David Stevenson: Farmland looks dirt cheap

Financier Jim Slater

Financial Times  | July 24 2009

By David Stevenson

Farmland is a curious and relatively new investment sector. I admit to having an ambiguous view of it.

One the one hand, I’m suspicious of financiers coming up with whizzier ways of accessing what is a fairly boring story – agriculture has always struck me as a tough old business that emphasises persistence and bloody mindedness. But, on the other hand, farmland is not as volatile in price terms as other asset classes (and certainly not the crops it produces) and so is arguably the best hard asset (I leave gold and oil to the traders).

When I wrote about agricultural land funds last year, one reader reminded me that what’s good enough for the Queen, the aristocracy and the Co-op is probably good enough for the rest of us.

Analysis on CNN backed this up. It quoted research from Kansas State University that suggested the average annual return on US farmland since 1950, including crop yield and land appreciation, is 11.5 per cent, compared with a 12 per cent annualised return for the stock market.

None of the above should blind investors to the fact that land markets globally have come off their peak values. Falls of 10 per cent in many national farmland markets are not uncommon. However, as Andrew Shirley, head of research at Knight Frank observes, those falls have started to tail off. “Prices seem to have flattened out again going into the second half of the year as farmer optimism improves and investors return to the market.”

He also identifies another trend: the small number of investors active in farmland are now looking globally, trying to snap up “bargains” in Latin America and Africa. The effect on local markets has been to increase volatility. “Farmland is a fairly illiquid asset... any sudden influx of investors would certainly have an impact on prices,” he says. Perhaps the best recent example of this is in Australia, where some UK private equity firms have been pushing up land prices sharply.

But while everyone from the Rothschild’s – via the Agrifirma Brazil fund, run with Jim Slater – through to Nicola Horlick and UBS are snapping up land in Brazil, I’m fascinated by another niche: Canada and New Zealand.

In these countries, the legal and logistic infrastructure is world class yet the land is – relatively speaking – dirt cheap. Prices are catching up with countries such as the UK and the US, though – a trend Shirley has noticed: “ I would say that [closing the gap] is happening in Canada because investors do see it as a safe and undervalued investment. Land in New Zealand has appreciated in value, but perhaps for other reasons. Many UK farmers, especially dairy producers, have emigrated there in search of a better life and that has helped to push up values”.

Canadian land strikes me as the better bet. Even during this recession, land prices have continued to increase, partly because they were so cheap to start with. AgCapita, a specialist Canadian fund, suggests that western Canadian farmland is up around 10 per cent in 2008 with land in Saskatchewan up almost 15 per cent – 8.8 per cent in the second half of 2008 alone.

Steve Johnston of AgCapita argues everything is now changing. Rules that prevent non-residents from investing in farmland are being liberalised, commodity prices are stronger and people are moving back to Saskatchewan. And Canadian land is still cheap. Saskatchewan has an average price of $400/acre, Alberta is $1,100/acre and Manitoba is $660/acre.

So, AgCapita represents a route into the sector. Another company called NorthStar Canada also reckons it has worked out a way for foreign investors to buy local land.

New Zealand is looking better, too. A small Anglo-Kiwi advisory company called Agro-Ecological Investment Management is raising money to invest in organic farming, a niche within a niche. Geoff Burke, the investment director, says that the dairy regions of South Island and the fruit farms of North Island are both great long-term bets. Here, there is no subsidy distortion, which means it’s a purer investment play. There are also fewer restrictions on land purchase compared with other countries.

Burke’s other big positive is water. New Zealand has lots of it whereas the Aussies are in big trouble. “NZ is much much better off in terms of water,” says Burke.

There’s one last significant advantage: exchange rates have made New Zealand land dirt cheap for foreign investors. According to Burke, farmland in New Zealand “is still over 49 per cent more affordable to dollar-

based investors than it was 12 months ago and over 53 per cent more affordable than March 2008”.

Add in the premium that organic farming land commands in yield terms – farmers make a lot more money from organic long term, after the initial investment – and you can see why Burke is touring the City trying to raise money for an organic farmland fund.
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