Two sides to every investment

There are compelling reasons to invest away from row crops and buy-to-lease farmland models, but there are good reasons to stick with them too. Your choice will depend very much on your strategy.

There are two sides to every coin. But when making investments into agriculture, there are so many options that the proverbial coin flip starts to feel more like solving a rubik’s cube.

That’s where experience and expertise comes in. We hear a lot about seasoned farmers being somewhat reluctant to change, but sticking to what you know isn’t always such a bad strategy.

As we first reported last week, private equity investor AgIS Capital advocated investments into permanent crops over row crops based on the robust versus lackluster performance of their respective NCREIF indexes in 2016. The firm also suggested avoiding the “buy-hold-lease” farmland strategy, investing instead into agribusinesses that integrate and improve farming operations.

AgIS is taking its own advice, but president and founder Jeff Conrad told me that’s possible due to his firm’s extensive experience in the agri market. “When you’ve been doing this for 25 years, you have the luxury to go in and out of different segments, and you’re not wedded to any one region or strategy,” he said.

But while some investors can shapeshift, others are better served sticking to what they know. Put simply, there are also good reasons to stick to row crops and farm rental models.

For row versus permanent crops, much of this deals with their respective risk-return profile. Because row crops are planted yearly, they offer the opportunity to reset following a bad season, whereas permanent crops take several years to produce revenue, noted Grayson Colvin, managing partner and founder of Colvin & Co., a farmland investment manager focused primarily on row crops in the heart of the corn belt.

“Certainly permanent crops will always have a better return because of the risk profile,” he told me. “But row crops represent one of the most developed commodity markets, with corn, soybeans and wheat grown in the US shipped all over the world.”

Meanwhile, the firm usually rents land under 3,000 acres. “In places like Iowa and Illinois, the rental market is so competitive that we can make more money leasing, but in other areas, especially on larger farms, that’s where we can get more involved by purchasing the land and adding value,” he said. Typically, the rented land is 100 percent prepaid by the farmer, while crop insurance programs insure about 80 percent of expected revenue in either scenario, he added.

For New York-based Colvin & Co., which has developed expertise by putting boots on the ground in the corn belt and focusing on row crops, buying and renting land, moving away from its strategy isn’t feasible. Boston-based AgIS, on the other hand, has developed the kind of expertise that allows it to dip in and out of different sectors, focusing on permanent crops when needed and targeting agribusiness.

The two strategies seem to represent two sides to a coin, but luckily investing in agriculture isn’t a simple game of chance. Once you’ve mastered your own rubik’s cube, it may be worth sticking with what you know.

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