November 19, 2018

This article will be featured along with other articles addressing investment opportunities in European agriculture in Volume 5, Issue 4 of the GAI Gazette, which will be distributed in conjunction with Global AgInvesting Europe 2018, held in London on 4-5 December 2018. Join us in London to hear valuable insight and best practices for investment strategy from the expert speaking faculty. Mr. Schoen will be a speaker at the event, where he will present “Addressing the Agriculture Investment Funding Gap With Debt & Equity Solutions”. Learn more and register.

By Michelle Pelletier Marshall

Detlef Schoen is passionate about agriculture, evidenced by a career that spans over 30 years and began with an agronomics degree. He is unique in his experience as a hands-on farmer and management executive across several large agribusiness/investing companies. Currently he is head of real assets for London-based Insight Investment, one of the largest and most prestigious global asset management companies, with over £604 billion (US$787 billion) in assets under management (as of 30 September 2018).

Prior to working at Insight, Schoen spent seven years as an independent consultant working under the name DS Green Assets, through which he ran an investment platform for Aquila Capital. He began his career with Cargill where he served as country manager for Germany and head of its European grain business for nearly a decade. He then moved to east Germany to establish his own grain origination, input supply, and crop finance business, which he ran for 10 years before re-entering the global grain trading universe as head of global grains for NIDERA.

Prior to joining Insight, he was invested in and personally managed grass-fed beef farms in Australia.

A sought-after resource for institutional investors who are cautiously diving in to this up-and-coming mainstream allocation, Schoen has been a frequent contributor to GAI News and speaker at our Global AgInvesting events. We caught up with him on the road.

Q1: What lessons have come from being a boots-on-the-ground farmer, along with operating at the executive level in global agribusinesses? Has this hybrid experience helped you better identify and mitigate risk, or enable you to better leverage certain drivers in farmland values?

You picked exactly what I would have replied – and yes, both answers are true; I would add that in my agribusiness roles I also benefited from being able to see things from a farmer’s perspective.

Given the cyclicality of farm commodities, for the investor, the timing of an allocation can be as important as the quality of all the due diligence and subsequent management. Therefore, having the ability and experience to read commodity markets adds significant value.

In terms of risk mitigation, a robust ‘de-risking’ strategy goes way beyond short-term hedging because in the agricultural value chain, return volatility reduces the closer one gets to the consumer; vertical integration is equivalent to ‘de-commoditization’.

Such vertical integration requires scale – the same scale that also generates unit cost benefits at the farm level and allows the investor to have more bargaining power.

Q2: By their nature, farmland projects lend themselves to be in compliance with ESG plans. Do you see an increased spotlight on ag investing based on this?

Absolutely – investors are beginning to understand that farming is one of the very few sectors where sustainability does not necessarily come at a cost but can actually enhance and de-risk financial returns.

What has been missing so far is a ‘stewardship body’ that moves ESG in agriculture out of the realm of statements and ‘self-certification’ towards a system of measured, managed, enhanced, documented, and audited metrics. Over time I believe – and certainly hope – that we will see ‘ESG accounting’ as being as important as financial accounting.

Q3: How do you see the fallout of Brexit impacting the European ag sector?

I see two immediate issues: a) the increased uncertainties regarding both the nature and the funding of future farm subsidies, both on the continent and in the UK; and b) the potentially massive shifts in both short-term trade flows and long-term value chain adjustments.

For example, in a scenario with recalibrated tariffs, a country such as the UK that is surplus feed grains but deficit pig and poultry meat (which in a way is processed feed grain…) is likely to gravitate towards an integrated grains-to-meat value chain, offering significant opportunities for private capital, with similar opportunities arising in the dairy sector where the UK today shows an ‘unnecessary’ trade deficit.  Such shifts would of course be mirrored by those EU countries that today supply these goods to the UK.

Q4: You have talked about the equity gap in farming that provides attractive opportunity for private capital. Can you please elaborate on this thought?

My thesis about the equity gap as the ‘undiscovered’ mega trend is based on three observations:

• Whilst there is no technological problem to sustainably produce the calories and amounts of protein required to feed nine or even 10 billion people, in order to unlock the production potential and reduce wastage there needs to be a massive uplift in capital spending (mostly for technology and infrastructure) – a new ‘green revolution’ in which an industry that has traditionally yielded low single-digit cash returns will not be able to fund from incumbent equity.

• The combination of farmers’ age structure in most exporting nations and the percentage of farms with a nominated successor – in short: old farmers and some equity retiring with few successors and less equity taking over means that the ‘next generation farms’ will inevitably be much larger than today’s average.

• Although larger farms (with lower unit costs) tend to exhibit an improved debt service capacity, the myopic focus on loan-to-value metrics by banks operating under regulatory limitations means that there will not be enough conventional bank debt available to close the funding gap.

What this means is that there will be unprecedented demand for private capital lent to or co-invested alongside the farmers of what will be a new generation, both in terms of demography and technology. We are talking about hundreds of billions of dollars over the coming 10 to 20 years.

Q5: Considering shifting global trade agreements, and the cyclical nature of the industry, what do you see as the top ag investment in the current European marketplace?

In spite of what I said about the importance of the ability to read cycles, I believe our primary role as investment advisors should always be to provide a balanced and diversified portfolio, with only the entry points for the individual components determined by cycle considerations.

Having said this, not only in the European marketplace but globally, I see a massive opportunity for institutional investors to provide  growth capital – fundamentally irrespective of whether deployed as co-investment equity or debt – to a new generation of farmers, empowering them to:

• Employ cutting-edge technology in order to ‘future-proof’ their farms by generating the highest possible, sustainable returns from capital, soil, water, and climate;
• Operate at the scale required to produce food of the highest possible quality at the lowest possible price; and
• Operate at the scale required to de-risk their business by integrating downstream.

In my mind the only financially and ethically responsible way to provide such investor capital is on a very long-term or even evergreen basis, targeting financially and ethically sustainable returns, which in today’s financial environment (and after tax) will struggle to exceed 4 percent cash or 8 percent IRR but which will deliver additional benefits both in terms of ESG criteria and inflation protection.

ABOUT DETLEF SCHOEN

Insight Investment is an asset manager owned by BNY Mellon and based in London, Frankfurt, New York, Sydney and Tokyo.

Detlef Schoen joined Insight Investment in August 2017 as Head of Real Assets.

With more than four decades of experience in farming and a multi-billion-dollar track record as a senior agribusiness executive, he is currently one of very few experts globally that combine experience and a successful track record all the way from hands-on farming to international agribusiness and financial markets.

Detlef Schoen is widely known for his thought leadership and is highly respected in the institutional investment world for farmland and agribusiness. At Insight, under his leadership the farmland team developed a strong focus on tangible sustainability metrics in farmland investing.

After his studies of agricultural economics he joined Cargill where he had a fast-track career with stations as country manager, Cargill Germany, and product line manager of the European grain trading business – at the time the leading exporter of grains from the EU and a significant country merchant in the UK.

He left Cargill to set up and run his own grain origination company which he grew from a small local trader to a significant country merchant and the largest exporter of German quality wheat.

Having exited from this business, he later ran the global grain book for NIDERA – at the time the 6th largest grain trader worldwide.

From NIDERA he moved to Aquila Capital where he was responsible for implementing a US$300 million farm investment plan, mostly in New Zealand where at the time he was responsible for the largest foreign investment in New Zealand agriculture.

Prior to joining Insight, he was invested in and personally managed grass-fed beef farms in Australia.