Changing Farmland Investing Options
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We think farmland as an investment is something that, in 5-10 years, will be a must in any professionally managed diversified portfolio. We are excited to be at the forefront of reporting the rapid changes in this exciting new market, which is now opening more opportunities for smaller investors via syndicates and specialised agro funds.
Those smaller investors ( USD 70,000 to USD 250,000 ) seeking exposure to tangible assets with strong cash yields and low volatility have found it nearly impossible to get direct exposure to farmland without incurring high risk in the past.”
Why should investors get into farmland?
For example, since 1992, US farmland has averaged a yearly return of 11.98%, outperforming the stock market with less than half the risk exposure. It also has a low correlation to other asset classes, which helps your portfolio. This growth is similar in the South American markets we specialise in,
An investment in farmland through a farm syndicate or fund can be a direct investment into farmland, an investment into the thesis that farmland is a scarce resource and demand will continue to grow. The solid returns and low volatility we have experienced over the past forty years are anything but an anomaly.
When one looks at the fragility of the world’s water supply. Given the macro outlook of a quickly rising population, a rising middle class in the East, and a changing climate, water will undoubtedly become one of the most precious commodities in the world.
Investing in farmland with senior water rights is an excellent way of having a long exposure to water value, particularly crops like almonds orchards, as almonds are one of the most water-intensive crops.
It’s clear that many foreign investors, not just the larger ones like Saudi Arabia and China, see the enormous upside in farmland offers.
There are many types of crops, and “farmland” entails everything from wheat to almonds?
This is a good question – different uses for farmland will have different characteristics for an investor’s asset. Still, it’s important to remember the foundational collateral for farmland is not the crops but the underlying land itself. This is why we advise investors to avoid some farming types, such as dairy farming, as much of the capital is tied up in non-land depreciating assets.
For crops like corn or soybeans, land appreciation has little correlation to crop prices or a bad harvest, and cash yields are most often determined by the rent, not a profit share. Permanent crops like almonds or fruit trees have enduring value in the producing asset, as they take longer than one season to establish, but the underlying value is still the land.
In terms of geography, South America has many different climates. How can an individual investor analyze that?
Investment philosophy must consider both global climate change and market-specific environmental conditions. In the northern states of North America and lower Canada, climate change is extending the growing season, leading to increased crop yield. In other parts of South America, rising temperatures impact which crops can be grown and how much water may be required i.e. Chile and Peru. As always, diversification can help mitigate risk but typically at the cost of lowering the overall returns.
What are the most significant factors related to farmland – I would think water, soil, etc. are significant factors often outside investor control?
Water or drainage if you have too much water. Soil as well. You’d be surprised how many physical factors technology can mitigate. In today’s tech-enabled farm economy, soil chemistry, irrigation, and even sunlight can be addressed via capital improvements. These are outside the farmer’s control but not outside the typical underwriting process, and the investor does and is accounted for in the price paid for farmland.
Is farmland an under-invested asset class?
Investor ownership in farmland is in single digits in the United States. 97% of US farmland is owned by families. The benefits of farmland as an asset class are well-known, but most investor-owned land is held by very large funds. Like commercial real estate, economies of scale make larger farms more profitable than smaller operations. But that also means it can take upwards of USD 2 million and a small team of lawyers to manage the acquisition and management of farmland.
Is Farmland really less risky than stocks? It’s a very illiquid asset
Risk and liquidity are two different aspects of any investment. Risk typically reflects the volatility or movement of the asset’s value. From 1970 through 2018, the average annual return rate of U.S. farmland was roughly 12% per year, and in many parts of South America, the returns have been even greater.
Only value-add real estate has delivered such high returns; for reference, U.S. equities have delivered about 7% and international equities sub-6% for the same period. Furthermore, farmland has achieved this average annual return rate at lower volatility (greater consistency) than any of the aforementioned asset classes. The average annual volatility for U.S. farmland during this period was sub-7%; for comparison, the volatility for value-add real estate, U.S. equities, and international equities was roughly 12%, 16%, and 20%.
On the liquidity aspect, farmland is an illiquid asset, with hold periods similar to other alternative assets. The manager should aim to increase the liquidity of this asset class by creating a secondary market where private sellers and buyers can meet and transact. A good example of this is MyFarms syndicates in New Zealand which have developed an excellent secondary market for farmland.
How significant are the barriers to entry: can’t anyone buy land and start growing crops?
The barriers to entry are pretty high for most investors. We recommend farmland as a component of every investor’s portfolio. Buying farmland would require knowledge of real asset investing – no different than real estate investing.
Furthermore, growing crops would require operational knowledge, equipment, additional labour, and regulatory compliance – this all requires a substantial amount of time. We believe most investors will understand and appreciate the value proposition that professional farmland investors and operators can offer, which is a simplified and streamlined process to gain exposure to the asset class without the need to understand the intricacies of underwriting or the industry knowledge of best farming practices.
In the next few months, GTSA will promote investors’ investment opportunities in syndicates and funds run by experienced operators with international experience to consider when investing in this sector.
As always, study the people behind these projects and ensure they have the track record needed to manage investments of this type. As mentioned above, the land exposure you are looking for is not an opportunity with depreciating assets.
If there is interest, let us know by direct email
Contact the Gateway to South America team to learn about the best investment opportunities in the region. The company is a benchmark for foreign investors wishing to invest in Argentina, Brazil, Chile, Paraguay, Peru and Uruguay, providing expert advice on property acquisition and investment tours.
The Gateway Team – When You are Serious About Property
Post available in: English