Could organics help diversify a farmland portfolio?

Growing demand for organics from industry giants like Hersheys, and the possibility of higher cash rents in the face of falling commodity prices, mean the organic sector could help diversify a farmland portfolio.

Growing demand for organics from industry giants like Hershey’s, and the possibility of higher cash rents in the face of falling commodity prices, mean the sector could help diversify a US farmland portfolio.

Yesterday, the United States Department of Agriculture (USDA) released a database of USDA-registered organic farming businesses. It found that the number of domestic certified organic operations has increased at its highest rate since 2008 – almost 12 percent between 2014 and 2015. But the market has grown much faster. The US eats and drinks nearly half the world’s organic agricultural output while hosting just 2 percent of its organic acreage.

Here at Agri Investor, we have been reporting that organic farming can fatten operational margins on the back of price premiums. Harn Soper of Sustainable Farmland Partners recently shared the net income results from one of his organic farms before and after transition. The farm’s two-year net operational income more than doubled after dipping in the two years it took for the farm to transition. The farm previously grew corn and soybeans, and now grows oats, alfalfa and corn.

These differences are more obvious because commodity prices for major crops like corn, sorghum and wheat have taken such a plunge, and amid difficulties faced by conventional farmers, organics are bucking the trend.

Organics has traditionally been an alternative farmland investment for the environmentally friendly-minded investor, but it is being seen by some as an increasingly important part of diversifying a farmland portfolio. Family offices have so far led the way in investing money through GPs like Iroquois Valley Farms, but there is little out there to suggest other institutional investors are focused on organics as a serious part of their portfolio.

At the same time though, organics might even be a useful balance for buy-and-lease investors, since farms converted to organic use appear to command higher cash rents, according to a USDA-sponsored research paper.

Take-up is slow, not least because of worries over the cost of transition to certified organic, and relative difficulty in adopting organic soil and pest control management. The USDA’s organic seal has been around for just over a decade and people’s tastes could change. According to a study by the University of Florida, income from organics for individual farms has sometimes fluctuated dramatically because many organic farms are so reliant on local demand, selling through town markets.

When Hershey’s said last December that it would no longer buy beet sugar for any of its products because all beet grown in the US is genetically modified, Rabobank described it as “shaking the sugar industry”. But following Hershey’s lead, Cheerios and Old El Paso owner General Mills is investing into growing consumer demand for organics over the next three years at least, aiming to double the acreage it sources its organic ingredients from by 2019.

As well as transition costs, investors are wary of moving into organics because the data available is still relatively limited. Even the USDA could be recording more detailed information for organic farmland, including whether it could have a small differential effect on land values, one researcher there told me. He also said that more market research could be done on cash rents and incomes, as anecdotal evidence suggest organic production follows slightly different market patterns.

Whether organics could become an important way to diversify your portfolio is a question worth asking. No doubt there will be shifts in demand and the sector will face its slumps. But the longer organic demand establishes itself in our food markets, where it has been growing steadily since the 1990s, the more interesting the question becomes.

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