CAIA Association Seattle Chapter
Opportunities and Risk in Agricultural Land Investing
March 23rd, 2017
About Us
Real Asset Portfolio Management LLC (“RAPM”) is an investment advisory firm focused
exclusively on real assets.
▪
RAPM was established in 2011 and is registered with the SEC as a Registered Investment Adviser, operating
under the Investment Advisers Act of 1940.
▪
We currently advise institutional clients with diverse and extensive portfolios encompassing approximately $3.8
billion of real assets investments.
▪
We are based in Portland, Oregon with clients spread throughout the U.S. and investments spread throughout
the world.
▪
We have advised institutional clients on over $1 billion of investment in agricultural land and agribusiness
operating companies.
▪
We function as both an advisor and a general partner in managed accounts to help our clients meet their needs
in real assets.
▪
We have on the ground investment experience in North America, Europe, Asia, and Latin America and we have
successfully navigated the complex structuring issues of a global portfolio to maximize proceeds to our clients.
▪
We have developed a state-of-the-art, proprietary, and comprehensive registration system and database of
investment opportunities to better serve our clients.
▪
We’ve developed best-in-class performance reporting and fund administration systems, following industry
standards and developed in consultation with leading industry performance reporting experts.
1
Why Invest in Real Assets?
Real assets are supported by strong long-term demand fundamentals and consistent market
inefficiencies making price discovery difficult and reward operational expertise:
Real Estate
▪
▪
▪
Diverse asset base with
varying risk/return
characteristics across
property types and
geographies.
▪
Relatively fixed supply
positioned to benefit from
global demand growth.
▪
Focus on enhancing cash
flows can manufacture cap
rate compression.
Diverse and fragmented
producer base.
▪ Operationally complex and
Opportunities exist to
invest across the capital
structure, with a focus on
risk-adjusted returns.
capital intensive business
models limit new entry
and reward proven
operators.
▪
▪ Lease escalators make
cash flows positively
correlated to CPI.
Infrastructure
Energy and Minerals
▪
Robust exit options
through public markets or
acquisition by “majors.”
Historically positive
inflation correlation.
▪
Substantial need to
upgrade and develop
global infrastructure
supply.
▪
Fiscal constraints make
private or public-private
partnerships increasingly
attractive.
▪
Operationally complex and
capital intensive assets
with monopolistic
economic characteristics.
▪ Generally predictable cash
flows with less commodity
sensitivity.
Timber/Agriculture
▪
Staple input/consumption
assets with lower economic
sensitivity.
▪
Substantially diverse asset
base with varying value
drivers leads to
uncorrelated returns.
▪
Marginal demand for
agricultural products
highest in low income
populations experiencing
economic growth.
▪ Import demand from China
and India likely to grow
significantly.
2
Specifically, Why Invest in Agriculture?
Sources of U.S. Competitive Advantage in Agriculture
Category
Factor
Description
The U.S. has a high concentration of alfisols and mollisols, which are fertile soils conducive to
Soil
crop production.
U.S. regions experience a mix of climates conducive to a variety of row and permanent crops.
Climate
Natural
Water
Equipment
U.S. farmers have invested heavily in roads, canals, and storage facilities, which are critical to
transporting goods to a global market.
Global leaders in farm planting and harvest equipment are U.S.-based companies and U.S.
farmers have consistently shown a willingness to upgrade machinery to improve production.
Science
U.S. farmers employ the most advanced technologies in seed genetics, pest management, and
crop rotations to enhance yields.
Financing
Debt capital for land and equipment is available and often subsidized, though U.S. farmers have
almost always utilized low levels of debt.
Infrastructure
Investment
Capital Markets
Futures
Legal System
Research Initiatives
Policy
The U.S. has regions with ample rainfall and river fed irrigation systems to ensure a consistent
water supply though water rights for irrigation are complex and evolving.
Subsidies
Trade Protection
Ownership
The U.S. has a highly developed futures market, which allows farmers to mitigate crop price
sensitivity through hedging.
The U.S. legal system is strongly supportive of private property rights in both land and water.
The U.S. has historically incentivized farming-oriented research through land grant universities.
The U.S. provides subsidies to growers of program crops and also supports federal crop
insurance.
