(MENAFN- ProactiveInvestors)You've heard the adage about following the smart money and in the past decade we've seen hundreds of millions of dollars flow to an inconspicuous place: farmland. Why now And could farmland be a benefit to your portfolio We break down the characteristics of farmland investments and why it's an asset class worth consideration. Farmland can benefit investors in three major ways: Current income in the form of rent paid by farmers and long-term appreciation of land values The ability to increase the output and profitability of the land through active management Portfolio risk mitigation 1. Rent and Land Value Appreciation. Rising land prices are the most obvious benefit of owning farmland but you may not have known that not all farmers own the land they work. Many engage with active land managers to do sale-leasebacks paying rent and sometimes a portion of the profits from the harvest. According to the National Council of Real Estate Investment Fiduciaries ('NCREIF') which monitors real estate performance cropland rents have more than doubled in the past 10 years. For the landowner this generates current income and does not require his day-to-day oversight. According to Ceres Partners an Indiana-based farmland investment firm rising crop prices have driven farmer incomes from an average of $70 per acre before 2007 to $208 per acre between 2012-2014. Ceres believes that extraordinary farmer profits will continue to flow into higher land rents. As for land values since 1990 they have grown at a compound annual growth rate (CAGR) of 4.3% per year. 2. Improvement Projects. Not all land is created equal but most of it can be improved upon. This has been a key tenant of active land managers striving to create value in farmland. Compared to the rest of the globe the U.S. is highly efficient in this manner. U.S corn yield for example is 11 metric tons per hectare. The world average is just 3. Some ways managers can help farmers increase yields include adding nutrients to the soil improving irrigation systems and building storage and shipping facilities. 3. Portfolio Risk: Since farmland values are based on collective long-term crop expectations and not day-to-day commodity price fluctuations farmland has historically provided equity-like returns with fixed income-like volatility. The below chart shows U.S. cropland's returns versus the variability of returns over a twenty year period. U.S. cropland returned on average above 11% per year and has the second lowest volatility (measured by standard deviation) of all major asset classes behind bonds. Source: Farmland (NCREIF Annual Cropland Index); Equities (S&P 500); Bonds (Barclays Aggregate Index); Commercial Real Estate (NCREIF NPI); REITS (NAREIT); Commodities (GSCI) In addition to relatively low volatility farmland typically demonstrates low or negative correlations to most traditional asset classes. This can provide ideal diversification for many investors and may allow for more stable long -term portfolio performance. When the S&P came down between 2000 and 2002 and again between 2007 and 2009 farmland values and yields were on the rise. These unique characteristics explain why large long-term-minded institutions like pension funds which need a predictable source of income to pay their pensioners have been taking a hard look at the space in the last several years. Source: Farmland (NCREIF Annual Cropland Index); Equities (S&P 500) While large pension and endowments funds are looking at farmland for these three reasons at Sprott we see several more key drivers. Farming is a favored industry in the U.S. contributing an average of $169 billion to U.S. GDP per year over the last 10 years. As the largest producer of row crops such as soybeans corn cotton wheat and rice America is a global farming powerhouse with several distinct competitive advantages that will keep it on top. In addition to high quality soil and extensively knowledgeable operators American farmers have the advantage of an efficient and expansive transportation and logistics network strong property ownership rights lower currency risk (helpful for exporting) and the ability and knowledge to rotate crops to suit the soil and market demand. There are also macroeconomic factors which may drive demand for grains including global population growth and in emerging markets increased caloric intake and demand for proteins. China is the most looming example. Its growing middle class has highlighted the scarcity of the country's own land resources and the growing dependence on U.S. products. According to the U.S. Department of Agriculture in 2011 in a massive sea change with global implications China became a net importer of rice corn and soy. And the demand is expected to continue for the next decade. The U.S. accounted for over 24% of the value of China's agricultural imports during 2012 and 2013 a larger share than any other country. U.S. agricultural sales to China doubled from 2008 to 2012 reaching nearly $26 billion in annual sales. Still the industry is highly fragmented with individual farms often held by family farmers and small corporations. Investment managers are coming into the fold looking to consolidate and generate diverse holdings in yield-generating assets and this is creating interesting new ways for individual investors to gain access to farmland. As with any investment investors need to remain cautious. The too-good-to-be-true proposition of higher returns larger income yields and lower volatility has and will attract under-qualified management teams. Finding a team that bridges farming and finance is a requirement to consistently attract quality farmer-operators and acquire undervalued farms; both necessities for sustainable investment performance. And as few of us are likely to quit our day jobs to don our overalls and straw hat utilizing good managers is vital. Fortunately there are a few ways to gain exposure to the asset class. If you are interested in learning more about American farmland as an asset feel free to contact me at 760-444-5254 or jstevens@sprottglobal.com. Jason Stevens is an Investment Executive with over 13 years of experience in natural resources. He has been a featured contributor to industry sites such as Accredited Investor Markets Resource Investing News and Financial Survival Network.
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