Hedge funds muck in down on the farm

Financial Times| Friday April 25, 2008

By James Macintosh and Kate Burgess

Hedge funds and investment banks are swapping their Gucci for gumboots as they bet on rising food prices by buying farms.

Billions of dollars are flowing into farmland across the world as investors gorge themselves on vast tracts of Australia, South America and eastern Europe.

"Sell banks, buy cheese," Crispin Odey, manager of London-based hedge fund Odey Asset Management who has started investing in farming companies, said recently.

His recommendation is being followed by many hedge funds and a new type of farmland holding company - often backed by hedge funds - which believe the food boom will make farming highly profitable.

Mr Odey, who has started investing in farming companies, told investors in a conference call this week: "What we wanted to do was get ourselves involved in making the recurring revenues that we felt that we could make from the price of wheat staying up."

Other hedge funds and investment banks are buying farms to give their commodity traders an edge from first-hand information about costs and prices. Ospraie Management, a New York commodity fund, for example, owns farms, while Morgan Stanley's commodities business has several thousand acres of Ukraine.

Most of the new breed of farm investors believe the world is entering an era of high food prices where farms will once again be profitable, after two decades of being starved of investment.

"It is an unashamed bet on the continuing rise in the price of food stuffs and the rapid recovery of the farming industry," said one hedge fund manager.

This creates two opportunities: buy successful farms to profit from rising food prices and possible land price rises, or pick up cheap land in developing countries and bring it into production or improve it to raise yields.

The former group includes BlackRock's six-month-old $420m (£218m) UK-based Agriculture Fund, which has bought 2,800 acres of Norfolk, as well as investing in futures and shares of agricultural companies. A land fund run by Braemar, a Manchester-based manager, is about to buy its first 200 acres. And local specialists are buying up farms in eastern Europe.

The second group hopes increased demand will make it worthwhile to invest in agriculture, putting capital into farms to develop land with improved technology, better irrigation and new equipment.

"The best way to participate in the future is to buy land and bring it into development," says Peter Hannen, the chairman of MG Capital, whose farming consultancy will be lead adviser to a new company from Dexion.

Dexion's Global Farming, set up using a limited company structure, hopes to raise $280m to buy 3m acres of land in Russia, Kazakhstan, Ukraine, Australia, and South America, and increase production fivefold in 10 years.

Emergent Asset Management is even more ambitious, with the British hedge fund manager aiming to raise €1bn (£787m) over the next year to put into sub-Saharan African farmland.

"The cost of land is very, very low," said Paul Christie, marketing director of Emergent. "We want to make the land more productive. It is industrial scale farming and it is going to make a big difference down there."

Plenty of other groups are also raising money to invest in farms. For example, Hinton, an Argentinian farming specialist, is trying to secure $25m for a new company, Peckwater, which will buy Argentinian farms.

Timothy Rawe, who co-founded Hinton in 1992, estimates more than $2bn of fund money is heading for the southern cone of South America alone. But he says it will be difficult to deploy such large amounts ofmoney without driving up prices.

"It is surprisingly difficult to get pure exposure to farmland," he says. Knight Frank, the property consultancy, says the most productive Argentine farmland soared 80 per cent last year to more than $2,400 an acre, and land in neighbouring countries are also booming.

City types who usually use a Bloomberg terminal to search for fertile investment opportunities are not the most obvious people to consult on whether winter wheat will grow in a moderately acidic soil (it will).

"Hedge fund managers themselves may not make good farmers," admits Paul Christie, marketing director of Emergent. "But hedge fund managers who understand their limitations and partner with the right people can make good farm managers." Additional reporting by Chris Hughes

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