The Funds Are Calling
The financialization of farms isn’t showing any signs of slowing down, as institutional investors continue to find new ways to enter the agriculture space despite – and, in some cases, because of – the downturn in prices for corn, beans, and wheat.
Corn futures are down about $1 a bushel, or 23%, from three years ago at the end of the last boom cycle caused by years of dry weather in much of the Midwest. Soybean prices have dropped by more than 25%, and wheat futures declined 40% since October 2013. Land prices fell to $4,090, on average, in 2016, the first decline in seven years, according to data from the U.S. Department of Agriculture.
Investors seeking a long-term or so-called haven investment are seeking ways to enter the agriculture space. With prices low, now may be the time to get into the market, fund managers say. While low commodity prices are bad news for farmers suffering through another year of low commodity prices and high input costs, it may allow more institutional investors who normally play stocks or park their money in precious metals such as gold or silver to enter the space. They enter through funds that track crop futures or real estate investment trusts (REITs) that buy and sell land as a long-term investment.
Sal Gilbertie, the president and cofounder of Teucrium Trading, which has funds tracking corn, soybeans, and wheat, says growing populations globally will increase food demand, which means the value of agricultural commodities and land will rise in years when there are production disruptions. While supply will fluctuate, demand is constantly on the rise, which always makes investing in agriculture a good long-term play.
“The population of the world is growing by the equivalent of two Californias a year,” he says. “Corn is used for everything, and incomes for the middle class are projected to skyrocket. Even if the population was to stop growing, which it won’t, people will keep using more grain. The first thing they do is buy more grain-fed meat, so you need more grain. Consumption is just going to keep going up.”
Corn consumption globally is expected to top 1 billion metric tons, reaching 1.016 billion tons for the first time in history, according to the USDA. Soybean use is forecast to rise to 328.7 million tons, also the most ever. Wheat consumption worldwide will total a record 732.3 million tons, according to the USDA.
Paul Pittman, the chief executive officer at Farmland Partners (an REIT that buys farmland and is traded on the New York Stock Exchange), says the USDA numbers don’t lie – the world’s population is getting bigger, and food demand will only rise.
Denver-based Farmland Partners recently acquired American Farmland Co., a rival REIT, making it the largest such entity in the nation with more than 133,000 acres in 16 states. The combined company’s assets are composed mostly of “premier row-crop farmland,” with about 25% in specialty farms in the U.S.
Since prices have fallen, Pittman says most of the farms he’s seeing on the market are through estate sales or retirees rather than active growers unloading property. Active farmers aren’t selling, he says, as many are either waiting to see if they can return to profitability or if land prices rise so they can sell for more in the near future.
Attracting investors into the agriculture sector should be a no-brainer, Pittman says, but it seemingly makes some uncomfortable. The same traders who are buying gold as a so-called haven investment because they’re worried that the global economy is collapsing should also be looking at agriculture commodities, because people, no matter what happens economically or politically, will still need to eat, he says.
Still, many investors have seen the downturn in the U.S. farm economy and likely have been spooked – and for good reason.
Teucrium’s corn, soybean, and wheat funds track the corresponding futures on the Chicago Board of Trade. While prices are down now, they will rise at some point due to a weather problem or other black-swan event, Gilbertie says.
“Every (few years) there seems to be supply disruption, and the price pretty much doubles,” he says. “It happened in 2007 and 2008, and then again in 2010, and it never fell back in 2012. Now we’ve had four consecutive season of really good yields, but every single month the global use of corn, beans, and wheat is rising to a record – it never fails. When you have uncertain supply and demand that never relents, you can figure out what happens when we do get a supply disruption.”
The Teucrium funds offer investors “unleveraged direct exposure to basic agricultural commodities without the need for a futures account.” Therein lies the allure of investing in a fund or REIT – investors can have exposure without having to secure a futures license or broker, he says.
Investors Want Farmland
Brandon Zick, director of acquisitions and portfolio management at Ceres Partners in South Bend, Indiana, says despite the downturn in the economy, “people still want farmland.”
The firm, which is not an REIT but a private fund that invests in farmland, counts college endowments, charitable organizations, and pension funds as its clients. The agriculture industry also is attractive because it allows investors to diversify. In the case of Ceres Partners, it also offers a way to invest privately rather than publicly.
“When we talk to our investors, we tell them that now is a great time to invest,” he says. “We’ve seen some decline in land prices,” but only a modest one.
Ceres, which has $500 million under management including 263 farms and 88,000 acres in 10 states, has already invested $70 million in land this year and likely will invest another $70 million by the end of 2016.
Zick has targeted 70 farms to buy this year, though he likely will only get 10% of those because the competition is stiff.
The buyers may not be who people expect.
“We still lose nine out of 10 times, usually to farmers who are willing to pay more,” he says.
The number of vehicles that will allow traditional investors to put money in agriculture will only grow, Zick says.
It’s not just buying some land and renting it out and hoping for the best, though. The key to making sure the investment is solid, he says, is ensuring strong management that will produce profitable crops and drive up the value of the land on which it’s grown.
“There will be more people in this space. To do it the way we do – which I think is the right way – you have to be on the ground in the Midwest, and you have to be a really attentive manager,” says Zick, who handles everything from finding the land to buy to working with growers and farm management.
“The gating factor isn’t buying land. If someone with a lot of money wanted to buy land, they could. The gating factor is building tenant relationships and finding farmers who are willing to pay rent. That’s the difficult part of all this,” he says.