Q What are the key demographic, environmental and geopolitical trends that are shaping the agri investing opportunity set today?
In terms of long-term, structural trends, we expect to see the global population grow by around 2 billion people as we head towards 2050, to nearly 10 billion in total. We also expect to see continued growth in middle-income classes in developing countries, which will bring associated changes in dietary patterns, particularly around protein consumption.
We see changing dietary patterns in developed countries as well. These tend to be centered on healthy and clean eating – with consumers being more selective about the protein types they consume. The other key long-term trend, of course, involves climate change. All investors are monitoring those risks and factoring it into their investment considerations.
In terms of more immediate trends, I would point to the ongoing global trade disputes, which inevitably impact the global flow of agricultural commodities. That is something that has created short-term volatility in this sector. We are also monitoring weather conditions, including the drought in parts of Australia. The African swine flu epidemic, which has had devastating effects in China and which now seems to be spreading more broadly, will also have ramifications for agricultural markets as we head into 2020.
Q In light of those macro themes, which sectors and regions do you consider to be most exciting and which, perhaps, are you avoiding?
We address agri investing in two distinct ways. First, we invest in farmland real estate. Second, we invest into the agricultural value chain itself, through either structured debt or equity of operating companies. As in many other asset classes, valuations are rich in a range of different sub sectors, but we do continue to see attractive long-term opportunities here.
Specific to agricultural real estate, those opportunities include permanent crops both in the US and elsewhere, including Australia and Chile. On the row crop side, we continue to be very selective, but find investable opportunities in several of the locations that we target.
In terms of agribusiness, we really focus on identifying great management teams with which we can partner, primarily in the US and primarily revolving around the protein thematic, both animal and plant based. We also look to make investments aligned to food safety, logistics and automation trends.
Q Speaking of automation, what impact is emerging technology, such as the Internet of Things and artificial intelligence, having on the agri investment landscape?
We see technology as a game changer for agri investing, as well for the future of farming.
We have had GPS guidance integration into US farming equipment for the past 12 or 13 years, for example. The adoption rate of that technology has been rapid. Now, as we see the beginnings of automation in passenger vehicles, we expect to see similar integration into agriculture machinery in the years ahead. That could obviously have a material impact on labor costs, as well as farming efficiency.
Even today, we are seeing the adoption of drones and aerial imaging, among other advances, that are all impacting the way in which we farm. In general, we have found that farmers and agribusiness companies we partner with tend to be very progressive in their thinking and in the implementation of technology. Everyone understands they need to become more efficient and sustainable, and so we expect to see ample opportunities to incorporate technology in the future.
“We see technology as a game-changer for agri investing, as well for the future of farming”
Q What is your approach to ESG and sustainability in the context of agri investing?
For us, ESG and sustainability considerations are foundational to agri investing. We look to integrate ESG factors throughout the investment process, beginning with due diligence, where we look at environmental site assessments and the incorporation of practices that could enhance the environmental conditions of an asset. That approach continues through our responsible approach to asset management.
Transparency is also critical. We believe the way that we communicate around our investment activities is highly important. That’s why we are committed to reporting on our activities and progress toward implementing the UN-backed PRI Farmland Guidelines.
And then we are also very focused on how we can mitigate the impact of climate change on our investments, and how agriculture itself affects the climate. To that end, we are building and adopting standards for sustainable agriculture that will increase the resilience of our assets and reduce their carbon emissions.
We understand, for example, that deforestation is a primary contributor to greenhouse gas emissions. In response, we have worked on a deforestation policy in Brazil. This aims to prevent the depletion of forested areas on farms that we already own and halt further deforestation on farms that we intend to buy in the future.
Q Beyond ESG, how would you describe your approach to managing agri assets?
We manage our agricultural strategies through two dedicated investment specialists. Westchester Group Investment Management leads our farmland investments, while AGR Partners is our partner in the agribusiness space.
With farmland, our approach is to build a globally diversified portfolio, investing across regions, as well as crop types. We use both leasing and operating models, depending on a range of considerations, including risk-adjusted returns, asset profile and depth of tenant market. We target food exporting markets, which tend to be the most cost competitive in the production of their particular food commodities, underscoring the logic of a global approach.
