Patrick Cheney, associate at Colvin & Co, the US buy-and-lease investment management firm, discusses how the firm differentiates itself and talks through the firm’s land valuation methods.
How do you differentiate yourselves?
We believe that demand from the emerging markets for soybeans and corn is inelastic and will continue to grow at a rapid rate. In 1985 China did not import any soybeans or corn; today it imports over 60 million tonnes and is predicted that this will grow to 100 million tonnes by 2020.
We are also serving a relatively unmanaged market in the US; family offices, high net worth individuals and trusts that have under $50 million to spend.
How do you value land?
We put together an income statement on a per acre basis and we try to forecast what the production will be after costs such as fertiliser, machinery, labour and get gross income per acre.
We target deals with a capitalisation rate of 5 percent or greater; income before operating expenses divided by land price. Based on our analysis this has been the average cap rate over the last 40 years, although it will depend on the crop at hand, permanent crop land buyers will look for a rate in the high single digits because there are different cash flows and risks.
What are the benefits of being a buy-and-lease investment manager as opposed to owning and operating land?
Owning land and leasing it out and operating it are two completely different animals with different risk profiles. Most investors and analysts don’t understand the volatility of farmland and chase an extra 3 percent or so by operating the land, but the risks are far greater.
It could make sense in countries such as Australia and Latin America where you might want to manage how the land is handled more closely but in the US we have a wealth of very experienced farmers so it makes sense to let them get on with what they know and love.
What is the most notable change in land ownership since Colvin & Co was established in 2008?
The changing size of the operator is interesting. Farmers are starting to operate larger and larger tracts of land in what appears to be a transition from a family farmer model to more cooperative operations.
This comes from local communities getting together to operate their land together, amortising machinery and other expenses over more acres. It also helps with economies of scale when selling the crop.