DTN/The Progressive Farmer | Wednesday 05/11/11
Marcia Zarley Taylor
DTN Executive Editor
So many Wall Street-types crammed the Waldorf Astoria in New York City last week for a global farmland and agribusiness conference that hosts warned the crowd of 600 not to block the fire exits. To me, that’s a sign that while the real estate owned by pension funds, insurance companies, foundations and family wealth funds remains a small fragment of the $1 trillion U.S. farmland market, there’s a lot of money sitting in the waiting room. When the Big Money Boys think the time is right to buy, U.S. farmland might get an even bigger lift than the phenomenal rally it’s enjoyed since 2004.
A survey by the Global Ag Investing conference sponsor High Quest Partners found that New York audience already owned more than $10.8 billion in agricultural assets, but intended to invest another 70% in the next three years. Half of the investors intend to focus primarily in the U.S., and another 31% said they would concentrate in South America. Just one country’s government employee pension fund is allotting $2 billion for ag investments, but possibly as much as $5 billion, conference managers said. One Danish nurses’ pension is targeting farmland in emerging markets, starting out with a $370 million purse. Name brands like Hancock Agricultural Investment Group, TIAA-CREF, Franklin Templeton Investments and Wellington Management Group are players.
To keep this cash volume in perspective, consider that the nation’s largest farm realtor, Omaha-based Farmers National, sold 650 farms worth $330 million last year, so it will be hard for these potential landlords to acquire enough North American cropland on the scale they desire, if all the dollars materialize. Some may also need to sink money into permanent crops, dairies, infrastructure investments or even agribusiness ownership, just to build their farm portfolio.
Investors have long held sway in commodity markets, or even in cyclical farming stocks like CF Industries, Monsanto, Mosaic and Deere. What’s new is that conservative institutions with a long-term horizon are now viewing farm real estate as a worthy investment, not something dull as dirt. They seem persuaded that agriculture will enjoy a super cycle in commodity prices over the next decade or so, and have been encouraged that states like Nebraska have dropped their anti-corporate farming laws, opening up new territory for investment.
Hunt Stookey, managing director of HighQuest Partners, notes that Illinois farmland averaged 8.2% appreciation between 2000 and 2010, less than half the 17.9% gains for farmers in Mato Grosso, Brazil. But he expects the U.S. to do even better in the next decade without the currency risk and the distance to market that plagues remote parts of South America. “In Brazil, growers need prices and exchange rates at these levels to make new land conversions work,” he says.
Stookey is bullish on U.S. farmland as an investment because he believes biotechnology and other productivity gains aren’t enough to help feed the world alone. Agriculture needs about 160-210 million net new acres of farmland worldwide to meet expected demand over the next decade he says, given the normal yield gains. “Basically, we’re out of stuff. And when that happens, it’s a new pricing paradigm,” Stookey says.
Dale Hunt, a manager for Ascension Health’s $15 billion retirement fund, says her organization has been thinking about an agricultural portfolio for several years, but the investment market dried up after the subprime mortgage crisis in 2008. Now pension funds like hers have lowered their expectations for long-term returns and are seeking steady returns rather than the 20% returns that required riskier profiles. “Stability is the driver for us,” she says.
Paul Pittman, an Illinois farm investor who owns 10,000 acres, first became enamored with farmland when he worked as an executive on Wall Street. He favors cropland because it’s returned 10% to 12% on average with appreciation and rents, at lower risks than alternative investments. “Land is like an inflation adjusted bond with very low principal risk,” he says. Plus U.S. agriculture boasts an enormous amount of highly skilled operators who can rent and manage property.
Will the Big Money Boys crowd out farmers as buyers? Not likely, argues Jeff Conrad, president of the Hancock Agricultural Investment Group which manages over 200 farm properties worth $1.5 billion. “Look at the data,” he says. “It’s not institutions buying. We’re just scratching the surface.” Farmers purchase about 80% of the land in most states, and the remaining 20% of investors are often doctors or other high-income individuals looking for safe havens, Conrad tells me.
In states without corporate farming bans, investors may be more active. Illinois Farm Managers and Rural Appraisers estimated that only 7% of the state’s farmland buyers in 2010 were institutions, although another 28% were private investors like doctors and business executives.
“There is a tidal wave of cash out there and it is both the farmer and the investor, but it’s mainly the farmer who has been willing to pay the price,” says another Midwest realtor and auction owner who asked to remain anonymous. “Three weeks ago we did an auction in North Carolina. A farmer dominated the $17 million sale and he ran the major institutional investors out of the auction at less than $13 million. From that point on, it was the farmers and one private investor bidding.
“But the real bottom line is there are nearly no sellers. Why do you want to sell your good Iowa farm which is returning 3.25%-4.25% cash rents to take it down to the local bank and put it on deposit for 0.6% with only the first $250K insured?” Well, maybe we really might run out of farmland.
Join DTN editors in a free, 90-minute webinar discussion May 18 on “Agriculture: Cornerstone Investment or Bubble?” To register for the live event or rebroadcast, go to http://www.dtnprogressivefarmer.com/go/ag/
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