Financial pressure on US agricultural producers has begun to translate into significant opportunity for private farmland investors, according to market observers and participants at the recently held Agri Investor Forum in Chicago.
Moderator Bruce Sherrick, a University of Illinois professor and director of the TIAA-CREFF Center for Farmland Research, began by recounting how outside fears of a bubble in US farmland markets have waxed and waned over the past decade. Over the past year, Sherrick summarized, political uncertainty and weakness in some markets have caused some to question progress in the financialization of farmland.
Red Reef Partners managing partner Suzanne Petrela, whose firm focuses on special situations in North American farmland, responded by saying that asset values are just beginning to reflect pressure that has hovered over the market. In fact, she added, her firm has seen more opportunities over the past six months than at any point during the past five years.
“We’re seeing pockets of distress, finally, almost five years into this [downturn],” Petrela said. “For the right team, with boots on the ground and established presence in the right markets, it can be a very compelling time to invest.”
Scott Henry, a partner at Iowa row crop operation Longview Farms and a Red Reef principal, confirmed that his 9,000-acre family farming operation has recently devoted capital to infrastructure improvements necessary to maintain a place within a rapidly consolidating row-crop sector. After three years of declining incomes, Henry said, some regional farmers have opened to sale/leaseback transactions after consultations with their bankers.
“From an outside investors’ perspective, there’s a lot of positive opportunities to find managers you can partner with for the long term,” Henry added.
Highlighting that less than 2 percent of US farmland is institutionally-owned, Brandon Zick, director of acquisitions and portfolio management at Indiana headquartered investment manager Ceres Partners, said that the opportunity for fund managers is in slowly aggregating portfolios of smaller properties that institutions may be interested in acquiring later.
Zick stressed that like all real estate, returns from farmland are likely to come through purchase prices and added that his firm has invested about $200 million over the past three years, focused mostly on Midwest properties with capitalization rates of at least five percent.
“I don’t think there’s necessarily new opportunity that wasn’t there before, it’s just the timing is right, right now,” said Zick. “If you have the capital and you already have those deals in place with the farmers there, it’s exciting to put money to work.”
In response to a question from the audience, panelists also discussed the significance of anti-corporate farming laws that prohibit or limit farmland investment in nine US states.
One panelist said their firm is often approached by farmers in restricted markets interested in selling substantial landholdings and that Canada provides an example of how such laws can keep investors from some of the most productive land in key markets.
Because such restrictions have often been put into place to protect acquisitive farmers not wanting to compete against institutions in the market, as more US farmers move towards retirement age, the panelist suggested, those farmers’ need for buyers could bring about pressure for a change.
“Maybe the political winds will change; maybe they won’t,” the panelist said. “The fact is, while those markets are closed, they’re closed.”
Zick said that though his firm would be interested in investing in two or three of the restricted states, it is already quite active in the 10 states where it already operates. Such restrictions can serve as a reminder, Zick said, of how important it is for investors to have deep networks within markets, rather than focus too much on establishing a presence across key geographies.
“We’re not litigious to start with, but we’re certainly not going to fight those laws anywhere so that everybody else gets a free ride,” Zick added. “I think they will all be overturned over time, but it’s not big rush for us.”
The sustainability balance
Echoing a theme that carried through both days of the Forum, Sherrick encouraged panelists to discuss how the financialization of farmland has shaped the approach of farmers looking to meet growing demand for organic and healthy food.
Though inter-generational transfer of farmland ownership in the US has received much attention over the past decade, Henry stressed that transfer of decision-making control to a younger generation often occurs before ownership changes and is already shaping the goals and risk tolerance of family operations.
Regarding sustainability, a key issue going forward, he said, will be the need to balance incentives between owners and operators while investing in sustainable land practices like cover crops and no-till agriculture. Because potential returns derived from such practices, such as fertility build and organic matter growth, accrue only over the long-term, Henry explained, the landowner often stands to benefit most.
“A lot of those costs are still being borne strictly by the operator,” said Henry. “Paying attention to that and better understanding how we can align those incentives will drive adoption.”
He added that organic production is not itself a sustainable production practice, involving as it often does heavy tillage and other practices and that continual education of the consumer will be important in the years ahead.
“As a producer, it is very difficult to commit the capital, energy and time to transform a system that ultimately, you don’t know where the endgame is,” Henry explained. “I don’t fully understand how we are going to get to true alignment without a little bit more education and maturity in the marketplace.”
Petrela added that rather than focusing too exclusively on increasing organic production, Red Reef has looked for opportunities to support sustainable conventional production and derive income from other approaches such as by partnering with a local livestock operator or windfarm.
“As investors, we need to bring capital to opportunities where there is a turn towards the environmental management perspective,” Petrela explained.