With regard to agribusiness, we focus on providing growth capital to best-in-class management teams. We look to support those companies in growing earnings by between 50 and 100 percent. The capital we provide is often used to fund platform extensions or acquisitions but may also be used to address shareholder liquidity or intergenerational transfers of ownership. We operate a partnership model and have a very deep and experienced team of investors and operating professionals who can add value and help support that desired earnings growth.
Q And how would you describe limited partner appetite for agri investing right now?
Our parent company, TIAA, started investing in farmland around 12 years ago and appetite from investors has certainly increased over that time. As a distinct asset class, agriculture is still relatively immature compared to other natural resource investment areas, such as timber or energy. Nonetheless, today, we see small and large public pension funds, in the US and internationally, expressing interest in agri investment, as well as sovereign wealth funds and increasingly corporate pension funds as well.
Q How does agri investing stack up against other asset classes from an investor perspective?
Agri investing tends to be a very defensive and resilient asset class. Its attractive long-term annualized returns are uncorrelated to traditional financial products such as fixed income and global equities. They also have low correlation to other real assets.
Q How competitive is the agri investing marketplace and how has that changed?
Competitive dynamics have certainly increased over the past 10-12 years. There have been quite a few new entrants and some of the big institutional investors are also starting to look at investing directly, as well. Valuations do appear to be going up, and so the way in which you source and underwrite investments is critical. But we do continue to see attractive investment opportunities, notwithstanding the competitive conditions we have today.
Q Are there other challenges that investors should be aware of when it comes to agri investing?
I think investors need to be cognizant of the expertise required. It is a very specific skill set, whether you are investing in agricultural real estate or the value chain. Agriculture also tends to be even more inefficient and illiquid than other private asset classes, so sourcing and disposition can be difficult.
And then we come back to the all-important ESG considerations. There is risk involved with an asset class where you are investing into farmland and food-related companies. You are dealing with issues close to people’s hearts, such as consumer health and climate change. Being able to invest and manage assets in the right way, while always being transparent and communicative, is critically important for both investors and managers today.
“Agriculture is still relatively immature compared to other natural resource investment areas, such as timber or energy”
Q How does your agri investing business fit in with Nuveen’s broader focus on resource efficiency?
Resource efficiency, as a theme, spans both our agri investing and impact investment teams. It is about creating closed-loop circuits to ensure true sustainability throughout the entire process, and it is an area where we are seeing more investment opportunities.
From an impact investment perspective, that could involve investing into recycling and waste management strategies, using new technology to improve outcomes. One step we have taken, particularly in California, is to incorporate solar panels on many of our farms. This allows us to combat increased energy costs, but also, where possible, to transmit that energy back to the grid to enhance the sustainability of our assets.
Q Finally, what do you believe the future holds for agri investing?
We are certainly very positive about the asset class at Nuveen. Notwithstanding the competitive conditions we see, we believe there are ample attractive opportunities to deliver risk-adjusted returns. Sustainability considerations will continue to be at the forefront, for both investors and managers – and not just when it comes to the integration of sustainable practices in the investment process. The way in which you measure and communicate your impacts to broader stakeholders will also become increasingly important in the years ahead.
Lastly, I would reiterate the significance of technology adaption both at a farm level and in the agribusiness value chain. Adoption of technology will play a crucial role in driving value creation and ultimately in delivering attractive risk-adjusted returns.
Unlocking value through water management
Among its Californian vineyard assets, Westchester, Nuveen’s farmland investment specialist, has developed the 900-acre Oasis Vineyard in Monterey County, at a cost of around $30 million.
During the underwriting process, the firm identified the opportunity to enhance the water efficiency of the asset, having witnessed leakage in the existing reservoirs and in the conveyancing of water around the property.
Westchester initiated a capital expenditure program that included the construction and redevelopment of three large reservoirs. It adapted the vineyard’s infrastructure for mechanical harvesting. Irrigation upgrades, including the installation of reservoir and canal lining, reduced water usage by 50 percent. This resulted in lower operating costs, the future-proofing of the business and, of course, a positive environmental impact.