Given the amount of land planted, 2012 should have seen the biggest harvests ever in the US, the world’s largest grain exporter. But it did not happen like that. The country’s corn-belt was hit by the worst droughts since the 1930s and the impact on global food markets was exacerbated by dry weather in Russia and Brazil.
This is set to lead to a period of “agflation”, with food prices due to hit new record highs in 2013, according to Rabobank’s Food and Agribusiness Research unit
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The current bout of price rises is mainly affecting commodities that are largely used in animal feed such as corn and soybeans, as opposed to the last bout of food inflation in 2008, when the price of staple foods such as wheat, maize and rice doubled, hitting the world’s poor hardest.
“Demand for agricultural commodities is expected to outweigh supply as these key macro trends continue,” says a report from the UN’s Principles for Responsible Investment*.
The tightness in the market suggests that farming and farmland could be set to see a surge in investment, particularly from institutional investors. “Almost everyone we talk to says this is an asset class they can invest in,” says Berry Polmann, head of real assets at Adveq, a fund of funds manager that has an agriculture-focused real assets fund of funds.
At the same time, he adds, “the farming industry is starving for cash”.
“Banks are not lending in most countries, investment banks are not doing deals and IPOs have not been successful either in raising money or providing a long-term return so there are very few ways to raise capital,” he says.
This looks set to change, though, according to Detlef Schoen, managing partner, farm investments at Aquila Capital, whose agriculture team manages more than £250m and runs more than 60 farms in New Zealand, Australia and Brazil. In the past, farming has been lumped together with soft commodities but it is increasingly coming to be seen as a specialised form of real estate, which will increase the amount of money available to the sector, he says.
The sector is becoming more attractive to investors who are finding it increasingly difficult to find assets that are truly uncorrelated from the rest of their portfolio.
“Long-term bond yields are very low and farmland gives the same type of revenue stream [as long-term bonds], but it is not linked to other financial markets,” says Christina Olivecrona, sustainability analyst at AP2, the Swedish government pension fund, which aims to invest some 1 per cent of its assets under management in farmland, up from 0.24 per cent today. “As well as being an asset class that operates on the same long-term perspective that pension funds do, it also acts as an inflation hedge and brings diversification to a portfolio.” Another attraction is that it offers a combination of capital gains and income.
As well as pension funds, the sector is attracting insurance companies and sovereign wealth funds, says Mr Polmann.
Despite the attractions of farmland as an investment, there are many pitfalls awaiting the potential investor. For a start, it can be problematic for investors to find land to invest in – farms tend to be tightly-held, family-owned and passed down from one generation to the next, particularly in developed markets. As a result, many of the funds investing in farmland are focused on family investors. Craigmore Sustainables, for example, focuses on farms in New Zealand, where CEO Forbes Elworthy also runs Craigmore Station, the family farm that gives the fund its name.
However, there is also caution among institutional investors because “wave after wave of corporate farmers have come into agriculture and failed,” Mr Elworthy says. “Corporate farmers often prefer cheap land to good land. They are just self-selecting land that is prone to drought or other problems. Family farmers look to buy land that has low volatility. The risk management skill set is not something that corporate investors fully understand.” Mr Polmann agrees, saying that Adveq’s due diligence on investments can take up to two years, “up to 10 times as long as institutions’ normal due diligence periods”.
Investors tend to look to just a few markets for opportunities – Australia, New Zealand, North America and Brazil, with countries such as Uruguay, Chile and Colombia also beginning to attract interest. These countries attract investors because as well as their strong agricultural sectors, they also offer a stable investment landscape with strong rule of law. “We only invest in countries where there is a good legal system, land rights and strong title to land,” says Ms Olivecrona.
Investors with a higher risk appetite, however, can look at frontier markets such as Ukraine, Romania and African countries such as Zambia and Mozambique. But it is not just security of title that can be an issue. “In some markets, the supply chain that we expect in developed markets simply does not exist,” says Nicholas Tapp, head of agribusiness consultancy at Bidwells, a UK property consultancy. “The 2008 harvest in Russia, for example, was huge but they had nowhere to store it – much of it was left outside and spoilt.”
The key to successful investment in farmland is to choose wisely, stresses Mr Tapp. “If you are going to invest in this sector, you have to pay more attention to it than to other asset classes. There is no homogeneity and there is a complex set of variables to deal with. The difference in performance between the top 25 per cent of farms and the rest is startling.”
Mr Elworthy at Craigmore says that the top quartile is fully 50 per cent more profitable than the average. This means that there can be opportunities to buy underperforming farms and put top quality managers in to turn them round, in the manner of some private equity investments.
The sector is likely to become increasingly attractive to investors of all types in years to come, says Ms Olivecrona. “The investment case for farmland is very attractive because we know we will need food, feed and fuel in future.”
But it is also a sector where investors need to be very aware of environmental and social issues, ranging from water availability to climate change to land rights and the possibility of being accused of land-grabbing. “These are illiquid assets so you really have to make sure that you are taking these longer-term issues into account,” she adds.
* Responsible Investment in Farmland, UN PRI