May 9, 2018

By Michelle Pelletier Marshall, GAI News

In a just-published report from HighQuest Consulting – The Role of Nontraditional Investors in the U.S. Farmland Market – author Ben Palen details the rise in interest in the farmland sector by the nontraditional investor (NTI). From merely a dabble 10 years ago, NTIs, which include pension funds, asset managers, family offices, public and private REITS, hedge funds, foundations, endowments and private investors, today account for an estimated $20 billion flowing into the $2.5 trillion U.S. farmland sector.

The report includes exclusive info on market trends, transaction sizes and locations, and permanent vs. row crop investment comparisons – sourced from those with more than 40 years’ experience in the ag value chain.

GAI News sat down with Palen to get some of the highlights of this 20-plus page report.

1. The report estimates that the amount of NTI capital invested in farmland in the U.S. since 2010 is in excess of $18 billion. What are the driving forces of this increase?

Top on the list is the increasing awareness of agriculture as an asset class, which I think in part has come from the Global AgInvesting conferences over the last 10 years. The realization that there are factors at work such as world population growth, increased food demand, and more attention to the food supply that are having an influence on the importance of farmland as an investment. I think the U.S. is viewed as a safe haven for investments in real property, specifically farmland, by certain types of investors – both domestic and foreign.

This report also discusses the fragmented nature of ag investing and how one has to drill down to the local knowledge to fully understand the dynamics of the sector in a specific area.

2. What type of data points were examined, and what type of expert sources were consulted in the analysis? 

That’s one of the keys to this report, because we’ve done something that to my knowledge no one else has done in the sector, and that is to pull together and examine data on literally hundreds of transactions from around the country worth several billion dollars. We looked at publicly available sources, and we spoke to landowners and real estate agents in a number of the key investment areas of the United States for NTIs. 

A lot of this was confidential information but the sources were happy to share it with us because they felt it was important for a report of this nature to give some context to this enormous market — $2.5 trillion by some estimates. The report provides a fairly deep dive into the market, thanks to our sources’ interest in helping potential investors better understand the many aspects of the sector.

3. Farmers remain the dominant buyers in the farmland market, but what is the expectation for the potential increase in NTI participation?

The report details the fact that farmers have historically been the largest percentage of buyers across the U.S., but that has started to change with the demand from investors for purchasing farms, the increasing age of U.S. farmers, and the generational shift that is occurring in some areas. The role of technology has come into play as well, as has the sheer amount of capital that is required in some geographical areas to invest in farmland. All of this has driven more institutional investors to farmland investing.

Do I think there’ll be a flip flop as far as NTIs becoming the dominant buyers across U.S. farmland? No, I don’t. There are certainly isolated areas at a particular market level where they are the dominant players, but those are the exceptions to the rule. I think we’ll see a healthy mix of investor capital as well as local buyer capital, and we’ll see more creative arrangements between local farmers who want to expand their operations and work with investors to do so.

4. As far as what NTIs traditionally invest in, they have to be pretty patient with agriculture and settle on a longer term ROI, correct?

Yes, if you look back to the period of 2008-2012/13 there were definitely some NTIs invested in agriculture and they flipped their properties relatively quickly because that was a period of time you might call one of the ‘Golden Ages of Agriculture” where commodity prices were jumping more rapidly, so some of those people got out and in pretty quickly. But what remains is the underlying investors in that market having longer term views. They look at the long view of agriculture and realize it has cycles relative to land and commodity prices and they are content to work within those cycles and be opportunistic.

 It’s a little different dynamic now – there are not too many of the buy and flip opportunities for NTIs, but people who are willing to accept cap rates on properties that are in line with historic averages, rather than the cap rates during the ‘Golden Age’, which were quite high, should do well.

5. What are the top questions answered by this report that NTI investors would be most interested in?

We’ve given a sense of the ROI and what might be expected in the near term. We’ve talked about some opportunities to add value and given some examples. We talked about the average cost approach for the farmer/owner versus investor, depending on their strategic focus, and if they can achieve some economies of scale via method of operation or a geographic location. There are a number of insights at the end of the report – at least a dozen – that come into play when an NTI is considering an investment in this market, and a number of them deserve further analysis before investing in the sector.

Those interested in purchasing this report can get more details at www.globalaginvesting.com/us-farmland-NTI/ or reach out to Palen directly at bpalen@highquestgroup.com.

ABOUT THE REPORT AUTHOR

Ben Palen, senior consultant for HighQuest Partners, is a fifth generation farmer with more than 30 years of experience in farm acquisitions, due diligence on existing ag portfolios, tenant negotiations, evaluation of farming arrangements, land sustainability practices, mineral rights, and overall farm operations. In the course of this work, he has evaluated farm properties throughout the United States. He holds a bachelor’s degree, with honors, from the University of Kansas, and a law degree from Northwestern. He began his career on Wall Street as a lawyer and investment banker.