provide financing and hopefully can add additional value in our knowledge of financial products and hedging tools." 

Investor clients include the Texas Teachers Retirement System, corporate pension plans and institutions.

"It’s a bond with upside," says Warner, who runs her family’s farm in Nebraska. "You clip a coupon, you clip a coupon, you clip a coupon. Every once in a while, you get a big payday. Every once in a while, your bond might default for a year or two. If you don’t overleverage yourself, it’s going to be there. It’s not sexy. You’re just going to plod along, doing something very basic. I like that." 

In the case of Chess Ag, funds are locked in for seven years. The company works closely with farmers to craft creative leases. Agriculture is a difficult business, and it doesn’t make financial sense for investors to flip a piece of land for a 5% commission very often. 

As a result, investors in Chess Ag portfolios earn modest annual returns from crop sales similar to a coupon from a bond during the lifetime of the investment. They also earn capital appreciation on the investment when they sell it later.

Not every state allows farms to participate in investment programs. Iowa, Kansas and the Dakotas are among states with corporate farming laws that make it difficult for any corporation to buy agricultural land.

"They don’t want to have big corporations controlling all the farm ground," explains Martin, with Kennedy & Coe. 

The portfolios in Warner’s company include farms in eight states. Although she grew up in the Corn Belt, most of the farms are outside of the region.

"My feeling is that future productivity gains will come more from better technology in more peripheral areas," she says.

Other investment companies are also diversified over multiple states. Farmland Partners Inc., for example, reports a portfolio spanning 23,000 acres across Illinois, Nebraska and Colorado. In June, the company announced plans to acquire a 1,250-acre row crop farm in Arkansas.

Familiar Territory. For Warner, farming and investing are a way of life. She has experienced both industries—as a farmer in her youth, a grain trader at Cargill and as a manager of several financial proprietary trading businesses at Goldman Sachs. Her approach suggests the future holds promise for investor-farmer partnerships that are forged properly from the start.

Although farmers might be hesitant to learn more, adds Martin, doing so could help them prepare to expand in the future. 

"My message to our clients is one about education," he explains. "Here are the different types of investors that are involved. If it interests you, at least take steps to allow it down the road. I’m not saying you should jump in right away, but I think you ought to avail yourself of the opportunity."

Kickstart a Dialogue With Wall Street 

Farmers shouldn’t just accept the first deal from an investment company. Ask these questions before signing on the dotted line.
  • What is your experience with agriculture? Use this to gauge the level of research an investor has conducted on your farm and its management.
  • What would a deal mean for my family? Choosing to pursue an investment relationship might mean an operation can’t afford to hire a child after graduation if his or her role isn’t spelled out in a contract, says Peter Martin, Kennedy & Coe. Weigh options and consider what is best for everyone.
  • What kinds of financial statements do you require? In general, institutional investors require high-quality business information in order to meet reporting requirements of the Securities and Exchange Commission. Failure to keep detailed records exposes investors to significant risk.
  • What types of organizational documents do you need? Investors prefer to work with companies that have well-designed organizational charts, details about the board of directors, employee manuals and more. "They’re companies that have taken the steps to really organize themselves and get very professional along the way," Martin notes.
  • What would you do in this situation? Farmers should ask hard questions, advises Shonda Warner, Chess Ag Full Harvest Partners. "They should think up scenarios they’ve experienced in their real life and say, ‘Hey, what would you do if this happened? What would you do if that happened?’ When someone prevaricates, or they don’t like the answer, they should walk away." 

 

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