By Tom Vulcan
"You can never make any more of it." -Old Scottish saying
Back then, there was land - lots of land. And it cost practically nothing.
In the early 1880s, my great grandfather, a former French cavalry officer, made the long trek from Roubaix, in Normandy, France, to a new life in the American West.
Finishing his journey at Beaver Creek, a tiny settlement in Montana, just over the border from North Dakota, in 1883, he and his partner established the firm of Grisy & Wibaux, intending to graze there some 10,000 head of cattle.
First filing claims for the two large ranges on Beaver Creek, and then the whole valley, they proceeded to build a ranch house followed by further separate homesteads. The enterprise prospered. While I've not been able to discover exactly how much land they owned (there is one transfer in the records of the Bureau of Land Management dated August 18, 1887 for some 160 acres), I expect the figure was well into the thousands of acres.
Just those 160 acres would be worth between $48,000-$80,000. Maybe even more if they have good water rights.
Now, there is considerably less land available. And it's getting expensive; very expensive.
As the world's population grows, so the supply of agricultural land around the globe diminishes. In the U.S. alone, while half of the 2 billion acres of the country's land is working agricultural land, every minute of every day, two acres of farmland are being taken out of production and turned to other uses; in particular, development. Each year, globally, some 12.3 million to 19.7 million acres of farmland, out of a worldwide total of 3.7 billion acres, falls fallow because of "deteriorating quality."
Available, quality, agricultural land is increasingly hard to find. Prices, everywhere, are going up.
By the end of August 2007, the average price of cropland in the U.S. over the prior year had increased some 13%, doubling in the decade from $1,340 an acre in 1998 to $2,700 in 2007.
Farmland values continue to rise. In the Seventh Federal Reserve District (Illinois, Indiana, Iowa, Michigan and Wisconsin - some of the best farmland in the U.S.), the Federal Reserve Bank of Chicago reported that "the year-over-year increase in District [‘good'] farmland values" had "eased to 14 percent in the first quarter of 2008." But that's still 14% - the third-largest such increase since 1980. Cash rental rates have "soared higher this year compared with those in 2007, rising 21 percent."
In the Eleventh Federal Reserve District (Texas, Northern Louisiana and Southern New Mexico), over the same period, the value of dry cropland rose 21.1%, irrigated cropland rose 14% and ranchland 10.8%.
Finally, in the Tenth District (Colorado, Kansas, Nebraska, Oklahoma, Wyoming, the northern half of New Mexico and the western third of Missouri), the percentage rises in the value of similar farmland over the same period have been even steeper.
In Canada, the rise in value of farmland for the six months ending December 31, 2007, was some 7.7%, more than double that for the previous six months.
Public SectorWhile there have always been, and will continue to be, investors willing to make transnational land purchases, a new category of player is appearing on the field of play: sovereign states seeking to secure food supplies for their countries. The following are just some of the countries (either in their own right or via private/public companies) that either have already invested in, or have expressed an interest in investing in, agricultural land away from "home."
|Sovereign State||Have Already Bought/Expressed Interest In|
|China||Africa and South America (Brazil)|
|India||Paraguay and Uruguay|
|Saudi Arabia||Thailand and South Africa|
|UAE||Pakistan, Sudan, Egypt and Yemen|
Although it is difficult to determine whether investors in the private sector - both individuals and companies - are currently really any more active cross-border than they have been (they have always been active), their agricultural land transactions certainly appear to be receiving more exposure in the press than they have before.
Some examples of such corporate cross-border transactions (purchases or leases - in some countries, e.g., Ukraine, land cannot be sold) that have been reported recently are:
|Hancock Agricultural Investment Group/U.S.||Agricultural land (including wine grapes and macadamia nuts)||Australia|
|Pergam Finance/France||Farmland||Argentina and Uruguay|
|AIG Investments/U.S.||Agricultural land||South America (primarily Brazil)|
According to Robin Maitland, a senior partner with Strutt & Parker, a leading property consultancy in the U.K., over the last year, in Scotland alone, some 25% of agricultural land sales have been to non-U.K. residents. Often purchases have been by Irish and Danish investors, for whom the cost of such land in their home countries can be 50% more than it is in the U.K.
With cost of agricultural land having risen some 40% in the U.K. in the last year, and with supply remaining extraordinarily tight, Mr. Maitland says the reverse is also true, with U.K. investors looking for possible opportunities in, for example, the erstwhile Eastern Bloc.
And while Landkom's recent investment (the lease of some 100,000 hectares [247,105 acres] of farmland) may have helped put Ukraine in the agricultural spotlight, according to the Financial Times, we may soon also see both Russia and Kazakhstan making "a mark on world agriculture and food markets in coming years."
THE U.S. MARKET
The price of agricultural land in the U.S. has risen strongly for several reasons, not least because of rocketing crop (and commodities) prices and a growing demand for biofuels.
Combine these, however, with a weak dollar and strong export markets, and agricultural land in the U.S. is now increasingly seen as an attractive investment proposition, particularly as a hedge against inflation. From having been "an asset class for ultra-pessimists only," it is now "hot" property.
While U.S. pension funds, endowments and family offices have always had an interest in farmland and agriculture, once again, various recent transactions and news items, in this "space" in particular, appear to have caught the eye of the press. And this is only what has been reported!