The U.S. imposes marketing orders and import barriers on a variety of crops and livestock
products.
The U.S. has strong private property rights for both land and water and lacks concerns of
nationalization.
3
Specifically, Why Invest in Agriculture?
1. Strong returns with reduced volatility
▪ Farmland has been the strongest performing asset classes over the last 20 years on both an
absolute and relative basis.
▪
Despite strong returns, volatility has been closer to core fixed income securities.
2. Enhanced portfolio diversification
▪ Farmland has demonstrated low to negative return correlations with traditional, alternative and
other “real” asset classes.
3. Demonstrated inflation protection
▪ Farmland has historically demonstrated positive correlations to inflation.
▪ Nominal and real returns in farmland have been strongest in periods of high inflation.
4. Consistent income yield
▪ Current income has been an important and consistent component of the historical returns of
farmland.
4
Strong Historical Returns
Asset Class Cumulative Performance 2004-2016
Asset Class Returns and Standard Deviations
1/1/1991 - 12/31/2016
14%
Return
US Stocks
Timber
10%
Real Estate
4%
250%
International
Stocks
8%
Hedge Funds
6%
350%
REITs
Farmland
12%
450%
150%
50%
3 Mo T-Bill US Bonds
2%
-50%
0%
0%
5%
10%
15%
20%
25%
Risk
2006
Farmland
Int'l Stocks
3 Mo T-Bill
2008
2010
Timber
US Bonds
3 Mo T-Bill
2012
Real Estate
Hedge Funds
2014
2016
US Stocks
REITs
Farmland Timber Real Estate US Stocks Int'l Stocks US Bonds Hedge Funds REITs 3 Mo T-Bill
Return
Std. Dev
Sharpe Ratio
11.63
6.17
1.44
10.01
7.3
1
8.05
4.66
1.14
9.9
15.37
0.47
5.78
17.56
0.17
6.02
3.94
0.83
7.14
6.44
0.68
11.99
19.38
0.48
2.87
1.15
0.11
Farmland has demonstrated compelling absolute, relative and risk-adjusted returns over the
last 20 years, along with strong downside protection in 2008-2009.
Source: Zephyr
5
Balance Between Income and Appreciation
• Farmland returns were subdued over 2016 as row crop commodity prices have been low for the past three
years.
• Permanent crops continue to post strong performance relative to annuals, but it appears to be moderating.
NCREIF Farmland Property Type Returns
NCREIF Farmland Returns
40%
35%
Income
34%
Appreciation
30%
30%
20%
30%
Permanent
25%
22% 21%
16%
16%
15%
7%
10%
10%
8%
6%
11%
9%
8%
7%
13%
12%
9%
6%
7%
20%
21%
19%
12%
0%
Annual
27%
15%
10%
7%
8%
9%
10%
7%
4%
4%
8%
7% 6%
17%
10%
9% 8%
6%
5%
5%
2%
5%
6%
14%
21%
21%
17% 17%
15% 16%
17%
16% 16%
15%
0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
5%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
NCREIF Farmland Regional Returns
50%
44%
40%
30%
20%
24%
17%19%
14%
13%
23%
15%
6%
10%
1%
6%
10%
8%
2%
6%
18%
10%
3%
6% 6% 6%
10%11%
2%
5%
0% 0%
3%
7%
11% 9%
3%
2%
8% 10%
0%
-10%
Pacific West
-5%
-5%
-2%
2007
2009
Pacific Northwest
2014
Corn Belt
Delta States
2015
Southeast
Mountain
Lake States
2016
Southern Plains
Source: NCREIF
6
5%
8%
Enhanced Portfolio Diversification
Bill
3M
o T-
US S
t ock
s
Int'
l Sto
ck s
US B
ond
s
Hed
ge F
und
s
RE IT
s
E sta
te
Rea
l
er
Tim
b
Far m
la nd
Total Return Correlations by Asset Class, 1991-2016
Farmland
1.00
Timber
0.39 1.00
Real Estate
0.19 -0.07 1.00
US Stocks
0.13 0.04 0.13 1.00
Int'l Stocks
0.15 0.03 0.13 0.84 1.00
US Bonds
-0.12 0.10 -0.16 -0.15 -0.16 1.00
Hedge Funds
0.07 0.16 0.11 0.67 0.69 -0.13 1.00
REITs
0.01 -0.06 0.16 0.57 0.52 0.10 0.43 1.00
