April 24, 2017

Although there are strong macro indicators including population growth, rising standards of living, and shifts in protein demand supporting the choice to pursue agricultural investments in emerging and developing nations, there is no denying that North America remains a powerhouse in the agricultural investment universe.

At this year’s Global AgInvesting 2017 in New York, a panel of prominent ag investors in the North American space gathered to discuss what sets North America apart, and their experiences while building some of the most impressive and successful farmland portfolios in the U.S.

“If you’re looking for investments around the world, you’re crazy if you don’t have a portion of your portfolio in the U.S.,” said Howard Halderman, executive chair with US Agriculture, adding, “…you’re buying into a system, not just one component.”

Indeed, the importance of North America’s well-established governance framework, high-level of transparency, existing infrastructure, climate, fertility, research & development pipelines, and dominance in world markets cannot be overstated when considering investing in the space. However, the agricultural production chain in the U.S. remains imperfect – and it is in the imperfection where investors see opportunity.

“The U.S. should be the most efficient, but it’s not yet,” noted Brandon Zick, director of Acquisitions & Portfolio Management with Ceres Partners. “That inefficiency gives me confidence. We’re finding a lot of great buy-side opportunities over the past 24 months…We’re pretty confident long-term that buying right now will be great for the future.”

Ceres Partners remains focused on specialty crops in the U.S. Midwest region, where the firm aims to build Alpha through value addition to undervalued properties.

“Water is a big part of our thesis,” said Zick, “We prefer to be where there’s a resource rather than a right. Water is going to be allocated to the highest value crops out west – I believe producers will move to the Midwest and Southeast where water is not so much an issue.”

Halderman agreed, and said, “There are some operators from the West Coast moving to the east due to water issues. I think over time the East Coast opportunity is something we’ll be watching.”

David Gladstone, chairman and CEO of Gladstone Land Corporation – which as of January of this year ran a portfolio of 59 farms encompassing 54,340 acres of high-value crops including strawberries, blueberries, lettuce, and vegetables valued at $452 million – noted the critical nature of water availability when building out a portfolio, but remained steadfast in his belief in California production.

“We don’t buy any farms that don’t have water – from whatever resource,” said Gladstone. “Our farms will have turnouts as well as wells. We didn’t have any problems throughout the [California] drought – all of our farms functioned as normal. Everything is relative to what that farm will produce – not the water that is directly on that farm.”

This sentiment was echoes by Bob Cowan, president of Farmland Partners – the largest public farmland REIT with a portfolio valued at more than $990 million across 17 U.S. states.

“We make sure water is number one,” said Cowan. “Some of our best returns are in California. I’ve seen four droughts come and go, and there are excellent water areas in California, and we stay away from the bad.”

Knowing to “stay away from the bad” is a direct result of thorough due diligence.

The importance of partnerships with highly experienced, reliable tenants to the success of a farmland portfolio was an overarching theme to the discussion.

“Due diligence is key,” noted Gladstone, who explained that Gladstone Land Corporation takes a dual approach to the process – examining the land and the tenant. “Most of our tenants are in the top 20 percent in their area. It’s all about the farmer for us – farmer first, land second.”

Cowan agreed, “The operator is slightly more important than the land – they can make 30 to 40 decisions per day, and you have to have the right people.”

Howard Halderman noted, “For us, it’s the partner you’re working with…it really comes down to the partnership with the tenant – they are often key to making that relationship successful.”

However critical a part tenant selection is to the success of a farmland portfolio, due diligence when sourcing properties for acquisition encompasses a wide range of important questions to ask. And although the process has simplified in recent years with the elimination of buried fuel tanks and asbestos, investors must gain knowledge of the soils and microclimates for each property, local regulations, labor rules, and market conditions.

Of course, tenant choice, geographic diversification, and the process of answering these questions are in place to mitigate risk for the investor, and in some cases, their shareholders. However, some level of risk is endemic to the ag investing space, and at times, this risk comes with crop choice.

Good fundamentals and brilliant marketing campaigns, as well as attractive value propositions make investing in North American permanent crops an attractive choice. Cowan mentioned that 25 percent of breakfast cereals on the market have almonds in them, indicating a positive long-term future, while citrus provides a good diversification with popular easy peel marketing campaigns showing promise for continued growth.

However, there is risk assumed when investing capital into trees or vines that cannot be switched out when markets shift.

“Permanent crops are a very different world than what we’re working with,” said Gladstone. “Once you put a lot of money into trees in the ground, and it’s not working – that’s a big problem. We’re heavy into vegetables. It’s all about price – we’re going to be in vegetables for eternity.”

“Permanent crops have a totally different return profile,” added Zick. “…you can’t rotate in and out based on price like corn. If we were to move into permanent crops, it would be through a different vehicle, so investors could choose if they wanted that profile.”

Even with the myriad advantages that come with investing in North American farmland compared to other geographies, building a successful portfolio is a complex exercise – but one not without rewards for patient capital.

“I’m optimistic,” said Cowan, “[It’s a] great long-term buy!”

-Lynda Kiernan

Lynda Kiernan is Editor with GAI Media and daily contributor to GAI News. If you would like to submit a contribution for consideration please contact Ms. Kiernan at lkiernan@globalaginvesting.com.