April 26, 2016

By Eric Francucci

Representing up to 10% of a typical investment portfolio, and often as little as 2-5%, in a traditional equity portfolio investing in agriculture is itself a diversification strategy. However, in order to have a well-developed farmland portfolio, experienced agricultural investors agree that diversity is key. Experts from across the agricultural investing space discussed diversification strategies at yesterday’s Global AgInvesting 2016 event in New York.

Investors looking to invest in cropland generally look at three classes of crops: row crops, permanent crops, and vegetable/specialty crops. The price cycles, growing cycles, management needs, and land value appreciation behave quite differently for each class and each has different capital requirements, as well as different risk and return profiles. While some investors choose to prioritize one type over the other, investing in a mix of crops in the same region is a good way to reduce risk associated with year-on-year S&D shocks that can impact a single crop. CEO of International Farming Corporation Charlie McNairy explains, “When choosing which crops to invest in, we like to look at the profitability of the crop relative to land value.”

Geographic diversification, both across countries and within the same country, protects the investor from price cycle differences and weather risk. CEO of Westchester Group Martin Davies believes that “true” diversification is not achieved until your assets are located in separate continents- for Westchester, this means the US, Brazil, Chile, Eastern Europe, and Oceania. Davies says that along with providing protection from decreasing land value appreciation associated with more mature markets like the US, geographic diversification can insulate the investor from changing commodity price cycles, which “don’t always move at the same speed” across different countries. However, investing across such a wide span of geographies requires significant access to capital.

Protection from weather factors, both year-on-year shocks and multi-year climate change factors, is a principle objective of a geographic diversification strategy, explained Proterra Investment founding partner Brent Bechtle, who referenced the vast distances between different operational locations of one of Proterra’s Australian investments as key to protecting the holding from weather-related risk affecting any one regional climate zone in Australia. Investing in the same crop over different geographies, such as both US and Brazilian corn production, will add another layer of weather protection.

While geographic and crop diversification is important to any ag portfolio, “diversification is secondary to finding value in an individual investment,” stated Bechtle. To that point, McNairy explained IFC’s identification of an improperly farmed plot of farmland in Missouri. After purchasing the asset, its agronomy team was able to nearly double yields from 110 bushels to 205 in four years, transforming a $56 million investment into an $82 million sale along with $10 million paid out in dividends, generating a 15% unlevered IRR.

Soil quality, adequate water supply and proper farming techniques are fundamental to the success of any investment. However, when taking a portfolio-level view, geographic and crop diversification is fundamental to insulating performance from negative year-on-year fluctuations.