3 Mo T-Bill
-0.09 0.25 0.09 0.04 -0.03 0.29 0.21 0.00 1.00
Source: Zephyr
7
Demonstrated Inflation Protection
Farmland Comparison Period 1946-2015
Inflationary Period
Nominal1
CPI
High Inflation
13.77%
7.36%
Medium Inflation
10.35%
2.87%
Low Inflation
8.88%
1.14%
Total
11.00%
3.78%
Inflationary Period
High Inflation
Medium Inflation
Low Inflation
Total
Timber Comparison Period 1960-2015
Nominal2
CPI
21.43%
7.22%
13.26%
3.16%
5.75%
1.42%
13.16%
3.85%
Real Estate Comparison Period 1978-2015
Inflationary Period
Nominal3
CPI
High Inflation
12.49%
6.38%
Medium Inflation
7.55%
2.97%
Low Inflation
7.71%
1.47%
Total
9.27%
3.60%
Real
6.41%
7.48%
7.74%
7.21%
Real
14.21%
10.09%
4.33%
9.31%
Real
6.12%
4.58%
6.24%
5.67%
1) 1946-1990: Hancock Broad Farmland Index, 1991-2015: NCREIF Farmland Index
2) 1960-1977: John Hancock Timber Index, 1978-2015: NCREIF Timberland Index
3) NCREIF Property Index
8
Strong Long Term Fundamentals
Farmland produces hundreds of different commodities, yet the end uses for these commodities are generally
grouped into four broad categories:
1.
2.
3.
4.
Food – Intended for direct human consumption, including cereal grains, fruits, nuts, and raw or processed
vegetables.
Feed – For livestock that are eventually consumed as meat, eggs, or dairy products.
Fuel – Portions of crops like corn and sugar are converted to biofuels to partially meet domestic energy
demands.
Fiber – Crops like cotton and even corn can be converted to fibers for making fabrics and other non-food
and non-fuel products.
Macroeconomic Trend
Global Population Growth
Global Economic Growth
Domestic Energy
Independence
Resulting Impact on Ag
Markets
Greater demand for food and
fuels.
Greater demand for higher
quality diet, incorporating more
high protein livestock raised on
feed grain.
Agriculture commodities are
increasingly used as a source of
fuel rather than food or feed.
Effect on Prices
Risks to Deteriorating Demand
↑
Disease, war, or other exogenous shock
to human population or fertility rates.
Stagnant growth in emerging
economies delays growth in GDP per
capita, resulting in lower nutritional
value diets.
Alternative forms of domestic energy,
like oil and natural gas become more
abundant and less expensive.
Government subsidies and trade
protections cease to artificially bolster
domestic consumption.
↑
↑
9
Strong Long Term Fundamentals
Pounds of Grain Required to Produce
One Pound of Meat
World Population 1950-2050
(Thousands)
8.0
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
-
7.0
6.5
Lbs.
6.0
4.0
2.6
2.0
0.0
1 lb. of Chicken
1 lb. of Pork
1 lb. of Beef
Growth in Feed Grain Demand
More Developed Regions
Less Developed Regions
Least Developed Regions
800%
600%
400%
200%
0%
140
1960197019801990200020102020203020402050
120
Feed Grain
Calories
Population
100
80
Projected World Biofuels Consumption
60
Billion Liters
Grams of Protein per Day Per
Capita
Protein Use by GDP Per Capita
40
20
0
$-
$10,000
$20,000
$30,000 $40,000 $50,000
Per Captia GDP
Source: UN, World Bank
$60,000
$70,000
$80,000
30
20
10
0
North
America
Europe
2010
2015
Developing
Asia
2030
10
Latin
America
Agriculture Investment Considerations – Crop Mix
Crop Type
Description
Crop
Examples
Investment
Attributes
Return
Expectations
NCREIF Annual Crop Returns, 1991-2016
25%
20%
Corn
Soybeans
Wheat
Alfalfa Hay
Oilseeds
- Most easily
adapted to
changing
market
conditions.
