Recent strength in farmland markets has validated those who have long predicted an inevitable shift toward higher inflation as a key reason for investing in agriculture.
Given the complicated swirl of factors propelling recent inflation – and the financialization of markets bubbling beneath it – the rally has also created a new perspective from which to gauge the role of investors within US farmland markets and consider challenges they could face in the years ahead.
Soon after the sale of his boutique to Farmland Partners in a deal that will see the unit continue managing institutional capital, Westchester Group founder Murray Wise told Agri Investor that a generalized compression of return expectations and the active role of producers and family offices rank among the most important farmland market changes over recent decades.
Wise – whose experience in farmland stretches back to his first purchase at the age of 17 – said while institutional investors have become well-established partners for large agricultural producers, such producers have also become a significant source of competition for investors.
He estimated that whereas large producers and family offices account for about one-quarter of farmland deals, their share of the market was significantly smaller as recently as 2017.
“The farmer doesn’t need us as badly as they did 20 years ago,” said Wise. “By the same token, we still work with major farmers who refer a lot of land to us with the hope that we will find a Farmland Partners, Gladstone, TIAA or whoever to buy it, with the understanding they will hopefully lease it back to the operating farmer. That transition has occurred.”
The role of investors was front and central last week at Peoples Company Land Investment Expo, where University of Illinois professor Bruce Sherrick suggested that role could change in the years ahead.
“Institutional, high-net positions have been really good for agriculture. Folks who needed to expand their production quite often couldn’t do so on their own and needed another source of capital,” he said. “In the long run, I think it will become low-cost – closer to debt – cost of capital, but in the meantime, you have to have someone help with the expansion.”
Looking further ahead at the Expo, Peoples Company’s Dave Muth shared his observations from a recent family office conference in New York. He relayed anecdotes about a Rockefeller heir’s plans to divest from JPMorgan due to its fossil fuel exposure, and disagreements within another ultra-high-net worth family about whether to buy a small oil company in order to bankrupt it.
Muth suggested such investors’ ESG concerns could come to play a tangible role in agricultural issues; for instance, what to do with any current grazing land likely to come out of production as beef consumption continues to decline among a growing number of health-conscious consumers.
“There’s a lot of really influential folks out there that are driving how capital is actually moving through the system and how a lot of these [ESG] focuses are going to work going forward,” he explained.
Specifically, Muth highlighted the “precision fermentation” and “food as software” paradigms described in a 2019 report from think tank ReThinkX, which he said could have a “potentially significant negative effect” on farmland values.
“The key takeaway is, there’s going to be significant investment in these kinds of technologies and they ultimately will have an impact,” said Muth. “We are seeing the first generations of this happen now.”
With farmland having recently proven the inflation-focused thesis that has driven market sentiment for much of the past 10 years, those interested in the decade to come should pay attention to the new view ahead.