We ask TIAA’s Justin (‘Biff’) Ourso about where the $889 billion manager is focusing geographically, why it’s walked away from some Australia deals and how it approaches risk in emerging markets.
Where are you looking to build your portfolio?
We are seeking to give [clients] geographic crop diversification across markets. Our dominant strategy is a buy-and-lease model meant to generate a consistent return profile over time. We opportunistically invest in permanent, broad-acre or row-crop farming where we take risk through custom farming that moves us up the risk return spectrum.
We are thinking about investments in a 20 to 30-year context and manage around $8 billion in farmland assets including commitments.
The US forms the dominant portion, [more than 50 percent], with more than half of assets dedicated [there], our next-largest target regions being Brazil and Australia respectively. We are also looking to diversify into markets in broader South America like Chile, as well as New Zealand, and Central and Eastern Europe.
Where are you seeing the highest returns?
The US row-crop market is one where it has been a period of softer rents and land values reported. That is creating the potential for new investment, but we are finding more opportunity today internationally.
We have the highest return expectations in the markets where we see the highest risk to compensate for that, and think Brazil continues to offer the highest prospect from a total returns standpoint, driven largely by capital growth expectations.
From a productive capacity, value and currency standpoint it is also an interesting time to be looking at Australia. From our investment experience in Australia going back eight years or so, our buy-and-lease model has worked very well. It has cultivated a number of long-term relationships with a number of local farmers and that has provided stability in what can be a volatile production environment.
What are you looking at in Australia?
The crop types that we target in Australia tend to be commodities that are not growing in other areas of our portfolio, for example wheat. In the US, wheat is primarily grown in anti-corporate states where we don’t invest so we get wheat exposure as an investor in Australia.
Other primary crops would be cotton, particularly on the irrigated land in northern, eastern and southern Australia, and then canola [rapeseed] and barley.
Over the last 12-24 months there has been a lot of interest in Australia from Australian farmers and domestic and international investors which has supported strong land markets, so to a certain extent we have had to walk away from transactions as we have found values exceed our underwriting criteria. In particular, there have been a number of dry land farming opportunities where we have seen increased investor interest.
What investment structure trends do you see in the market?
As [farmland] relates to traditional private equity it is illiquid, but there is an active secondaries market. When you think about agriculture and farmland as an emerging asset class and evolving vehicle structure, I think it is logical to look at other parallels that came before, whether it is real estate, timber, or other more traditional private equity classes. As this asset class matures, the ability to trade in vehicle interests will be there.
I don’t believe, given the relative immaturity of the asset class, that it is fully there today, but over time it is logical to think the industry would develop in such a manner.
How do you approach risk in South America?
When you think about South America or any emerging market the importance of local knowledge and access can’t be underestimated. Our approach is very much predicated on having a local team or partner to analyse, understand and mitigate specific risks.
The second nuance is where the buy-and-lease model works well. You are enabling a local farmer or company who understands that market. We can add value by being a capital provider.
Across markets, we have asked what we can do to enhance operations on an asset, sometimes building modest grain storage facilities, improving the drainage, minimising soil erosion, improving irrigation, that drive productive value increases for the tenant and underlying land value increases for us.