- Often cash rent
or flex rent
arrangements.
15%
8-10%
Balanced
between
income and
appreciation
10%
5%
0%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Annual
These crops
are planted
and harvested
each year and
are easily
rotated or
changed based
on prevailing or
expected
market
conditions.
10-Year Average annual return = 12.37%
Income
Appreciation
NCREIF Permanent Crop Returns, 1991-2016
Permanent
Permanent
crops are not
easily changed
from year to
year.
Fruits
Nuts
Rubber
Berries
Coffee
Sugar
- Longer
development
cycle results in
more cyclical
pricing.
- Historically more
volatile.
- Often
owner/operator
arrangements.
Source: NCREIF
50%
Average Permanent return = 20.32%
40%
30%
8-12%
Primarily
income
20%
10%
0%
-10%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
These crops
are planted a
single time and
take years to
mature.
Income
Appreciation
11
Agriculture Investment Considerations – Operating Strategy Mix
More Passive
Structure
Description
•
Fixed Cash Rent
•
•
Cash Flex Lease
•
More Active
•
Shared Operations
•
•
Direct Operations
Risks
Expected Performance
Tenant pays owner a fixed,
guaranteed rent
Owner provides use of land but no
other inputs into production
•
•
•
•
Tenant credit risk.
Land value depreciation
Tenant farming practices
No production or price risk
•
•
7-8% total IRR
3-4% cash yield
Tenant pays owner a base cash rent
with potential for a bonus based on
production
Owner provides use of land but no
other inputs
Owner contributes land and
additional inputs in exchange for
disproportionate share of total
revenue
Tenant provides equipment, labor
and operational expertise in
exchange for a share of the
operating proceeds
Owner contributes 100% of the land,
equipment and labor and owns 100%
of the crop
•
•
•
•
Tenant credit risk
Land value depreciation
Tenant farming practices
Minimal production and price risk
•
•
8-9% total IRR
4-5% cash yield
•
•
•
Tenant operational risk
Land value depreciation
Crop and price risk
•
•
9-12% total IRR
5-6% cash yield
•
•
•
Owner operating risk
Land value depreciation
Crop and price risk
•
•
10-13% total IRR
7-8% cash yield
12
Agriculture Investment Considerations – Geographic Mix
Region
Crops
Midwest
•
•
•
Corn
Soybeans
Wheat
Delta
•
•
•
•
•
Rice
Cotton
Corn
Soybeans
Wheat
Plains
•
•
•
•
•
•
Modest unit size of farms
Liquid market
Most productive region for grains and oilseeds
Cash rent leases offer good returns and low risk
•
Large unit size of farms available
Easy access to export markets via Mississippi
River
Narrow basis in grain markets
Large unit sizes available
Cash markets often above futures
Strong livestock markets
Low cost per acre
•
•
Wheat
Livestock
•
•
•
•
•
Large variety
of fruit, nuts,
and
vegetables
Cotton,
alfalfa, etc.
•
•
•
•
Pacific Rim export markets
Moderate unit sizes
Concentration of permanent tree and vine crops
Cash rents are generally highest in the U.S.
Apples
Berries
Pork and
poultry
•
•
•
Easy access to Atlantic export markets
Large unit sizes
Attractive valuations
West Coast
•
East Coast
Characteristics
•
•
•
Risks
•
•
Highest entry price for land
Requires aggregation of multiple small farms
•
•
•
Requires irrigation
Less liquid given large farm sizes
Weed, pest, and disease pressures highest in
the U.S.
Hurricane risk
Cash rents significantly lag the Midwest
•
•
•
•
Requires irrigation
Water availability is an issue and could get
worse
•
•
•
Water availability can be an issue
Most restrictive environmental regulations.
Most sensitive to labor availability and
immigration policy
•
•
Cash rents lag the Midwest
Less liquid and sought after market
13
Options to Invest in Agriculture
• Different types of vehicles exist to access agriculture investment.
• The return characteristics, volatility, and exposures provided by these vehicles differ, as do their liquidity profiles
and investment terms.