In December of last year, TIAA-CREF, the largest manager of retirement funds in the U.S., spent some $340 million on farmland across seven states. And George Washington University has announced that it "plans to earmark $100 million for agricultural investments during the next year, with some, if not all, allocated ex-U.S.
The Hancock Agricultural Investment Group, part of Canadian Manulife Financial Corp, and one of the largest institutional managers of agricultural real estate in the U.S., recently posted an annualized total return of 12.3% over the 10 years to end-2007 from its U.S. directly held, investment-grade properties alone. The group oversees some 140,000 acres of farmland in the U.S. and 7,600 acres of farmland in Australia.
FURTHER INVESTMENT BENEFITS
Looking beyond just returns (currently extremely attractive), and a potential continuing hedge against inflation, an investment in farmland can provide two further significant benefits.
First, it can provide returns with less volatility than those from other classes of asset. According to Agcapita GP Corp, a Canadian farmland investment partnership, over the last 15 years, farmland returns have exceeded stock and bond market returns with up to 60% less volatility.
Second, because there is low and negative correlation between farmland yields and those from stock and bonds, such an investment can provide the important benefit of diversification. In addition, correlation even with conventional real estate is very low.
As with timberland, while direct ownership and management (i.e., being a farmer), is a possibility, such a route is similarly fraught with difficulties. One of the most significant of these is the issue of diversification in the farmland itself - especially with a single investment. A well-diversified holding of farmland (row crop, permanent crop, pasture and even timber) will, therefore, not only require a significant investment, but may also involve land holdings in a number of different locations.
For institutions and "instividuals" (i.e., the very rich), the Hancock Agricultural Investment Group can establish an individually managed account with a minimum commitment of $50 million.
UBS, through UBS AgriVest LLC, can also provide individually managed farmland investment portfolios for those willing to invest a minimum of $50 million. And for those seeking to invest a smaller minimum amount, UBS AgriVest LLC also manages commingled accounts.
If you already own land, then a number of U.S. banks, including JPMorgan Chase & Co. (JPM), Bank of America Corp (BAC) and U.S. Bank (USB) will, for a fee, manage your farm for you.
For those interested in Canada, and suitably qualified, an investment in farmland in, for example, Saskatchewan, can be made through the likes of the Agriculture Development Corporation or through Agcapita GP Corp.
And for those seeking more international diversification, then Emergent Asset Management and Landkom (LKNTF.PK) are certainly innovative in their approaches.
Except for access via a private equity, or other, fund, the only other option is to invest in land indirectly. This is, however, a very loose proxy, with, as any such investment being, primarily, an investment in what the land produces, as opposed to being an investment in the land itself.
Vis-à-vis the exceptions, there are, ex-U.S., the likes of BlackRock's agricultural fund or the Schroder Alternative Solutions - Agriculture Fund.
For "indirect" investment, there are a number of pure agricultural commodity ETFs and ETNs to choose from. Amongst these are:
|US:FUE||ELEMENTS Linked to the MLCX Biofuels Index Total Return||ETN|
|US:GRU||ELEMENTS Linked to the MLCX Grains Index Total Return||ETN|
|US:LSO||ELEMENTS Linked to the MLCX Livestock Index - Total Return||ETN|
|US:RJA||ELEMENTS Linked to the Rogers International Commodity Index - Agriculture Total Return||ETN|
|US:UAG||E-TRACS UBS Bloomberg CMCI Agriculture Index||ETN|
|US:FUD||E-TRACS UBS Bloomberg CMCI Food Index ETN||ETN|
|US:UBC||E-TRACS UBS Bloomberg CMCI Livestock Index ETN||ETN|
|US:JJA||iPath Dow Jones AIG - Agriculture Total Return Sub-Index||ETN|
|US:JJG||iPath Dow Jones AIG - Grains Total Return Sub-Index||ETN|
|US:COW||iPath Dow Jones AIG - Livestock Total Return Sub-Index||ETN|
|US:MOO||Market Vectors Agribusiness||ETF|
|US:EOH||Opta Lehman Brothers Commodity Index Pure Beta Agriculture Total Return||ETN|
|US:DBA||PowerShares DB Agriculture Fund||ETF|
The market in agricultural land in the U.S. is currently experiencing a boom; a boom fueled, not least, by sky-high commodity prices, a strong and increasing demand for ethanol and the continually diminishing amount of agricultural land actually out there.
With the inexorable rise in the price of domestic agricultural land, investors are starting to look seriously ex-U.S. for opportunities. Investors in countries experiencing similar land market conditions, and those countries concerned about securing sources of food for their growing populations, are also looking at acquiring land internationally. What we are seeing now is just the start of such a search and the start of such investment.
While there's nothing to say that both the demand for ethanol and/or the price of commodities may not crash, it appears that, even if they did, then, rather than in the '80s, the demand and, indeed, requirement, for good quality agricultural land is now very much more solidly underpinned by contemporary global economic conditions.
Wibaux, formerly Beaver Creek, became an important railhead for the transshipment of cattle at the end of the 19th and into the early 20th century, with hundreds of thousands of cattle passing through on their way to the yards in Chicago.
My great grandfather, however, returned to France, but kept in contact with one particularly good friend from his American West days - Buffalo Bill Cody. My family used to have a watch Colonel Cody gave my great grandfather, but, along with everything else, this was lost when the family's château was razed following the Normandy landings in World War II.