The Rohatyn Group: Taking a holistic view on investing

This article is sponsored by The Rohatyn Group.

Achieving maximum value for your agricultural assets depends on possessing an understanding of land use optimization, one that, somewhat counterintuitively, may actually mean reducing allocation in certain areas to increase output. Agri Investor spoke with Erik Kankainen, Ian Jolly and Mike Claridge, partners at The Rohatyn Group (TRG), about how the company ensures all its properties achieve their potential.

What current trends are you witnessing within agricultural investment?

Ian Jolly: I grew up on a farm and subsequently I’ve been in the industry for about 40 years, so I can claim to have a lifetime of perspective. There is certainly increasing awareness of agriculture as an investible asset class, which is reflected in the mainstream media, as well as investment journals. A greater range of institutions are waking up to the potential of agriculture as an investment. I think this is in part driven by demand for inflation hedges, but also long-term thematic trends focused on resources and the climate.

Erik Kankainen: There is also a sustainability trend taking hold. Third-party certification programs, for example, are well established for forestry investments but historically less established for agriculture investments. That has been changing, with new agriculture certification programs being developed. We are witnessing heightened demand for sustainability tracking, and the industry is responding. In addition, long-term trends around demand for diversification, inflation hedging, and high risk-adjusted returns are as prominent in ag as they are in other asset classes.

What role does land use optimization play in ag investing?

Mike Claridge: In theory, land use optimization seeks to ensure every property is maximizing its productive potential, both in terms of the types of crops it grows and that the cropping practices and systems employed are matched to site. In practice, this can be achieved in numerous ways at the farm level, and often includes a range of activities undertaken in tandem to transform the farm’s capacity and operating output.

This optimization arbitrage is best secured via a mix of intelligent planning, patient capital and a flexible mindset. As part of our acquisition due diligence, we identify immediate opportunities to optimize productive land use via thoughtful decision making about what crops to plant and where, and how best to maximize each crop’s potential.

IJ: Coming from a farm background, my father held the view that trees were the enemy – that they should be replaced with pasture to extract maximum value from a limited land area. When I joined TRG, this view was reflective of historic attitudes toward land use – in our part of the world (New Zealand and Australia), properties were either 100 percent farming or 100 percent forest – there were not many multi-use properties.

This perhaps showed our relatively young state of development compared with Europe, where land use optimization has evolved after centuries of development, and each relatively small plot of land is dedicated to its best use (subsidies aside, that’s another story). What we are now seeing is an evolution of land use toward what is logical from a productive optimization standpoint and a sustainability perspective.

We bought a large New Zealand farming property in 1998 and immediately retired one-third of the land into regenerating native forest. We retained and invested in just one-third for farming, and planted the remaining third into plantation forest for timber and carbon (with some ‘overflow’ grazing). Within five years, the property was carrying a greater number of stock units from the retained farmland area (30 percent) than it was prior to the purchase on 100 percent of the property, primarily due to better allocation of land and capital. It also led to more positive environmental outcomes.

While TRG sold this property 10 years ago, we have been able to revisit and view the results of our land use allocations several times, including in the last 12 months. It remains, in the view of the current owners, a success and very satisfying to revisit. While this is a historic deal for the firm, being able to review the results after many years for what was a long-term land use allocation plan is what gives us confidence that our reasoning and decisions of the time were sound and that helps us make similar decisions now.

Could you talk more about ‘integrated landscape planning’?

MC: As a manager, you look to review each property and find opportunities to allocate to a range of strategies. Each property will have a diversity of land types, and differences in access and infrastructure. Institutional investors look at integrated landscape planning because a lot of value can be created and efficiencies achieved.

IJ: Integration doesn’t happen immediately. You need to experiment, which sometimes leads to a failure or two. For example, we pivoted to intensive cropping in one of our properties before discovering these areas were ultimately unsuited for this activity. We then converted to cattle grazing, which has been successful and synergistic with the remaining cropping areas (cattle are finished in an on-site feedlot using grain grown on the property).

Further, the two large water reservation areas on the property were connected to a sophisticated pivot irrigation (instead of flood irrigation systems) and productivity and environmental gains have been significant. On the same property, a few areas lent themselves to tree crops (eucalyptus), which we grow for the local mills. Like the New Zealand property, well-chosen integrated land uses are symbiotic and lead to better environmental and productive results.

How can partnering with not-for-profits help to enhance results in ag investing?