Vehicle
Expected
Return
Income
Return
Volatility
Liquidity
Strengths
Annual Fees
Public Stocks
8-10%
1-2%
High
Daily
0-50 bps
•
•
•
Commodity
Futures
6-12%
1-2%
High
Daily
0-150 bps
•
•
•
High alpha potential
Instant exposure
Highly liquid
•
•
•
•
•
•
•
•
Private agriculture exposure
Strong returns driven by
operations
Strong income and appreciation
Low correlations
Private agriculture exposure
Low correlations
More exposure control
Lower fees
Instant, though indirect exposure
Low fees
Highly liquid
Weaknesses
•
•
•
•
•
•
High volatility
High correlation to equities
No participation in operations
Highly efficient market
High volatility
Return sources are driven by
trading skill and not agriculture
exposure
•
•
•
Higher fees
Very low liquidity
No control
•
•
•
Higher staff burden
Larger investments required
Opportunity set is limited
Commingled
Funds
8-14%
4-5%
Low
Low
100-250 bps
Co-investments
8-14%
4-5%
Low
Low
0-100 bps
Separate
Accounts
Varies
Varies
Low
Low
100-200 bps
•
•
•
Private farmland exposure
Ability to customize
Lower fees and more control
•
•
•
Larger investments required
Manager concentration risk
Parameter definition risk
Direct Asset
Own/Operate
Varies
Varies
Low
Medium
0-50 bps
•
•
•
Private farmland exposure
No management fees
Complete control
•
•
High staff burden
Increased liability
14
Performance of Common Agriculture Stocks
• Exposure to companies that benefit from strong crop prices, as they provide key inputs
• Low fees
• Highly correlated to other equities within the portfolio
• Requires frequent reassessment of companies
• Active trading costs may be high
Growth of $100 in Agriculture Individual Stocks
Growth of $100
Investment in US Ag Stocks
(Normalized as of Year End
2006)
$600
$500
John Deere
Monsanto
ADM
Potash
Investment
Value as of
12/30/2016
NCREIF
Price $
$400
$300
$200
John Deere
$272.50
Monsanto
$232.59
ADM
$176.62
Potash
$142.35
NCREIF
$341.40
$100
$0
2006
2007
2008
2009
2010
2011
2012
2013
Source: Bloomberg Intelligence, Company filings, NCREIF
2014
2015
2016
15
Performance of Diversified ETFs
• ETFs may diversify holdings across sub-asset types, such as agricultural chemicals, equipment, livestock and
renewables companies
• Stocks in the agricultural companies previously mentioned, such as John Deere and Potash, are common in
diversified Ag ETFs
$350
Example Diversified ETF Portfolio: Powershares
DB
Diversified Ag ETF Growth of $100
$300
Powershares DB Agriculture
ELEMENTS
iPath Bloomberg
NCREIF
$250
Price $
$200
$150
$100
$50
$0
2007
2008
2009
2010
2011
2012
2013
2014
Source: Bloomberg Intelligence, Company filings, NCREIF
2015
Common Name
% of Net Assets
Live Cattle
14.48
Soybeans
12.65
Wheat
12.51
Corn
12.46
Sugar
11.57
Lean Hogs
10.11
Cocoa
9.31
Coffee
9.12
Feeder Cattle
4.65
Cotton
3.13
16
Performance of Specialized ETFs
Change in $100 in Commodity Based Ag ETFs
$250
Teucrium Corn Fund
Teucrium Wheat Fund
Teucrium Soybean Fund
NCREIF
$207.45
Teucrium ETFs
(Inception Date 9/19/2011)
Total Return
Annualized
Return
Teucrium Corn Fund
-51.33%
-12.44%
Teucrium Wheat Fund
-68.02%
-18.97%
Teucrium Soybean Fund
-11.66%
-2.26%
Total Return
Annualized
Return
Corn
-41.30%
-9.36%
Wheat
-53.36.%
-13.13%
Soy
30.60%
5.05%
Bloomberg Commodity Indices
$200
$ Price
$150
$86.30
$250
Change in $100 in Bloomberg Commodity
Indexes
$100
$200
BB Corn Subindex Growth
BB Wheat Subindex Total Return
BB Soy Subindex Total Return
NCREIF Growth
$207.45
$46.92
$ Price
$50
$30.31
$0
2011
$127.79
$150
$100
$56.36
$50
$44.07
2012
2013
2014
2015
2016
Source: Bloomberg Intelligence, Company filings, NCREIF
$0
2011
2012
2013
2014
2015
2016
17
Ag REIT Performance
• Currently two Agricultural REITs in the United States: Gladstone Land Corp, which focuses on specialty crops
in California and Florida, and Farmland Partners Inc which specializes in row crops in a variety of markets.
