What were the biggest trends when it came to agri investing in 2022?
Matthew Corbett: Agri investing has benefited from a flight to safety by investors against the backdrop of the asset class providing a proof of concept by performing well through an inflationary period. We are also seeing a greater understanding of the importance of quality assets within a farmland portfolio, the integration of effective ESG management into the investment process and focusing on capital developments that improve resource-use efficiency.
Olly Hughes: Over the course of 2022 we have seen some significant volatility in timber prices but forest values have remained stable due to the long-term nature of the asset class. The clear trend is an increasing interest across the institutional investor spectrum to invest in forestry for a long-term return aligned with sustainability and the opportunity for carbon sequestration.
Ryan Ramsay: As it has become evident the current inflationary cycle is not temporary, the role agriculture can potentially play in hedging this exposure has renewed interest in the sector. However, it has also raised pertinent questions regarding investment strategy, such as subsectors and business models, which offer varying degrees of inflationary hedging. The other factor that has come to the forefront is the concept of natural capital and how this is becoming central to many agriculture investment strategies. While, historically, sector sustainability has been focused on avoiding any negative ESG outcomes, this is elevated under natural capital-based strategies that also seek to drive positive ESG outcomes.
What were the challenges last year?
MC: The legacy impacts of covid (increasing labor shortages, challenging supply-chain management, etc) created some operating challenges, particularly in the early part of the year. Higher quality assets performed relatively better in this environment, so maintaining our focus there was important. Additionally, it was important for us to empower and support our partners to manage through the challenges presented.
OH: A key challenge in the forestry sector remains sourcing new investment opportunities that deliver the right combination of financial return and natural capital opportunity. We have continued to source our pipeline through a combination of on and off market with a strong focus on afforestation.
RR: The ongoing disruption to global supply chains arising from covid have continued to present cost and operational challenges, as has drought in the Western US. These are issues largely outside the control of individual investments, and while both appear to be subsiding in early 2023, it highlights some of the inherent risks of the sector.
The other challenge faced by the sector is track record, whether that be the relative short tenure of managers relative to other asset classes or market headwinds over the last 10 years and is often an impediment to obtaining allocation approvals. Fortunately returns have benefited from a more favorable couple of years. However, this can still require a complex diligence process to attribute historical performance and explain the figures (eg, asset, sub-sector, market, geography, currency, etc.).
How are investor attitudes toward agri changing?
MC: There is an increasing appreciation for the benefits of the asset class in a modern institutional-grade portfolio and the operating models/geographies/sectors available to investors. The last few years have also highlighted the essential nature of food production in our lives. It is not a short-term trend; the asset class will continue to grow.
OH: There remains a very noticeable positive change in the appetite of investors to invest in high-quality forestry and natural capital. There is significant global interest in sourcing large-scale, high-quality assets.
RR: Historically, the rationale for including agriculture in an investment allocation has centered around portfolio benefits. While we believe the portfolio rationale remains robust, based on our client, and broader market engagement, the characteristics of natural capital and potential alignment between environmental (ecosystem, biodiversity and carbon) and financial outcomes is changing how agriculture (and forestry) is viewed by potential investors, and how it is being incorporated into investment allocations.
Looking ahead, which sectors do you see being most popular among agri investors?
MC: High-quality farmland assets that have the ability to offer high-margin, lower-input, lower risk, sustainable production of food. The popular answer here would likely be controlled environment farming, which I believe will find its (increasing) place in the food production system (and asset class), but investors will continue to show an appreciation for high-quality, core farmland that produces high-quality food at a low cost of production.
OH: We remain confident that investors will continue to increase their allocations to natural capital and specifically forestry investments as they are able to deliver a good combination of return and ESG positive characteristics.
RR: One of the attractions of agriculture is the breadth of the sector in terms of geography, subsectors, business model and position within the value chain, resulting in a large matrix of opportunities. We expect annual and permanent crop-based strategies to remain popular given the ability to access large GP coverage, attractive asset level liquidity and most straight forward sustainability profile. However, increasingly, strategies that are aligned with natural capital outcomes, in particular biodiversity, ecosystems and carbon, are going to attract more of the capital coming into the sector.
What do you look for when investing in a food or agri fund?
MC: I believe our investors value the diversified offering of our fund which is more nuanced than simply what we grow and where. There is consideration for the diversification of input sources, end market exposure and trade regulation diversification. Additionally, as referenced earlier, the high-quality asset base and quality farming partners are increasingly well understood to be important for success in the asset class.
OH: At Gresham House, as a specialist forestry asset manager we invest directly in assets. We look for forests and planting opportunities that are high quality and have scale. We focus on building portfolios that have high levels of diversification in terms of geography, age and species.
RR: Our approach is fairly consistent from sector to sector; what changes is that our team features dedicated sector specialists who spend all of their time in their field of expertise. Our focus is on developing investment programs that meet the needs of our clients, such as risk/return, yield, liquidity, etc; this is the starting point for all investment selection decisions. In terms of investment specific considerations, we focus on organization, strategy and track record, and critical to this is alignment with the team we are entrusting to invest our clients’ capital, and their willingness to embrace a partnership approach with our clients.