Tim Hopper, Senior Economist
Farmland has attracted significant institutional investor interest recently because of its distinctive investment characteristics and ongoing price appreciation. A key resource in the agricultural production chain, farmland is also – like oil and other commodities – a tangible, finite resource. Indeed, the global supply of arable land is shrinking as worldwide demand for food, stock feed and biofuels increases.
In the following article, Tim Hopper, TIAA-CREF Senior Economist, answers some frequently asked questions about farmland investing.
What is farmland investing?
Farmland investing is exactly what it sounds like – a direct investment in land used for agricultural production. Because its end result is essential to sustaining human life and meeting certain social needs, farmland generally has an underlying value that does not fluctuate in response to market forces the way stocks and bonds do. Consequently, it can potentially be a source of stable investment returns.
What are the main benefits of farmland investing?
Investments in farmland provide attractive total returns. Between 1970 and 2009, agricultural land values, as measured by the USDA’s ERS database, have outperformed both domestic stocks and bonds on an annualized basis, returning an annual average of 10.25% vs. 6.24% for the S&P 500 and 7.3% for 10-year Treasuries. We also believe that spreading farmland investments across the world—in regions with different climates, crops and economic influences—can further reduce portfolio risk. Finally, farmland prices have generally risen faster than the rate of inflation. Between 1970 and 2009, the same period covered by the USDA data, the U.S. Consumer Price Index rose an average of 4.36%. As a result, we believe that farmland investing offers a certain degree of inflation protection.
How do farmland investments differ from investments in agricultural commodities?
In the past, investors gained exposure to the farmland asset class through the commodity futures market. Agricultural commodities futures are easy to buy and sell, but their prices can fluctuate dramatically in response to changing market sentiment. Investors participate only in the appreciation of the commodity – soybeans, for instance – in which they invested. A direct investment in farmland, in contrast, is illiquid and less volatile. Farmland investments perform based on the value of the land and crops.
What are some factors to consider in farmland investing?
Agricultural investing in the U.S. and other developed nations offers all the benefits of the asset class – good return potential and inflation protection. Global farmland ownership creates further diversification opportunities as well. Many developing nations are experiencing strong economic growth and their farmland productivity is likely to increase. Brazil, for example, is attractive because its climate can support two annual harvests for many crops that typically yield just one harvest per year in the U.S. and much of the rest of the world. Furthermore, because Brazil has a lot of arable land and an economy that lacks infrastructure, its land prices are typically cheaper than those in the U.S.
A portfolio can also be diversified among different types of agricultural investments, each with distinctive risk and return characteristics. Row crops, such as corn, soybeans and wheat, are planted and harvested annually. These crops tend to produce more stable income returns over time because planting decisions are made annually. A number of row crops are also used in the production of alternative fuels. Permanent crops, such as wine grapes, nuts, citrus, apples and cranberries, take three to seven years to mature, so there is a lag between investment and the realization of returns. Investors can also look beyond farmland to agriculturally related companies and technologies that support the production and distribution of food, including alternative fuel producers and distributors, grain storage facilities and water treatment companies.
What are some of the current issues affecting farmland prices?
A number of factors have combined to fuel farmland price appreciation and income, including a growing world population, demographic trends, changing dietary habits and a shrinking supply of arable land.
The world’s population continues to expand by 25 million people per year, according to the United Nations. The Global Harvest Initiative 2011 GAP Report estimates that to meet global demand, agricultural producers worldwide will have to nearly double their output by 2050. Meanwhile, as the people of the developing world become more prosperous, they are consuming more meat and are buying corn and grain to feed their livestock. At the same time, the increased use of alternative fuels has enhanced farmland values. Corn and sugarcane are generally used for ethanol production, while soybeans and canola are used to manufacture biodiesel. Furthermore, regions with secure, sustainable water resources, including rain-fed and irrigation resources, are becoming leading agricultural producers. In fact, we believe that in certain regions the value of water assets attached to farmland could overtake the value of the farmland itself.
This environment contributes to strong profitability on the farm. According to the U.S. Department of Agriculture, farm income rose to a record $98 billion in 2011. Although agriculture income is influenced by weather patterns and commodity prices, farmers are managing their profitability better than in years past. For instance, farmers are focused on land purchases, thus increasing the size of their farms. In doing so, they have reduced average capital expenditures, boosted productivity, and improved inventory management practices. They have accomplished this and still managed to reduce average debt levels on the farm to about 10% at the end of 2011, as opposed to a historical average of about 20%. As a result, today’s farmers are well positioned for ongoing profitability even in the face of typical changes in weather patterns and economic cycles.
What is TIAA-CREF’s philosophy on farmland investing?
TIAA-CREF is one of the largest institutional owners of farmland in the world, with approximately $2.5 billion of investments across the United States, Australia, South America and Europe as of December 31, 2011. We have been investing in farmland and agriculture-related assets since 2007.
TIAA-CREF takes an opportunity-driven, global approach to agricultural investing. In our opinion, the best way to capitalize effectively on this asset class is through direct ownership of farmland properties and through diversification across countries, crop type and operating strategy. In every acquisition, our agricultural investment team considers farm-specific investment criteria. These factors take into account regional and micro-climate factors, including weather variability and soil types; the strength of local infrastructure and tenant markets; water availability and sustainability; crop returns; environmental and social impacts; the potential for future operational growth; and capital gains. Our investment decision-making is also based on crop type. Row crops generally exhibit stable income and capital return, while permanent crops offer higher income, but also higher risk. As a result, we focus on row-crop farmland and make select, opportunistic investments in permanent-crop farmland. To ensure sustainability, we place a strong emphasis on environmental stewardship and seek investments in line with this philosophy.
Farmland is a relatively new investment asset class that is not widely understood. Many deals are not publicized, meaning that they take place “off market.” So a good reputation and local market knowledge are vitally important. In addition to insight and access, exclusive relationships with partners around the world can be also critical to making the most of this compelling investment opportunity.
TIAA’s Agriculture investments are just one of many investments of TIAA’s General Account, an account solely owned by TIAA that is not available to individual investors and whose performance is not directly allocated to any specific contract or obligation. TIAA’s General Account invests in a broad range of diversified investments to support TIAA’s contractual guarantees and business operations.
Past performance is not indicative of future results. The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.
TIAA-CREF Asset Management provides investment advice and portfolio management services to the TIAA-CREF group of companies through the following entities: Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC and Teachers Insurance and Annuity Association® (TIAA®). Teachers Advisors, Inc. is a registered investment advisor and wholly owned subsidiary of Teachers Insurance and Annuity Association (TIAA).
Performance of farmland may be based on appraised values or comparable market transactions, whereas stock and bond investments are marked to market and reflect actual market prices. Past performance does not guarantee future results.