Low permanent crop prices could drag down valuations

Further drops in permanent crop prices could pull down values for the sector, but increasing interest in the strategy will be a strong buffer, Ryan Sullivan of Aberdeen Asset Management told Agri Investor.

“A lot of the institutional investors entered the space on the row crop side,” said Sullivan, who was vice-president at private real assets manager FLAG Capital until it was bought by Aberdeen in September 2015. He is now senior investment manager at the larger firm and continues to focus on real assets.

“It’s a little easier to understand; you have more optionality in terms of crop choice. Now that those investors are getting more comfortable in agriculture more broadly, they’re moving into permanent crops … So much capital chasing a scarce number of deals will likely serve as a buffer against falling prices,” said Sullivan.

Institutional interest in permanent crops has also grown. At the beginning of 2008, only 112 properties were registered on the National Council of Real Estate investment Fiduciaries farmland index with a market value of $745 million while 244 properties were registered in the fourth quarter of 2015 with a market value of $3.2 billion.

Although income returns from US permanent croplands have fallen off the highs seen between 2012 and 2013, valuations have remained resilient, according to NCREIF.

Total returns were 1.003 percent in the first quarter of 2008, rising more or less steadily to 1.080 percent in the final quarter of last year, in the face of falling prices.

Sullivan noted farmland in the US remains undercapitalised, meaning farms often promise to exceed regional benchmarks on the strength of investments in on-farm operational improvements.

“Of all the asset classes we look at, farmland is probably the most inefficient and fragmented. It’s very regional, and the difference in quality between farms in a given region is pretty wide,” Sullivan said.

Aberdeen’s real assets team invests in energy, energy infrastructure, timber, agriculture, real estate, metals and mining. The firm had £301.4 billion as of March this year, according to its most recent trading update. Its FLAG Private Equity Fund IX closed on $285 million last year.