Sorting the wheat from the chaff

A dip in US farmland values and commodities could impact institutional investment appetite – and perhaps spark some Darwinism among buy-and-lease-focused fund managers.

US farmland-focused asset managers have been quick to defend themselves  against claims that this year’s bumper harvest and falling commodity prices will impact investment returns.

While some offering buy-and-lease investments admitted that rental values could fall by as much as 20 percent, they argued that this would only represent a short-term dip in returns for generally far longer term investments. Even Jim Rogers, the famed US agriculture investor, said he was not worried by this potential “blip” during Agri Investor’s Q&A with him.

They have a point. Several US farmland investors, such as TIAA-CREF and AP Fonden 2, have positioned themselves to hold US farmland assets for more than 20 years; even those with a 10-year investment horizon might not feel the heat too much.

What’s perhaps more concerning, however, is the impact that a year of losses – and potential write-downs if land values fall – might have on the burgeoning institutional appetite for private investment into agri. A bad year might do little to impact overall returns over the long-term – but it might put off first-time investors from taking the plunge or discourage any anxious existing investors from investing further.

“We have seen some people invest in US farmland that do not know where they are on the J-curve – and they will be none-the-wiser by being down next year,” said one concerned global agri fund manager. “It could set people back a few years in terms of making more commitments.”

The US farmland market also has some of the biggest and most established agri asset managers on the planet – name-brand firms that many first-time investors automatically flock to on reputation alone. The fund manager noted that even a perceived fall from grace by a large agri investment manager could do a fair amount of reputational damage to the asset class. Investors might start to worry: ‘If the big guys can’t do it properly, who can?’

Of course that would be a narrow view. Any sophisticated institutional investor should be able to distinguish between avoidable and unavoidable losses – not to mention the fact they should be focused on long-term results. And next year could actually be helpful to investors in revealing which buy-and-lease managers have effective and well thought-out leasing strategies, and which do not.     

While buy-and-lease agri investments might seem fairly straight forward, there are varying ways in which leases can be negotiated with farmers. For example, managers that renegotiate leases every two years instead of one, and those that stagger the expiration of leases so they don’t all fall on the same year, are likely to be relieved this year.

The effectiveness of crop sharing leases, where investors receive rent and some of the profit from production, or bonus rents, whereby farmers pay a higher rent if they produce more than a certain volume, will also be called into question.

“It doesn’t seem to be acceptable to pursue a method that includes crop prices in the equation; because ultimately a good year for a farmer is when prices are high and production is low, and that’s when the landlord doesn’t get anything,” said another agri fund manager.

The coming months will certainly not be doom and gloom all round, and the long-term picture still looks rosy. Let’s hope investors remain steadfast and recognise this cycle for what it is – and that these changing market dynamics help sort the wheat from the chaff.