Exclusive: Row-crop returns to stay beneath 8 percent over next half decade

Annual row-crop farmland returns are unlikely to rise above 8 percent during the next five years, according to separate-account-focused AgIS Capital.

In its second annual State of the Market report, Boston-headquartered AgIS outlined what it predicted would be a “long slog ahead” for US agricultural markets, which the firm described as currently in a state of marginal profitability. After summarizing recent indicators of farm income and land prices, the firm presented a snapshot of its approach to the current market.

“It is important that investors carefully consider and provide realistic estimates of the income generation associated with farmland investments,” said AgIS vice-president of acquisitions and strategy Cody Dahl. “While individual assets could certainly generate 8 percent annualized returns over the next five years, we do not expect a large, multi-property portfolio of row-crop assets to be capable of achieving such a threshold.”

Although agricultural land values in many parts of the country are beginning to soften, according to the report, the fact that row-crop land prices remain high relative to their income generation helps explain why AsIS continues to avoid the sub-sector, as it has since 2014.

While certain crops such as cranberries and apples have experienced negative or low earnings of late, Dahl said, the firm continues to find opportunities that have the capacity to generate sufficient income returns.

“We continue to focus on food crops and products that are destined for US consumers, rather than on feed, fiber and fuel crops,” AgIS said. “We also continue to seek opportunities to invest in firms downstream of our production assets.”

Of the many headwinds facing the sector, rising interest rates present the greatest near-term threat to agriculture, according to AgIS. Given the liquidity and cash flow challenges facing the highly solvent US farm sector, Dahl said, a continuation of recent increases could have a significant impact on the market.

“Sufficient increases in real interest rates may cause slim cap rates to decompress, in which case, farmland prices may rebase lower as cap rates equilibrate with a higher opportunity cost of capital,” said Dahl. “Higher relative real interest rates also could strengthen the relative value of the dollar, which would further suppress the value of row crops.”

AgIS was founded in 2013 by Jeff Conrad, former president of the Hancock Agricultural Investment Group. In October, the firm secured a $150 million commitment from the $76.6 billion Virginia Retirement System and earlier this month, former Hancock Natural Resource Group vice-president of business development Stephen Kenney joined the firm.