Asset Management

Help wanted: Worker bees

Justin Ourso, CFA, Director, Global Private Markets

How farmland investors manage declining honeybee populations

Investors have been increasingly drawn to real assets such as farmland investments for their long-term orientation, diversification benefits and attractive risk/return profile. But these investments require significantly different skills than traditional financial assets such as stocks and bonds because the risks and opportunities are different, and often fall outside the financial realm. The recent mystery surrounding disappearing honeybee populations is one such example of “idiosyncratic,” or non-market-related risk that real asset investors must contend with.

Disappearing bees

Honeybees are critical to farming — without them many crops would fail. They are responsible for pollinating as much as $20 billion in crops each year2 while numerous food crops, including almonds, berries, fruits and vegetables, are completely reliant on honeybees. Honeybees, however, have made for alarming headlines in recent years as the insect has suffered massive population declines, most notably in 2012.

For beekeepers, some decline in colony population over the winter is normal. Over the last several years, however, losses were far from normal. The USDA estimated that the bee population in the U.S. declined 33% each year from 2007 through 2011.3 The problem diminished somewhat in 2012; the USDA reported a 22% drop during the winter of 2012 (October 2011 through April 2012), possibly due to mild weather conditions.4

The USDA attributes about a third of the honeybee losses to Colony Collapse Disorder, or CCD. There’s strong debate about what has triggered CCD. Some blame cell phones and cell phone towers. Environmentalists blame certain pesticides, particularly a new class of pesticides called neonicotinoids, which derive from nicotine.5 But, there are other factors that are also likely contributing to the disorder, including unfavorable weather and a honeybee parasite that has become increasingly prevalent in recent years.

The USDA concludes that while a number of factors persist in being associated with CCD, no single factor or pattern of factors has been proven to be the cause of CCD.

How the bee epidemic impacts farmland investments

TIAA-CREF manages approximately $260 million of assets (about 8% of our total farmland assets) that are reliant on pollination from honeybees. These assets include almonds, apples and cranberries.

We partner closely with agri-businesses in regions where we own farmland around the globe, including here in the U.S. where we own farms and have a stake in crop yields. While many beekeepers have experienced tremendous losses in recent years, an estimated 94% of the bees required for almond pollination were delivered in 2012. TIAA-CREF’s almond properties did not have any issues sourcing bees for the 2013 crop year due to the scale of our platform, the quality of our operating relationships with beekeepers and local partners, and the professionalism of our beekeepers, who are working hard to minimize colony losses.

While we are continuously monitoring the bee population, we are contracting with suppliers to bring in more than 10,000 hives to ensure that the crops within our portfolio are pollinated. Furthermore, we continually will reassess our acquisition and management strategies in light of this issue.

Help wanted: Worker bees

The biggest impact to farmland investors from the decreasing honeybee population to date has been the increasing cost of “renting” pollinator bees over the past several years, primarily for use in almond orchards. Apples and cranberries are pollinated during different times of the season as compared to almonds and do not directly compete for the honeybee supply, which has reduced some of the pressure for those industries.

In all, TIAA-CREF contracts with beekeepers that collectively control more than 10,000 hives to pollinate crops within our portfolio each year. While there remains ample supply of bees to pollinate our almonds, costs to contract these hives have increased.

We continue to monitor the bee issue as it is critical to the success of a segment of our farmland portfolio. In the future, we may reassess our acquisition and management strategies in light of the declines in the bee population. But as of now, we continue to believe that direct investments in farmland and agricultural products that are pollinated by bees is a wise choice for increased stability and reduced volatility in our investment portfolios.

Managing risk and maximizing returns down on the farm

Farmland is among several private investments in real assets that we believe offer the potential for competitive risk-adjusted returns, a hedge against inflation and improved portfolio diversification. While there are always risk and return tradeoffs in investing, planning for variables such as weather, pests and crop yields are a critical part of the equation for maximizing returns and managing farmland investment risk.

The honeybee issue is just one example of the many risks that fall outside the traditional realm of financial markets that institutions need to consider when making an allocation to real assets. Farmland offers the opportunity to feed growing populations and provide fuel and energy as well. In an increasingly complex and challenging world, investing in real assets such as farmland can enhance risk-adjusted returns and provide attractive growth, which is why TIAA-CREF believes the asset class plays such an important role for institutions with long-term horizons. Managing the myriad risks are critical to maximizing returns in real assets — just like any investment class — though as the honeybee issue shows, the risk part of the equation can encompass many areas previously unknown to institutional investors of traditional financial assets.

TIAA-CREF NEWS ARCHIVE

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