Funds Enter Farmland

July 28, 2010 11:50 AM

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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.

Interest in farmland also is on the rise because, like commodities, it tends to move opposite to investments, such as corporate bonds, T-bills and stocks, Conrad points out.

"Introducing a 10% weighting in farmland to a portfolio of stocks and bonds reduces risk by more than one percentage point and improves income," says Julio Bestani, CEO of Agrifirma, a land developer and operator in Brazil. "Returns will rise with commodity prices, offsetting expected inflation."

Investor Varieties.
The investment vehicles represented by managers interested in farmland come in many varieties. Susan Payne, founder of Emergent Asset Management Ltd., represents the firm’s African AgriLand Fund. It invests only in sub-Saharan Africa, applying modern management techniques to increase crop yields and investment returns. Payne is sensitive to local conditions and customs and aims to improve life in the villages. She tells of one example: The men working one farm were walking miles to come to work, so Emergent bought each a bicycle.

At the other end of the spectrum, TIAA-CREF invests primarily in the U.S., followed by Australia and other English-speaking countries, and is partnering in South America in the interests of diversification.

Some funds, such as TIAA-CREF, buy for the long term, while others flip the land.

Global Land Opportunities. According to one fund manager, within the next 10 years, more than 60% of the global increase in grain production will come from newly opened areas globally.

"South America is clearly the region that is going to supply the production growth needed in the next 20 years," Potocnik says.

Brazil, with its vast tracts of undeveloped agriculture-appropriate land and ample water, is the darling of many in the investment community. Central and South America currently are using only 14% of the land that could be put into agricultural production—and the economic and political situation generally is better than that in sub-Saharan Africa, which is using only 19% of its suitable land. Some 35 million acres of land—about the size of Iowa—has been brought into production in Brazil in the past four years, and 543 million acres of pasture could be converted to crops.

"We specialize in the transformation of land," says Alejandro Elsztain, CEO of Cresud and BrasilAgro, two publicly traded companies. In 2009, the companies farmed nearly 2.5 million acres in Argentina, Bolivia, Brazil and Paraguay and expect to double that acreage in the next few years. "We purchase bare land, clear it for cattle, then transition to cropping," Elsztain explains.

Central Europe has excellent soils and decent weather, but the political and economic situation in some cases don’t allow ownership and in most cases mean high risk. "Ukraine and Russia are cost-competitive with anywhere in the world when the management is right," says Adam Oliver, director of Brown & Co., an agribusiness consulting firm.

Spearhead International, owned by 200 investors, operates 148,000 acres in the United Kingdom, Czech Republic, Poland and Romania. It has been the largest farming company in Poland since 1999. It plans to double its area farmed by 2012, and is considering buying land in Hungary, Ukraine and Serbia.

"In the next 10 years, the Black Sea Region will become—after Brazil—the most significant farming region in the world," says Spear-head’s Tom Green. "Land is not a constraining factor, nor is technology, nor capital. The challenge is our ability to deploy capital and technology in a sustainable way.

"We seek undervalued land and invest in new equipment and training, thereby boosting efficiency," he explains. "Our biggest hurdle is government subsidies that keep inefficient producers in business, making it hard to attain scale." In Romania, for example, the average land lease is five acres.

Africa is the last frontier, Payne says. When people think of Africa, many conjure up images of dry prairies and extreme poverty. However, it is not a physical shortage of water that plagues sub-Saharan Africa. Rather, the limitations are political and economic.

With 58% of arable land currently in use, the U.S. has potential as well. "The U.S. is a mature market; prices are higher and it is harder to source large properties," Minaya says. However, the country offers many advantages, not the least of which is lowest risk of ownership, thanks to stable political and legal structures, adds Gary Taylor, president of Agri Cura, which buys and manages farmland in the U.S.

Farmers Still Buyers. Prominent U.S. agricultural real estate and management companies say that farmers, not investors, still account for the most farmland purchases.

"In the overall farmland market, 75% to 80% is purchased by operating farmers; however, there is strong interest from investors," says Randy Hertz of Hertz Farm Management in Nevada, Iowa. "Most investor interest is from individuals, although there are groups looking to buy land. They are, of course, restricted by laws regarding corporate and foreign ownership in some states."

Jim Farrell of Farmers National in Omaha agrees: "Demand is outpacing supply, with volume of listings down approximately 30% from 18 months ago."

He reports that 70% to 75% of sales are going to farmers. However, Farrell is working with a number of individual nontraditional investors who don’t have direct ties but see farmland as a good long-term investment. "They tend to pay cash or use limited leverage," he adds.

Institutional investors, such as insurance companies, which played an important role in the 1980s, represent 10% or less of the land purchases right now, Farrell estimates. "This could increase; there are several farmland real estate investment trusts being marketed."

For all the reasons farmland management firms have been touting for years, "investing in farmland is becoming recognized by the most sophisticated investors as a key asset class," sums up Murray Wise, chairman of the Westchester Group, with offices in seven states and Australia.

"Coming out of the recession and the disastrous results related to more esoteric investment vehicles, farmland’s steady appreciation, cash return and hedging potential offer the promise of consistent long-term performance," Wise says.

Top Producer, Summer 2010

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