Digging Into Farmland
For some investors, farmland is terra firma—and profitable too.
Emerging players are snapping up land worldwide. World-class gurus like commodities kingpin Jim Rogers and hedge fund-luminary George Soros have been fueling demand, repeatedly citing rising demand and shrinking supply.
“Farmland is a theoretically safe, investment producing, inflation-protected hedge,” says Barton Biggs, the former Morgan Stanley strategist who now runs the hedge fund Traxis Partners.
The downside, he quickly adds, is that farmland is also “very illiquid" and a "complicated thing."
Farmland returns are nearly rock steady, though. Biggs pins them at 6 percent to 7 percent annually.
Measured by the NCREIF Farmland Returns Index, farmland handily beats the S&P 500 over the past ten years. Negative quarters for farmland are rare, making investments far less volatile than stocks.
Like other alternative investments, farmland is attractive, because it "doesn't correlate with equities,” says Roger Nusbaum, chief investment officer at Your Source Financial in Phoenix.
There's also a current-events component to the investment equation.
Global demand for commodities is strong and from time to time leads to tight supplies. Healthier—and, so to speak, wealthier—diets in emerging nations, especially China, a heavy importer—means more demand for U.S. grains and, by extension, farmland.
“It’s a straight line up,” says Nusbaum, “The middle class lifestyle is starting to ascend in emerging market countries.”
Surging population growth is pumping up prices. U.S. farm-oriented, real estate prices, measured by the U.S. Department of Agriculture’s National Agricultural Statistics Service, have nearly doubled in the last decade. Meanwhile, U.S. agricultural exports will surge to $113.0 billion in 2017 from $83.2 billion in 2007.
So, investors are snapping up arable land here and overseas, from Russia to Africa to South America.
“It’s not the first inning of the game, It’s not the eighth inning either," says Shonda Warner, managing partner at Chess Ag Full Harvest Partners, which specializes in pension funds and wealthy investors and owns over 40,000 acres in the U.S. "Farmland prices do move slower than commodity prices.”
Limited Stock Plays
Finding suitable investment vehicles, especially in the U.S., is not as easy as one might think. There are surprisingly few vehicles and are mainly aimed at wealthy investors.
“Not too many vehicles offer pure exposure,” says Nusbaum.
Nusbaum, for instance, recommends a slew of smaller, international companies. One popular play—and the easiest to trade—is Argentina- based Cresud. It owns 1.28 million acres of land where it produces grains, beef, milk and other products.
“Cresud isn’t a secret,” says Nusbaum. “But it has a lot of farmland in several South American countries.”
Other picks include London-listed stocks that aren’t easy to trade. M.P. Evans , for instance, owns palm oil plantations in Indonesia and Malaysia and cattle ranches in Australia. “It’s for off-the-beaten path portfolios,” says Nusbaum.
New Britain Palm Oil Limited is another option. It owns New Guinea’s largest palm oil plantations. “Palm oil is a base element in all kinds of manufacturing,” adds Nusbaum.
Warner warns investors to beware of “valuations in securities overseas,” though. “There’s a lot of danger for small town investors,” she adds.
Finding Farmland investments in the U.S. is tough. “Placing tens of millions of dollars in farmland is difficult here,” says Glenn Kreuder, principal at Agrinuity, a farmland investment consultant. “Investments are partially limited by the states.”
So, investing in agribusiness likeMonsanto, Potash Corp. Saskatchewan , and Andersons make sense.
“There are 50 to 100 agricultural stocks,” Warner says.
Another liquid way to invest, she adds, is plunking money into Van Eck Global’s Agribusiness ETF, aka Market Vectors-Agribusiness, . It tracks the DAXglobal Agribusiness Index.
Private investors in farmland fare far better. They can create companies and then pool money for farmland investments. Managers oversee farm day-to-day operations. Returns are strictly long-term, though—typically 10 to 15 years.
“It’s less volatile than other things,” says Warner. “But it’s not for people who want triples and homeruns.”