Agriculture - can it be a cash cow for investors?

By Ellen Kelleher

Might the era of the yeoman farmer be upon us? A clutch of investment advisers say so, claiming that buying arable land is a sounder idea than taking out futures contracts if you are hoping to profit from rising food prices.

Investing in land remains risky and approaches to its ownership and management vary, as do returns. But John Paul Thwaytes, manager of JPT Capital’s Agrifund, which is seeking £50m ($79m) next month in a Dublin listing to support the development of Australian wheat farms, talks it up as a long-term gamble.

Provided a stake is held for eight years for the purpose of hedging exposure to poor years, he expects the fund to throw up a yearly yield of as much as 9.25 per cent from profits generated by farming activities. Investors also gain from any increase in the value of the land. Another fringe benefit is that commercial land offers a hedge against inflation and is not correlated to equities.

There are just a handful of institutions with agriculture divisions (Macquarie, Prudential, Rabobank and UBS are well-placed in the area) and even fewer funds on offer. But interest in land holdings across Brazil, Canada, Africa, Australia and New Zealand is growing, particularly among pension funds as well as private equity and sovereign wealth funds.

Tim Hornibrook, a director with Macquarie Agricultural Funds Management, which runs dairy, sheep, cattle, horticulture, forestry and wine estates, mainly in Australia, and oversees more than $1bn in investments, says: “We’re coming from a low base, but agriculture is starting to gain attention. Investors are looking for alternatives and buying agricultural equities can be a challenge as there’s not a huge range of listed companies to invest in. And while futures contracts are highly liquid, they are also highly volatile and their outlook is quite short term.”

The investment vehicles available include: AgCapita, a Calgary-based private equity firm with a focus on farmland in Saskatchewan; Agrifirma Brazil , a privately-held Jersey company backed by Lord Rothschild and Jim Slater, which owns more than 50,000 hectares of Brazilian farmland; and Agro-Ecological Investment Management, an Anglo-Kiwi partnership that takes stakes in organic farms in New Zealand on behalf of institutional clients and family offices. Funds with a focus on Africa, which boasts a quarter of the world’s arable land, are scarce. But the Emergent African AgriLand fund, a private-equity style fund based in London that aims to invest in 14 sub-Saharan countries and employs 3,500 farm workers, is said to be the largest.

While its managers aim to pay a coupon of 8-10 per cent and provide a target risk-adjusted return of at least 25 per cent, its fees are high. It charges 2.5 per cent a year and a 20 per cent performance fee, and institutional investors must cough up at least €5m.

The pick-up in desire for land holdings comes as global food prices hit nominal all-time highs, according to the United Nations Food and Agriculture Organisation, after a string of bad harvests and amid robust demand in Asia, surpassing the levels seen during the 2007-08 food crisis.

A recent study from the property group Savills concludes that soaring food prices will push up land values in several countries – though growth may be stunted in mature markets like Ireland, Denmark and the Netherlands where land is expensive. Agricultural investment funds, which own land around the world, are forecasting cash-on-cash returns of 3-8 per cent and internal rates of return of 10-18 per cent after fees, according to Savills’ research.

Jonathan Davis, FTfm columnist and a founding shareholder of Agrifirma Brazil, estimates it requires at least four years for managers to see a return on Brazilian land. By his estimates, it costs as much as $1,500 per hectare to purchase it; $1,500 a hectare to develop; and $6,000 per hectare is gained from its sale. “It’s a very difficult business to make money out of. There are so many things that could go wrong. Weather can be a big problem. Crop failure. Land is also a relatively illiquid asset. Then there’s the farming side of it,” he admits. “But it is possible to see an internal rate of return of 20 to 25 per cent. You can see real returns over a long period and see the benefits of an operating yield and capital appreciation.”

Some fund managers are less than enthusiastic about the sector’s prospects, however. Political risks are one concern. Last year, for example, the Brazilian government placed further restrictions on land ownership by foreigners, sparking fears among investors. More generally, farming can be hard work.

Henry Boucher, manager of Sarasin’s ₤£152m Agrisar fund, which invests mainly in agricultural equities and gained 15.5 per cent in the past year, looked into taking a direct land holding in 2005, but later abandoned all efforts. “I really explored it. I tried very hard and came to the conclusion that it wasn’t an accessible area.” Mr Boucher also points out that to woo investors, some vehicles such as Agrifirma were forced to restructure themselves and scrap their hedge-fund style fees (2 per cent fee a year plus 20 per cent of profits).

George Lee, manager of the Eclectica Agriculture fund, meanwhile, is just as cynical about the possible complications and claims equities are an easier bet. He is focusing on fertiliser stocks as he thinks farmers will spend more on soil nutrients as food prices rise.

“That’s one of the themes I’m playing. Farmers will look for a chance to improve their crop yields after the events of 2008 and 2009,” he concludes. “As for trying to farm land yourself, it’s trickier than just getting out your plough. It turns into a five, 10 or 15-year project. There are big issues with logistics and weather conditions.”