• Decreasing farm rents have caused these REITs to generate negative return rates since their inception.
Gladstone, which IPO’d earlier, has been trending upward since its low point in late 2015.
Total Return of Ag REITs vs NCREIF
$140
$127.75
$120
$95.13
Price $
$100
REIT
Gladstone
Land Corp
Farmland
Partners Inc.
Total Return SI
IPO Date
-7.99%
1/28/2013
-14.26%
4/30/2014
$96.46
$80
$60
Gladstone Land Corp
$40
Farmland Partners Inc.
$20
NCREIF Total Return Farmland
$0
2014
2015
2016
Source: Bloomberg Intelligence, Company filings, NCREIF
18
Ag REIT Performance
• Performance has been highly volatile from quarter to quarter, without clear cyclical trends
Gladstone Land Corp Returns
Farmland Partners Returns
20%
20%
15%
17.80%
13.60%
10.68%
11.06%
7.34%
10%
5%
11.40%
2.45%
5.69%
6.69%
0.78%
10%
0.07%
5%
0%
0%
-5%
-10%
13.89%
15%
-7.74%
-15%
-20%
Jun-13
-4.47%
-7.50%
-6.85%
-12.16%
-10.16%
-3.13%
-10%
-10.06%
Jun-14
Appreciation
Dec-14
-20%
Jun-15
Income
Dec-15
Jun-16
Dec-16
Total Return
Source: Bloomberg Intelligence, Company filings
-10.69%
-4.31%
-15%
Dec-13
-5%
-1.03%
-15.23%
Sep-14
Mar-15
Appreciation (%)
Sep-15
Income (%)
Mar-16
Sep-16
Total Return (%)
19
Current Risks to Farmland Investment
• The value per acre has historically tracked income/acre, but values held as income fell in 2016.
• Farmland values may have reached a near-term peak and should eventually correlate to income.
• Farmland value-to-cash income multiple is at an all-time high.
U.S. Farmland Value vs. Income
$ Value/Acre
$3,000
Value/Acre
$175
$150
Income/Acre
$2,500
$125
$2,000
$100
$1,500
$75
$1,000
$50
$500
$25
$0
$ Income/Acre
$3,500
$0
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
U.S. Farmland Value-to-Cash Income Multiple
35.0x
Investment Multiple
30.0x
Average Multiple, 15.01x
25.0x
20.0x
15.0x
10.0x
5.0x
0.0x
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
Source: USDA, RAPM
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Current Risks to Farmland Investment
U.S Farmland Debt Ratios
30%
U.S. Farmland Value vs. 10-year Treasury Yield
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
Source: United States Department of Agriculture
2016
2013
2010
2007
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
US Net Farm Income
US Gross Farm Income
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2000
-2%
2006
0%
2005
2%
US Farm Income vs. Expense
$600
$500
$400
$300
$200
$100
$0
2001
Billions
4%
1974
0%
8%
6%
10%
5%
1971
Trailing 19 Year
Trailing 10 Year
Trailing 3 Year
15%
Value/Acre
10 Year Yield
2004
10%
1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017F
2003
12%
Farmland Value Change, CAGR
10%
1962
14%
15%
1968
• Permanent crop-biased Federal Reserve Districts have
had a more moderate but sustained increase, driven by
tree nut performance.
20%
2002
• In some row crop-laden Federal Reserve districts land
values have nearly doubled since 2010, but have
plateaued since.
Debt-to-Equity Ratio
Debt-to-Asset Ratio
25%
1965
• Farmers paid down their debts in the last bull market
and the industry has had ample capital to deploy in
acquiring new land, but debt ratios are rising again.
