Investors seeing farmland as safer bet than stocks
As investors tire of Wall Street’s roller coaster, more of them are plowing their money into land — farmland.
Few people understand this shift better than farm manager Carl Evers.
On a recent morning, Evers steered his pickup truck through a Central California almond grove, his drawling sales pitch at the ready. Evers is co-founder of Farmland Management Services, which runs about 30,000 acres of nut groves, fruit orchards and wine grape vines for a Boston investment firm. Sunburned and stocky, tugging down his wide-brimmed hat, he talked about how farmland — and the food it produces — is the safer bet these troubled days.
“You want to throw your money into something you can’t touch?” said Evers, 50. “Or do you want to put your money here, into soil and sun, into food that feeds people around the world?”
It’s the fourth time this year Evers has wandered through these trees and given his spiel to pension fund managers, hedge-fund operators and hungry investors on behalf of Hancock Agricultural Investment Group. He’s reeled it off many more times over the phone.
Farmland has become hot. Average U.S. farm real estate prices — including the value of land and buildings — have nearly doubled in the last decade to $2,140 an acre, according to the U.S. Department of Agriculture’s National Agricultural Statistics Service. Wells Fargo, the nation’s top agricultural business lender in total dollar volume, said demand prompted it to increase farm lending 12% from 2008 to 2009. Since the recession began in December 2007, financial analysts say, agricultural investments have easily outperformed the Standard & Poor’s 500 index.
Wealthy Americans and private funds alike are gobbling up Washington apple orchards, Illinois cornfields and Louisiana sugar plantations. So are foreigners. In California, investors from countries including Spain, Switzerland, China, Egypt and Iran collectively boosted their holdings 2.5% from February 2007 to February 2009 to 1.08 million acres — about 5% of the state’s total farmland. Overseas, U.S. and other investors are snapping up tens of millions of hectares of farmland in Africa, Central America and Eastern Europe.
Such investments generally involve a group of people who come together in a company or group of firms, pool their money and purchase parcels of land through a corporate structure. (Minimum investments can start around $25,000 and often require a commitment of at least six years.) After purchasing the land — whose value historically appreciates — it is usually then turned over to a farmer or a management firm, which handles day-to-day operations. If all goes well, investors can receive rent, proceeds from crop or livestock sales, or some combination of both.
For some, there is a sense of romanticism and relief at the idea of putting money into something as tangible as dirt.
“It’s something people understand,” said Jeff Conrad, president of Hancock Agricultural Investment Group. The enterprise manages about $1.3 billion of agricultural real estate for institutional investors, including public and corporate pension funds. “It’s something you can touch, feel, see, visit.”
Investors also understand that land is a finite commodity. The amount of arable land worldwide is dwindling, while the world’s population is forecast to jump to more than 9 billion by 2050 from 6.9 billion today. That has water-strapped countries eager to establish secure food supplies and bolster biofuel production. Fast-growing economies such as China are stepping up food imports to feed a burgeoning middle class.
As a result, U.S. exports of meat, grains, nuts and other farm products are surging. Overall, federal officials estimate that U.S. farmers will ship $107.5 billion in agricultural products overseas in fiscal 2010 — the second-highest amount ever, according to the USDA.
Frustration with the stock market persuaded Dr. Stephen Rivard to bet on farms. The physician who lives in the Chicago area invested heavily in stocks, only to cringe as the value of his portfolio shrank 42% over the last decade. When a friend launched Midwest Organic Farm Management and asked him to bet on a farm, Rivard reached for his wallet.
As the country’s economy suffered the worst decline since the Great Depression, he bought into more farms: So far, he’s put $300,000 into three Illinois organic operations, including one called Two Roads Farms.
“My only regret so far is that I didn’t invest more sooner,” said Rivard, 57.
The payoff has been mixed. Three years ago, commodity prices jumped and Rivard enjoyed a 15% return on an annualized basis. But last season’s harvest at Two Roads was a dud. Some of the fields were overgrazed by cattle. Heavy rains flooded the land. A lack of nitrogen in the soil made the corn stalks puny.
This year is more promising. D.D. Burlin, a Chicago-area stay-at-home mother, sank $25,000 from her savings into Two Roads for financial reasons and social concerns over how the food her family eats is produced. She recently toured her investment and wandered among the emerald-green fields of soybeans and oats.
“If people are willing to pay more for organic food, why can’t you make money by doing the right thing?” said Burlin, 42.
By its very nature, farming is risky. The investments aren’t liquid. Profits can fluctuate with weather, commodity prices and politics. Large parcels of good land can be hard to find. What is out there doesn’t come up for sale very often.
With U.S. opportunities limited, investors are looking overseas. The result has been a land rush, particularly in the wake of the food price crisis earlier this decade. The World Bank reported this month that the number of large-scale farmland deals in 2009 amounted to about 45 million hectares, compared with an average of less than 4 million hectares each year from 1998 through 2008.
The report found that about half the 406 land acquisitions in Ethiopia and the 405 deals in Mozambique from 2004 to 2009 came from foreign investors. Foreign investment in Sudanese agricultural land was expected to increase fivefold by 2014.
Banks, universities and investment firms are closing some of the biggest deals.
Optima Fund Management, a New York fund, plans to acquire about 10,000 acres of Arizona farmland and California vineyards by year’s end. Macquarie Agricultural Funds Management in Australia — which has invested in dairy, forestry and more than 7 million acres of land — is launching a second fund that may expand into Brazil. Pharos Financial Group, a firm backed by financier George Soros and based in Moscow, created an agriculture-focused private-equity fund in November and is scouting farms in Asia and Africa.
Such deals have sprouted a backlash and raised concerns of speculators becoming wealthy at the environmental and economic expense of local communities. John Peck, executive director of the anti-corporation advocacy group Family Farm Defenders, said institutional investors could distort global food production patterns by planting crops for profitability rather than nutrition.
Such critics also wonder whether investors have forgotten the cautionary tale of the 1980s U.S. farm crisis. A combination of low prices, high interest rates and plummeting land values devastated rural America. Thousands of family farms fell into foreclosure and scores of farm banks collapsed.
“Could we see the ‘80s all over again? Absolutely,” said agricultural economist Michael Swanson, of Wells Fargo’s Agricultural Industries Group. “The combination of high crop prices and ultra-low interest rates has farmers bidding historically high prices. It will end very badly for some of them.”
Burlin isn’t swayed.
“Right now,” she said, “this still feels safer.”