Ryan Sullivan, a senior investment manager for real assets at Aberdeen Asset Management, offers Agri Investor his thoughts on farmland, the role of debt in agriculture and his timber market outlook for 2017.
Do you expect US farmland prices to fall in 2017, and if so by how much?
It’s tough to be able to say ‘farmland prices are down’ because there is such a wide disparity across various regions of the United States. I think we are going to see a checkerboard pattern where certain regions will see an appreciation of farmland values and others that are overvalued today will come down.
In places like the Midwest, which is a core farmland market, you would expect values to drop a little bit, since cash flows are going down. County by county is really what matters in farmland because it’s such a local business.
What is the current level of demand for farmland investments?
There’s a real structural move into the asset class. What a lot of people don’t appreciate is that farmland is probably the most distressed area that we are looking at today, when factoring in the pure cash flow metric that shows net farm income levels down 45 percent below 2013 levels.
For the last 10 years, farmland has been viewed as overvalued. It will be interesting to see how the cash flow characteristics of the asset class translate into land value going forward. Ultimately, the big differentiator for farmland versus other asset classes like oil and gas or mining is that leverage levels are much lower. I don’t think you will see the leverage driven distress level that you may see in a real estate, where there is 60 to 70 percent leverage on some assets.
Does that create opportunity for private debt investments into agriculture?
I think the asset class is ripe for debt. We have had conversations with smaller agricultural operator types, not necessarily fund structures yet, about the opportunities.
But given the local nature of the asset class and the family orientation, the fact that so many of these farmers got really burned in the 1980s with debt is a very important factor. One of the biggest challenges will be to convince a high-quality farmer to take non-bank debt onto their property.
The broad thematic makes a ton of sense. There are young farmers out there today who are very ambitious, they went to business school and really want to grow their operating business. They might be willing to take on some level of debt to re-invest in their business and the acres they are leasing. But, at the same time, there still is an overhang of thinking ‘debt is bad’ in agriculture.
You can do it at a small level, which is what we would be interested in doing, but to do it in a big way, I think there is an important education process that has to take place.
What will you focus on in the timber markets next year?
There are a number of funds out there that were part of the initial institutionalization of the asset class and are now getting to the end of their fund lives. There’s some frustration from investors that the return projections they thought they were going to get just weren’t there, and that may create an opportunity. As these funds reach the end of their lives and have an investor base that may be a little fatigued, that could be a catalyst to find some opportunity and to buy timber at a reasonable price.
We haven’t seen the growth in managers for timber that we’ve seen in agriculture, mining or even oil and gas. The question becomes who can augment their business model and find interesting deals in what has become a much lower-returning asset class compared to other real assets. I don’t think you’re ever going to get a real steal in timber because it’s a relatively efficient market, but you might be able to at least close that bid-ask spread a bit and feel better about what you are buying.