Farmland Alternative Investments

Investors have been pouring money into farmland – especially Midwest USA land for the past few years. So much so,that the Federal Reserve Bank of Kansas City reported that fourth quarter 2010 prices for farmland surged 20%. Once again, readers, we have missed the boat on the next ‘hot’ alternative investment.

Today, land prices are high and returns are much lower that the double digit returns afforded investors who started buying at least five years ago. However, investing in farmland or food related investments may still be an option for you to consider (remember I am not an investment or financial professional – get competent advice before acting on anything you read on this site!).

How farmland investments work.

People investing in farmland are not all becoming farmers, as you can imagine. Instead, institutional or accredited private investors are putting money into private funds which are buying up land, renting it to farmers and getting income from the rent, the crops and the land appreciation. In addition many of the funds manage the farmland to also supply alternative energy sources, such as bio fuel or wind.

The funds buy up farms – 100 acres here, 220 acres there and then lease them to one of the farmers in their network of seasoned farmers. The farmers share crop the land, using their own equipment.

This way the farmers have access to many more acres than they could afford to own and are able to use the modern equipment, designed to operate on large plots of land. Being able to make better use of the very expensive equipment (which can cost hundreds of thousands of dollars) helps the farmer’s operation to be more productive, lessening the impact of the cost.

Farmland investments are not correlated with stocks and bonds and because of that can provide risk reduction and diversity in a portfolio. They allow investors to “have a passive investment in farmland without having to identify and acquire property, manage the property, hire a farmer, and negotiate rental contracts.” as Colvin & Co., LLC’s website   puts it. Some, such as Ceres Partners have returned 16% on investments since 2006 (according to George Maniere on Seeking Alpha). Most sources say that current returns are down to the 4 – 6% capitalization rates now. Capitalization rates are computed by dividing the cost or current market value of the farm by the net annual operating income.

Citing the increase of middle class in China; the ever increasing scarcity of tillable land; the potential for inflation, the need for bio fuels, and the increasing prices of food across the world, multiple firms have opened farm land funds.

Indirect individual investments in farm land

Among firms offering individual accredited investors the opportunity to buy in are:

Ceres Partners, LLC  started by Perry Vieth in 2007 is still accepting investors in one of it’s funds.It has two limited liability companies in which investors are members: Ceres Farms, LLC which owns over twelve thousand acres of farmland in Indiana and Heartland Farms, LLC (now closed to new investors) which owns close to five thousand acres across Indiana, Illinois and Tennessee.

Colvin is another company that has funds that invest in farmland in the US Midwest. The have funds (Sather Agriculture LP and Colvin Farmland LP) and separately managed accounts in which you can invest.

George Soros, a renowned hedge fund manager bought 23% of a South American farmland venture called Adecoagro SA which owns over 729,000 acres of land in Argentina and Uruguay. South America is one of the best agricultural areas in the world, second only to the US Midwest.

Canada’s Farmland Investment Partnership  currently has three funds, only one of which (Agcapita Farmland Fund III) is open to investments. This fund invests in western Canadian farmland and is RRSP and RESP and TFSA eligible. You must be an accredited investor to invest, but the minimum investment is only $5000. They provide this information about accredited investors:

“the more common categories within which persons may fit in order to qualify as an accredited investor are: (i) an individual who, either alone or with a spouse, beneficially owns financial assets (primarily being cash and securities) having an aggregate realizable value that before taxes, but net of any related liabilities, exceeds $1,000,000; (ii) an individual whose net income before taxes exceeded $200,000 in each of the two most recent years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the two most recent years and who, in either case, reasonably expects to exceed that net income level in the current year; or (iii) an individual who, either alone or with a spouse, has net assets of at least $5,000,000.”

Direct investments in farmland.

What if you want a more direct investment in farm land? Obviously you can find and buy land yourself, but there are services that will help you evaluate and select the best land. A quick google search yielded:

Investors Farmland Services – which claims to have a private network to find farmland before it goes on sale to the general public and which tries to match buyers and sellers. The site also promotes a ‘special’ investment of buying less than desirable farmland in temperate zones such as Texas and Florida to plant pongamia trees – which produce nuts that can be used as bio fuel.

Colvin& Co. (mentioned above) also has Farmland Management Services, you own the land, they provide support in managing it. They help determine what you need as far as erosion control and additions; they help you get good rent and good farmers to work the land; they supervise taxes and liability insurance; and they give advice on contracts with the US Department of Agriculture.

Farmland investments for the rest of us.

What if you aren’t an accredited investor, or don’t have the several hundred thousand dollars laying around that buying a piece of land outright requires?

While there aren’t many (if any) exchange-traded funds or mutual funds which allow you to own a piece of stock in a company that has farmland – there are some that will let you follow agricultural trends.

Seeking Alpha  thinks that the Market Vectors Agribusiness ETF (MOO) is the closest thing we might come to a farmland ETF. They also suggest BARN, an ETF which focuses on companies that manufacture farm equipment, and companies involved in livestock and agricultural.

Reuters  in addition to MOO, suggests PowerShares DB Agriculture ETF or Global X Farming ETF.

Reuters cautions that these sector specific investments “are subject to stock, interest-rate, commodity, country and now climate-change risk. If interest rates rise, commodities can move in the opposite direction. Land prices can easily crash without any warning and sometimes for reasons related more to finance and cash availability than crop prices.”

Money Morning   suggests:

Bunge Ltd. (NYSE: BG), which they say operates in about 40 countries buying, selling, storing and transporting oilseeds and grains; making protein meal for animal feed and edible oil products for commercial and retail consumers; producing sugar and ethanol from sugarcane; milling wheat and corn to make ingredients for food companies; and selling fertilizer in North and South America.

Archer Daniels Midland Co. (NYSE: ADM), processes oilseeds, corn, wheat, cocoa and other agricultural commodities and also manufactures corn sweeteners, vegetable oil and protein meal, flour, biodiesel, ethanol and other food products.

Monsanto Co. (NYSE: MON) is among the world’s leading suppliers of seeds – both natural and genetically engineered – fertilizers, herbicides and other products designed to improve productivity and reduce farming costs.

Small investors wanting to invest in a REIT holding farmland may get their chance if Gladstone Investment Corp. (Nasdaq: GAIN) becomes a reality (they filed for REIT status in 2010).

Is it too late to invest in farmland?

Not according to this January 2011 article from CNBC.com:

“Farmland is a theoretically safe, investment producing, inflation-protected hedge,” says Barton Biggs, the former Morgan Stanley strategist who now runs the hedge fund Traxis Partners. The downside, he quickly adds, is that farmland is also “very illiquid” and a “complicated thing.” CNBC adds that “Farmland returns are nearly rocksteady, though. Biggs pins them at 6 percent to 7 percent annually.”

Also according to CNBC: “Measured by the NCREIF Farmland Returns Index, farmland handily beats the S&P 500 over the past ten years. Negative quarters for farmland are rare, making investments far less volatile than stocks.”

They quote Shonda Warner, managing parter at Chess Ag Full Harvest Partners (specializes in pension funds and owns over 40,000 US acres) as saying “It’s not the first inning of the game, It’s not the eighth inning either,”

Do you own land?