CalPERS’ Plan to Invest in Farms Makes Some Growers Nervous
CalPERS, the country’s largest public pension fund, will soon begin investing a portion of its $175-billion fund in California agriculture, a surprising vote of confidence in a sector that has not been generating strong investment returns.
It is also a worrisome development to local farm groups who fear that big institutional investment will hasten consolidation in the industry and encourage more housing development on farmland.
The board of the California Public Employees’ Retirement System, which covers more than 1 million state workers, retirees and beneficiaries, voted this month to begin moving some money into such agribusinesses as almond orchards, citrus groves and vineyards, despite the fact that plunging farm commodity prices have made agriculture a less-than-stellar investment over the last two years.
Indeed, the U.S. Department of Agriculture expects farmers’ net cash income--income from all sales and subsidies minus expenses--to drop to $48.6 billion this year, the lowest since 1986.
However, notes Karen Klonsky, an economics specialist with UC Davis, several factors could make the outlook brighter long-term: the balance of trade improving in California’s favor--thanks partly to more exports to China, increased productivity in the state and a rising demand for agricultural products.
“I certainly don’t think they’re crazy,” Klonsky said. “Things are looking quite good in terms of [California’s] competitive position in agriculture.”
Some other investment managers agree. “It’s fair to say that in 1998 and 1999 our returns have been off,” says Jeffrey A. Conrad, managing director of Hancock Agriculture Investment Group, one of the nation’s largest farmland investment managers, which counts much of its holdings in California. “But looking forward we think the market is very attractive with global trade barriers being reduced.”
Farming groups such as the American Farm Bureau Federation oppose pension fund investment in agriculture because they believe it speeds consolidation in agribusiness, making it harder for farmers to command fair prices for their crops.
“Large farming operations tend to drive out small farmers,” says Will Stockwin of the Community Alliance With Family Farmers. “They take up a lot of space, a lot of resources and make it harder for small farms to compete.”
Others expressed concern that investment by a big real estate investor such as CalPERS would further drive up land prices and eventually lead to residential development as the population in rural areas such as the Central Valley mushrooms from 5 million to an estimated 15 million during the next four decades.
“They could be part of the great building boom that’s paving over some of the best soil on the planet,” says John Gamper, director of land use for the California Farm Bureau.
CalPERS officials wouldn’t rule out eventually developing any land they purchase. But they insist that their interest is in the business of farming, especially the specialty crops like almonds that California exports around the globe. As global demand for food rises, they believe they can get 12% to 16% returns on their farm investment, better than the average return it gets on its office buildings.
“We believe certain permanent, higher-value crops will generate such returns,” says Mark Albertson, who manages CalPERS’ real estate portfolio. He would not reveal how much the fund plans to spend on farm investments but said the fund would focus on selling some of its $1.2 billion in timber assets to finance new agriculture investments starting this fall.
Among the commodities the huge fund is considering are so-called permanent crops such as almonds, citrus, walnuts and wine grapes. The low prices paid in recent years for vegetable row crops and grains would make it hard for them to meet their return criteria, Albertson said.
Although the last two years have been tough on farmers, agriculture has in the long term been a solid investment, Albertson says, earning a better return than commercial real estate and approaching that of the blue chip Standard & Poor’s 500 index.
According to a report prepared for CalPERS by consulting firm E&Y; Kenneth Leventhal, between 1970 and 1998 returns on farmland--counting both sales of farm products and land value appreciation--averaged 10.4% a year, compared with 10.3% for bonds, 14.7% for domestic and international stocks and 9.3% for commercial real estate.
Albertson says the purchase of farming operations will help diversify CalPERS’ giant portfolio, providing a hedge against inflation and insulating it from down cycles in its urban real estate holdings.
CalPERS generally believes that “alternative” investments such as agriculture, venture capital and private equity funds will produce higher returns than common stocks in coming years, in part because stock prices have risen so dramatically since 1995. Hence the fund is trimming its stock holdings moderately in favor of those other investments.
CalPERS could buy the farmland directly, but Albertson says a more likely scenario is that the pension fund would enter into joint ventures or partnerships with existing farm operators, with CalPERS making most of the investment.
All of that hinges on CalPERS’ ability to find properties that are not only large enough but capable of meeting their return requirements. Conrad says his fund had stopped purchasing California properties in recent years because land prices had risen so high. Instead, he has focused on purchasing more distressed property such as struggling Washington apple orchards.
Albertson says CalPERS would also have to find properties that meet its ideological requirements.
According to a report prepared for the fund, “Much farm labor practice is inconsistent with the responsible contracting philosophy” of CalPERS, which requires fair wages and benefits in companies it invests in. And the report noted that widespread use of chemicals and pesticides could create “public perception” problems.
“At any point, in any cycle of agriculture, if we find those opportunities we will take advantage of them,” Albertson said.
