Investors Head Back to the Farm

Wall Street likes Ag sector outlook

Justin Durdan came to San Francisco this week looking for investment partners for his farm back in Streator, Ill. He found plenty of enthusiasm for agriculture from a wide range of would-be investors.

"I'm just looking to diversify our capital sources," says Justin, who grows corn and soybeans with his father in northern Illinois. "We have to market ourselves to investors and build these relationships."

Durdan isn't the only farmer here looking to ally with non-traditional funding sources. But the majority of people at Terrapin's Ag Investment Summit Americas conference are new to agriculture. They see the sector as an answer to portfolio problems that may be coming as the economy unwinds from its long recession.

"The school of thought is, we're going to experience high inflation and typically, farmland has been a good hedge against inflation and improves portfolio diversification," one private firm investor told me. "You want something that goes up when everything goes down."

But the new intrigue for Ag goes deeper. Food price shocks and volatility make Ag a dynamic play for many investors. Global population growth, set against a backdrop of limited resources, has more people jumping into the game on multiple levels from farm to retail.

This is no ordinary farm meeting – that was clear the minute we arrived here at the Marine's Memorial hotel, a few hundred yards from the Giants-Tigers World Series game. At a meeting full of investor types you hear a completely different language. People talk about how to 'define this emerging and expanding asset class,' or 'how to evaluate the risks and return potential of emerging markets.' The Ag sector is described as 'a moving target.'

Got that right.

Long-time farmland investors offered various bits of advice. Paul Pittman, who owns and farms 15,000 acres in Illinois Nebraska and Colorado, says, "We try to buy property at the right price - buy and hold - then after that we work incredibly hard to drive costs down. We're fundamentally a commodity business, so low cost wins."

Pittman notes that land and operating returns have different risk portfolios, so they should be treated differently. "Land is like an inflation adjusted bond and you should expect returns as you would an inflation adjusted bond over a long period of time," he says. "That's a wonderful kind of risk profile – almost like passbook savings. You do have risk with increased interest rates, but one would expect over time, inflation will bring land values up and it will balance out, assuming you have enough liquidity to stay in the business."

Sustainability is coming 

Food retailers from Walmart to McDonald's are increasingly under pressure to source food grown with best management practices. Several speakers at concurrent high-tech Ag seminars focused on new ways supply lines could be managed and productivity increased, with sustainable, traceable farming practices. One company solely focuses on how to help processors mitigate supply chain risk by using systems that analyze pre-harvest yields.

As outside money comes into farming, expect a paradigm shift in how you grow crops and manage business relationships. If one message came through from this meeting it was this: Farmers who demonstrate great management, communications and financial skills will be reaping the rewards of new money in Ag.

And Durdan? He came away with a new appreciation for what investors may be looking for.

"It's a whole different way of thinking," he says. "In Illinois you're thinking corn and soybeans, but a lot of these folks are thinking globally. If they think growing cherries in Chile will make more return, that's where they will invest."

 

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