American Farmland – an Alternative Investment!
Several days ago I did some research to learn a bit about alternative investments in farmland. For about five years institutional and accredited private investors have been putting money into funds that buy and manage farmland. Read more about this alternative investment class in article Farmland Alternative Investments.
Being from the American Midwest, I and pretty much everyone around me has a farm somewhere in their lives or their immediate past. My Dad grew up on one, my Mom’s Dad owned one. We live next to one. So when I read about investors buying up farmland around us, I got a bit concerned.
How Does Investing in Farmland Work?
Investment funds buy up farms to put together large operations that they consider more productive and cost efficient. The farms are carefully selected and then upgraded with the latest scientific improvements following which they are leased to local farmer operators in the fund’s networks who plant the crops.
The fund managers claim that the farmers can then use their expensive farm equipment more productively – since they have access to the large land plots the equipment is built to serve. The farmers take on most of the risk. The investors get money from the rent the farmer pays and from land appreciation.
Returns at some funds have been running at 16% since 2006 on these investments. Now, however, the returns are becoming lower, since farmland cost has risen.
Some of the funds (such as ones run by Ceres Partners or the Farmland Investment Partnership) allow private investors to buy shares in a limited liability company or partnership that directly owns the farmland. Others buy shares in existing farm operations (such as Adecoagro SA).
How Much Land Is Being Bought?
So much land has been bought recently that in March the Federal Deposit Insurance Corp. (regulates banks that lend to farmers), held a symposium with economists, bankers and agricultural experts to decide whether investors may be pumping up prices and creating the conditions for a crash like the one that devastated the market in the 1980s, resulting in the failure of 300 farm banks.
How much land is being bought? One example – Cere’s Partner funds own at least 17,000 acres of the US Midwest farmland. There are numerous companies and investment firms that have started buying farmland – including a fund controlled by George Soros (a noted hedge fund manager); Hedge funds Ospraie Management LLC and Passport Capital LLC as well as Harvard University’s endowment and TIAA-CREF and Black Rock and others. Individuals are also buying the land and then hiring land management services to run it for them.
What Does it all Mean?
Some lament this farmland snatch. Sustainable Table claims that “the food industry has become dominated by a handful of giant corporations which benefit from government policies that favor large-scale production” and that of two million farms remaining in the US only 565,000 are family operations.
However, US government statistics negate that statement. The USFA Agricultural Census of 2007 found that non-family farms accounted for only 10% of all farms in the US. In addition a USDA fact sheet from that census shows that the declining number of farms levelled off between 2002 and 2007 – with more small and more very large farms – and certain sections tending towards very large.
There is no doubt that farmland is disappearing. The American Midwest farmland is being eaten by sprawling metropolis’s, commercial developments and other non farm concerns. According to the Farmland Trust – (an organization working to preserve American farmland)
“America is losing 1.2 million acres of farmland annually, much of it the best and most productive farmland near where most Americans live.”
This is occurring at a time when the Chinese are moving into middle class mode, beginning to eat a more western diet of meat (which requires more grain be produced).
Most American farmers are now in their late fifties or early sixties and many family members are opting out of farming pursuits. Farmland fund managers believe that now is an opportune time to obtain valuable farmland – as the current generation of farmers passes control of it. Farmland does not come up for sale frequently – typically hitting the market as the owner becomes incapacitated or dies.
Should You Invest in Farmland?
Even though buying up farmland has been a ‘hot’ investment for half a decade already, many think that investing in agriculturally related items, such as farmland, is a sure bet for the future, with the world’s population still growing and tillable land shrinking while pressure is being put on the land to produce more bio-fuels as well.
Some countries are buying up land in other countries to insure a supply of farm produce. What if America’s farmland is owned by foreigners? Will our bountiful supply of food be owned by other nations down the road? Will our great grandchildren be unable to partake of the food grown next door to them because it is owned by investors?
What do you think? Is it wrong to ‘invest’ in farmland? Should America and other farming countries move to large operations so that the land is more productive overall, or should the smaller operations, owned locally and with produce sold locally be the future? Are you concerned about the farmland snatch? Would you invest in a farmland fund if you could?