Howard Kaplan is founder and president of Farmvest, the agri investment consultancy based in California. While Kaplan’s services are global, he has most experience performing due diligence for clients on US-based assets. Here he explains some of the challenges investors face in the US.
What are the main concerns expressed by your clients when looking at agriculture?
It appears as though returns are lower in agri because a larger component is appreciation so on a relative comparison basis, compared to current incomes from other asset classes, agri is lower. And that perception persists even with the fact that farms have performed so well for two decades.
There are also concerns that the US farmland market is due for a correction and that land values are now too high. With corn and other commodity prices falling, indeed next year could be a bad year in some locations where there has been a run up in rents such as the Mid-West.
There are some locations where rents are likely to be stable and some where there is still room for upwards movement. Rental rates really depend on site-specific fundamentals. But in my opinion, land values will not suffer too much and are sticky on the downside because there is so little debt forcing sales.
What other risks to farmland investment exist in the US?
Environmental regulations such as the Clean Water Act and the Endangered Species Act both have broad impacts that are increasingly targeting agriculture. The expansion of these regulations can weigh heavily on costs of production and add to administrative burden. On a more local level, pesticide regulation could impact specific farms.
Bad weather and drought are other big risks but the expansion of crop insurance in this year’s USDA Farm Bill was very well-received by the sector and helps to stabilise incomes – from produce or rent – in years of poor production. Growers realized the significance that crop insurance offers their operations after the recent major drought and this in turn impacts land investors.
What is holding back first-time investors from taking the plunge into agri?
Unfamiliarity. Many investors are busy doing what they have been doing until now and it is hard to commit to something unfamiliar and get comfortable with it. Also, among US investors, there is also still the impression that the US agriculture industry is managed with subsidies. Willy Nelson was the biggest downside to agri investment in the US with his series of farm aid programmes that cemented the sense that agriculture was a risky business. But this is not the case at efficient scale and with the crop insurance programme. While the reputation has been steadily improving over the last 10 years, it still lingers.
However I must say that I no longer have to convince people that agriculture is a good investment. Now it is more that they need help in execution. There is a limitation of applicable technical and financial expertise in this industry.
Globally, where is the most interest for agri?
Australia is increasingly popular and the next step for many investors after the US. Brazil has lost its appeal among some investors due to the foreign ownership rules limiting ownership to 49 percent and the need for local partners; it’s a tricky place to do business. I also think that the values of the farmland have caught up with the US.
Eastern Europe was appealing a few years ago but the political climate has now changed that and I am not seeing much activity there.
Africa is the next frontier and somewhere a lot of people are talking about. But it will still be some time before it becomes a popular destination. There are higher risk and prospective returns with “end of the road” projects.