New York Times | June 5, 2008
By DIANA B. HENRIQUES
Huge investment funds have already poured hundreds of billions of dollars into booming financial markets for commodities like wheat, corn and soybeans.
But a few big private investors are starting to make bolder and longer-term bets that the world’s need for food will greatly increase — by buying farmland, fertilizer, grain elevators and shipping equipment.
One has bought several ethanol plants, Canadian farmland and enough storage space in the Midwest to hold millions of bushels of grain.
Another is buying more than five dozen grain elevators, nearly that many fertilizer distribution outlets and a fleet of barges and ships.
And three institutional investors, including the giant BlackRock fund group in New York, are separately planning to invest hundreds of millions of dollars in agriculture, chiefly farmland, from sub-Saharan Africa to the English countryside.
“It’s going on big time,” said Brad Cole, president of Cole Partners Asset Management in Chicago, which runs a fund of hedge funds focused on natural resources. “There is considerable interest in what we call ‘owning structure’ — like United States farmland, Argentine farmland, English farmland — wherever the profit picture is improving.”
These new bets by big investors could bolster food production at a time when the world needs more of it.
The investors plan to consolidate small plots of land into more productive large ones, to introduce new technology and to provide capital to modernize and maintain grain elevators and fertilizer supply depots.
But the long-term implications are less clear. Some traditional players in the farm economy, and others who study and shape agriculture policy, say they are concerned these newcomers will focus on profits above all else, and not share the industry’s commitment to farming through good times and bad.
“Farmland can be a bubble just like Florida real estate,” said Jeffrey Hainline, president of Advance Trading, a 28-year-old commodity brokerage firm and consulting service in Bloomington, Ill. “The cycle of getting in and out would be very volatile and disruptive.”
By owning land and other parts of the agricultural business, these new investors are freed from rules aimed at curbing the number of speculative bets that they and other financial investors can make in commodity markets. “I just wonder if they need some sheep’s clothing to put on,” Mr. Hainline said.
Mark Lapolla, an adviser to institutional investors, is also a bit wary of the potential disruption this new money could cause. “It is important to ask whether these financial investors want to actually operate the means of production — or simply want to have a direct link into the physical supply of commodities and thereby reduce the risk of their speculation,” he said.
Grain elevators, especially, could give these investors new ways to make money, because they can buy or sell the actual bushels of corn or soybeans, rather than buying and selling financial derivatives that are linked to those commodities.
When crop prices are climbing, holding inventory for future sale can yield higher profits than selling to meet current demand, for example. Or if prices diverge in different parts of the world, inventory can be shipped to the more profitable market.
“It’s a huge disadvantage to not be able to trade the physical commodity,” said Andrew J. Redleaf, founder of Whitebox Advisors, a hedge fund management firm in Minneapolis.
Mr. Redleaf bought several large grain elevator complexes from ConAgra and Cargill last year for a long-term stake in what he sees as a high-growth business. The elevators can store 36 million bushels of grain.
“We discovered that our lease customers, major food company types, are really happy to see us, because they are apt to see Cargill and ConAgra as competitors,” he said.
The executives making such bets say that fears about their new role are unfounded, and that their investments will be a plus for farming and, ultimately, for consumers.
“The world is asking for more food, more energy. You see a huge demand,” said Axel Hinsch, chief executive of Calyx Agro, a division of the giant Louis Dreyfus Commodities, which is buying tens of thousands of acres of cropland in Brazil with the backing of big institutional investors, including AIG Investments.
“What this new investment will buy is more technology,” Mr. Hinsch said. “We will be helping to accelerate the development of infrastructure, and the consumer will benefit because there will be more supply.”
Financial investors also can provide grain elevator operators the money they need to weather today’s more volatile commodity markets. When wild swings in prices become common, as they are now, elevator operators have to put up more cash to lock in future prices. John Duryea, co-portfolio manager of the Ospraie Special Opportunity Fund, is buying 66 grain elevators with a total capacity of 110 million bushels from ConAgra for $2.1 billion. The deal, expected to close by the end of June, also will give Ospraie a stake in 57 fertilizer distribution centers and the barges and ships necessary to keep them supplied with low-cost imports.
Maintaining these essential services “helps bring costs down to the farmers,” Mr. Duryea said. “That has to help mitigate the price increases for crops.”
Mr. Duryea of the Ospraie fund dismissed the idea that financial investors, with obligations to suppliers and customers of their elevators and fertilizer services, would put their thumb on the supply-demand scale by holding back inventory to move prices artificially.
“It is not in our best interests for anyone to be negatively affected by what we do,” he said.
Perhaps the most ambitious plans are those of Susan Payne, founder and chief executive of Emergent Asset Management, based near London.
Emergent is raising $450 million to $750 million to invest in farmland in sub-Saharan Africa, where it plans to consolidate small plots into more productive holdings and introduce better equipment. Emergent also plans to provide clinics and schools for local labor.
One crop and a source of fuel for farming operations will be jatropha, an oil-seed plant useful for biofuels that is grown in sandy soil unsuitable for food production, Ms. Payne said.
“We are getting strong response from institutional investors — pensions, insurance companies, endowments, some sovereign wealth funds,” she said.
The fund chose Africa because “land values are very, very inexpensive, compared to other agriculture-based economies,” she said. “Its microclimates are enticing, allowing a range of different crops. There’s accessible labor. And there’s good logistics — wide open roads, good truck transport, sea transport.”
The Emergent fund is one of a growing roster of farmland investment funds based in Britain.
Last October, the London branch of BlackRock introduced the BlackRock Agriculture Fund, aiming to raise $200 million to invest in fertilizer production, timberland and biofuels. The fund currently stands at more than $450 million.
Braemar Group, near Manchester, is investing exclusively in Britain. “Britain is a nice, stable northwestern European economy with the same climate and quality of soil as northwestern Europe,” said Marc Duschenes, Braemar’s chief executive. “But our land is at a 50 percent discount to Ireland and Denmark. We just haven’t caught up yet.“
Europe, like the United States, is facing mandated increases in biofuel production, he said, and cropland near new ethanol facilities in the northeast of England will be the first source of supply. “No one is going to put a ton of grain on a boat in Latin America and ship it to the northeast of England to turn it into bioethanol,” he said.
For Gary R. Blumenthal, chief executive of World Perspectives, an agriculture consulting firm in Washington, the new investments by big financial players, if sustained, could be just what global agriculture needs — “where you can bring small, fragmented pieces together to boost the production side of agriculture.”
He added: “Investment funds are seeing that this consolidation brings value to them. But I’m saying this brings value to everyone.”