As US farmers grow older – and greyer – nimble PE firms offer the potential for an attractive exit
It quickly becomes apparent during a two-day conference packed with agriculture executives that the areas of the market primed for private equity investment – from upstream to downstream and everywhere in between – are practically endless.
But beyond the technological innovations, the burgeoning start-ups and the mergers and acquisitions that head off an equally long list of industry changes that present new opportunities, there is a major demographic shift that may perhaps be the biggest elephant in the room.
As Curt Covington, senior vice-president with Farmer Mac put it in an interview with Agri Investor at our annual Chicago forum: that’s the “greying of rural America”.
By some estimates, the average farmer in the US is 62 years old, and after decades of hard labour on their farms these citizens will be looking to get out sooner than later, which will present a major gap of farmland that’s ready to be picked off the market and recapitalised.
These farmers do have other options, Covington explained, but each carries its own set of drawbacks. First, ageing farmers could look to children or other family members to take over the farm; but their children are increasingly looking outside of the family business, looking at opportunities that stretch beyond ownership of a single farm.
Second, they could lease the farm; but then they are forced to “take on the risk of the strengths and weaknesses of that tenant”. Third, they could outright sell the land; but they then face tremendous capital gains taxes that will take a large chunk out of the profits of any sale.
Here lies the opportunity for private equity. Private investors will be able to offer these farmers flexibility that the other options do not, perhaps in some cases giving them ownership rights to their funds, and in others negotiating options for the investor to buy the property over time.
“I think investors are going to fill that gap because some of these farmers will find that they have nowhere else to turn,” Covington said. “There’s also an advantage that private equity brings through a sense of quality management that is sometimes lacking [at these farms].”
During a panel discussion at the forum focused on debt investments into agriculture, during which Covington shared the stage with Barry Bogseth, managing director with MetLife, Bogseth agreed that a significant void was growing as older farmers look to retire.
“It’s important to recognise that there may be this gap in the future,” Bogseth said, going on to point out that technological innovation will be crucial in making or breaking many of these farm businesses as they begin to change hands.
“Technology is going to increase and improve productivity,” Bogseth said. “Over the last decade a lot of progress is attributable to the research, development and information society that we now live in… you can’t just run out and obtain additional acres, and technology is an extremely important piece” to solving the aging issue.
Chris Soules, land investment specialist with Peoples Company, who spoke during a previous panel discussion, pointed to the ageing population as a major factor that has provided incentive for his firm to scoop up farms that by many standards are operating on antiquated methods.
“Those guys are slowing down and are not as progressive as they should be, and being there when they are ready to sell and being someone they can trust is really our strategy,” he said. “Often they don’t want anyone to know they’re selling the farm and they can often sell without anybody knowing.”
Soules stressed the importance of being mobile and managing boots on the ground, being nimble enough to seize the opportunities as they arise, and finding distressed buying opportunities through “unreasonably low auctions”.
Following the acquisition, his strategy in many cases entails modernising the farms to make them more productive and finding the right tenant.
“If you can find the low-hanging fruit, that’s where you’ll find the opportunity to make money,” he said. “We understand that this land has a lot of potential.”