The great commodity super cycle, which has lasted nearly a decade, has caused farmland values to skyrocket in many regions of the country. While growing agricultural producers have purchased and rented a large share of the land, older citizens who are 60-95 years of age and outside investors have been the investors of choice in recent years.
Let’s zero in on outside institutional investors and examine their investment characteristics. According to a recent article in the Financial Times, TIAA-CREF, the teacher pension annuity, has built a farmland portfolio of up to $4.4 billion, given the latest data from 2012. Their investments include approximately 800,000 acres on 600 properties on four continents. This investment portfolio includes 77.6% grains and oilseed, 16.2% sugarcane and the remainder is wine grapes, other permanent crops and fruits and vegetables. In the United States, row-crop land offers attractive income compared to other fixed income investments and is a good hedge against overall inflation.
The case for outside investor groups purchasing farm ground is driven by a growing population and improving dietary habits. In seeking farm ground, they look for soil quality along with water availability, reasonable infrastructure, and access to markets where there will likely be demand growth. The biggest concerns of outside investors are the lack of liquidity of farmland, the availability of large tracts of farmland, and the political, natural, and ethical risks of exposure related to farmland. The geopolitical risk of countries, for example, the turmoil in Ukraine, factor into these investors’ strategies also.
Investors buying farmland either receive rental payments, or they purchase rough quality farm ground and invest to improve its value and earning power or dividend, which is the latest trend. In a recent trip to Canada, marginal farm ground was being improved and introduced to new seed and fertilizer technology to improve its productivity.
A group of institutional investors has developed principles of responsible investment in farmland. They include:
- Promoting environmental sustainability
- Respecting labor and human rights
- Respecting existing land and resource rights
- Upholding high business and ethical standards
- Reporting on activities and progress toward implementing and promoting the principles
Outside investors are a force in the North American farmland market. When the bloom comes off farmland, appreciation and liquidity will become a concern. It will be interesting to see the institutional investors’ sustainability in the farmland market for the long term.