US Farm Production Expense
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Current Risks to Farmland Investment
• Ongoing bumper crops in corn, soybeans and wheat have contributed to record global stocks. Stocks, while
important, can be wiped out by a single bad crop year.
Index, 100 = January 2012
Agricultural Index Comparison
170
150
130
110
90
70
50
2013
2014
2015
2016
Generic 1st Coffee, Arabica (AX1 Commodity)
S&P GSCI Agricultural Index Spot CME
Generic 1st Soybean
Dollar Index Spot (DXY Currency)
Million Metric Tons
500
300
200
100
78
77
80
210
210
218
62
53
128
55
133
175
198
178
195
218
241
249
2011
2012
2013
2014
2015
2016
0
Soybeans
Corn
Wheat
27%
26%
25%
24%
23%
22%
21%
20%
Stocks-to-use ratio, combined
Billion Metric Tons
Global Stocks in Corn, Soybeans & Wheat
600
400
2017
2.25
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0.00
Global Production in Corn, Soybeans & Wheat
0.24
0.27
0.89
0.87
0.70
0.66
2011
2012
Soybeans
0.28
0.32
0.31
0.34
0.99
1.02
0.96
1.04
0.72
0.73
0.74
0.75
2014
2015
Wheat
2016
2013
Corn
Source: USDA, Bloomberg, RAPM
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Current Risks to Farmland Investment
Risks to Current Valuations
Mitigating Entry Price Risk
1. Increasing long-term interest rates would make
1. Acquiring farmland with little to no leverage
2. Assembling a diversified portfolio of row and
capital market investment alternatives more
attractive and raise discount rates. This capital
market factor would also affect all asset values.
2. Lower commodity prices for an extended
period of time would cause a shift in
commodity price expectations in the long term,
reducing the expectations for future farmland
income.
3. Changes to the ethanol mandate in the U.S.
permanent crops in various regions and
geographies.
3. Assembling a portfolio over a period of 3-5
years reduces entry price risk in any given year
and accumulating properties over 10 years or
more significantly reduces entry price risk.
4. Acquiring farmland with optionality to
could significantly reduce domestic demand
and resulting corn prices.
monetize other aspects of the land (water,
minerals, timber, etc.) reduces reliance on crop
harvest alone.
4. A strengthening U.S. dollar would make U.S.-
5. Acquiring farmland with a long-term holding
dollar-based commodities
attractive to export markets.
relatively
less
5. Sustained high commodity prices can result in
a supply response increase.
period in mind (20+ years) allows investors to
benefit from long-term macro trends that
should increase values while riding out shortterm fluctuations.
23
Current Risks to Farmland Investment
Key Risk
Farm Operating Risk
Commodity Price Risk
Weather Risk
Pest Risk
Mitigating Factors
-
Geo-political risks
Currency Risk
Entry Price Risk
-
Judicious and timely application of herbicides and insecticides according to Best Management Practices.
Cash leasing land to local operator who assumes all production risks.
Constructing a farmland portfolio that is geographically diversified.
Utilize crop insurance when available.
Invest in areas with historically proven productivity.
Operate crops with strong scale advantages to provide margin buffers.
Land ownership can buffer the volatility of commodity prices because land value is based not only on the
value of the commodities it produces today, but also into the future.
Cash renting land to local operators who can incorporate the land in with their existing lands under
operation and achieve higher levels of operating efficiency.
Utilizing futures markets or downstream supply agreements.
Having some downstream or cross-product integration can buffer production margins.
Utilize crop insurance.
Diversify portfolio across crops and regions.
Utilize proven pesticides and fungicides to protect crops.
Practice crop rotations that prevent the buildup of pests.
Ensure tenants follow established fertilizer and maintenance provisions in leases.
Investing with managers with a long history of navigating the political risks in their target countries can
help mitigate this risk.
Country diversification can also help to mitigate this risk.
Hedging currency risk over long time periods is prohibitively expensive.
Owning agriculture in different countries but of similar crop mixes.
A multi-year acquisition period across a broad range of commodities.
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Other Considerations
•
•
•
•
•
Water as an investable asset
Global vs. U.S. agriculture investment
Consumer demand for organics vs. conventional
Sustainability initiatives in farming
Impact of immigration reform on farming
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Questions?
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