EK: Collaborations with conservation-focused organizations can play an important role in conservation while ensuring land use meets local needs. Any piece of land can produce a number of different products. Land can be used to grow crops but can also be used for community recreation, renewable energy such as solar or wind power, or any other sort of land use with broader social objectives. These collaborations are not always with non-profit groups – they can be with universities or government agencies, or local businesses.

Over the last five years, we’ve been developing internal reporting impact metrics that measure factors such as water quality, safety incidence rates, or the number of hectares open to the public, to help us to track how our investments are performing more broadly, and offer opportunities for us to drive ongoing improvement. The Forestry and Agriculture ESG oversight committee is made up of individuals from across various parts of our business, and different geographies, and also serves to ensure we can transfer learnings across assets and investment strategies.

MC: Acquiring reliable and useful data is not challenging per se but designing data standards that are consistent and enable meaningful analysis can be – particularly around certain types of impact metrics. Ag investors face problems around standardization. It remains a work in progress to consolidate standards to be repeatable, measurable and independently verified.

What sort of impact is climate change having on ag investment?

MC: We have given a lot of thought to climate change. This encompasses a raft of issues that we and our investors consider, including negative components like desertification, soil erosion and many others. Of course, long-term considerations must be factored into any investment strategy – it’s not just about understanding the situation today but in 10 or 20 years’ time. Researching how crops may perform in the changing environment – and if no longer suitable, alternative options – helps us re-evaluate our investments and adjust our approach.

It’s also important to realize the interesting opportunities that will emerge from climate change from an investment point of view. We are looking for properties with attributes that make them more resilient to climate change. This includes some obvious qualities, such as access to robust aquifers, but also others like which crops should be planted and how the environment may change in the years ahead.

It may seem like an unusual thing to say, but climate change will have beneficial impacts in certain areas. You have to be nimble to grasp the opportunities that will arise as the planet warms. We have, for example, been investing in the Northern Territory of Australia for 15 years, reflecting long-term climate modeling that suggests the NT will get warmer and wetter due to climate change – in turn improving productivity for certain crops.

IJ: We try to avoid certain areas without good long-term prospects. We stay away from higher-risk areas. There will be opportunities to introduce new crops, and access to water is becoming increasingly attractive. We want to mitigate risks. You can’t replace rainfall completely, but you can mitigate water depletion with irrigation, technology, and capital.

How do you ensure effective execution of your ag investments?

IJ: We take a lot of personal ownership when selecting our properties. The thrill of having bought something fades quickly if it is not managed well, so we have management options front of mind before a purchase takes place. There is a rigorous process to select a manager and TRG is on-site regularly. We take a holistic view of all our purchases. Property management is dynamic, which means you need to stay connected and adaptive. You also have to stay alive to the possibility something is not working.

MC: Our business model is such that we separate property management from our teams’ role as fiduciaries. For every property we invest in, we seek to secure the best available management at the best cost on an entirely transparent basis for investors. Globally, we have about 20 managers, who we work closely with, incentivizing them so they are aligned with our investors’ objectives. This ensures we have access to a huge amount of management expertise, within a very flexible and responsive framework.

EK: Ultimately, our management team is essential to optimizing the value of our investments. We aren’t experts in every single aspect of property management. But we make sure we have people in place that are.

TRG land use optimization

A notable example of TRG’s approach to integrated land use planning (or what we describe as land use optimization) is well illustrated by our sandalwood plantations in Western Australia.

This strategy has involved the acquisitions of several large-scale row cropping properties, all of which are comprised of a range of soil types including:

1. Soils with clay content – ideal for broad acre row crops of wheat, barley, canola and others;
2. Light sandy soils – poor performers for row crops but ideal for the native sandalwood species;
3. Degraded soils affected by rising saline water tables.

TRG has rationalized these properties into ongoing cropping on type 1 soils, sandalwood plantations on type 2 soils and typically retired and or remediated on type 3.

The benefits of the above land use allocations include that the average cropping yields are improved significantly and the degrading soil salination effect (brought on by the removal of the original vegetation including sandalwood) is reversed by the sandalwood afforestation. Numerous other benefits accrue to biodiversity. And from an investment perspective, we immediately elevate our farming activities to above-average cropping yields, and the sandalwood accrues value from biological growth, adding to property value and total return. It’s a real win/win in the context of retaining high-quality land for food production and the reallocation of lesser quality land to tree plantings for environmental benefits and investment returns.

We believe these land use allocations, like the NZ sheep station example, have long-term implications for the landscape, helping to generate and preserve valuable resources for future generations while optimising investment returns. Without this attention to land use allocation, some agricultural systems will eventually deplete and degrade the landscape to such an extent they become completely unproductive, such as the salt water polluted areas in Western Australia.