Chicago Forum: ‘This is the institutional roll-up finally happening’

Less active as competitors for land and facing succession issues, US farmers are giving a jolt to the market by divesting assets, panelists said at the Agri Investor Forum.

 

US farmland markets will find support from demographic, economic and policy factors in the coming years, according to a group of seasoned investors.

Comparing notes on how the recent downturn in agricultural commodity prices has impacted farmland markets, panelists at last week’s Agri Investor Forum in Chicago largely agreed that the capital accumulated by farmers during the fat years was starting to dry up, setting the stage for a potential expansion of investor participation in the market.

“We actually view this as a great time to be investing. To be honest, in 2012 and 2013, it seemed like every farmer we met had a million dollars they wanted to spend on some ground. As an investor in land, that was pretty difficult to compete with,” said Ceres Partners senior portfolio manager Brandon Zick.

“This is actually the time when I believe there is going to be a little bit more dislocation in the market,” he added, highlighting that farmland properties that elicited 20 bids at auction just a few years ago now only attract just five or six offers.

Red Reef Partners managing partner Suzanne Petrela noted that the increasing need for scale in agriculture has helped give institutional investors a relevance they did not have 20 years ago. However, she stressed that any opportunities arising from distress would vary widely by region and even by operator.

Petrela noted that while the continued availability of long-term debt at “reasonable” interest rates of between 4 and 5.5 percent would dampen the effect of any interest-rate policy change for large farms, a less accommodating monetary policy could create a “pinch point” causing stress for certain smaller operators.

“Most farmers are taking floating-rate debt for their operating loans, and those numbers are enormous. We’re talking millions and millions of dollars to put a crop in. A hundred basis points will be material,” she said.

“That will cut right to the bottom line. In some cases, we are seeing operators who are going on three years of very thin profits; that will hurt. That may put them over the edge where they can no longer service their loans.”

Not like timber

US Trust managing director Dennis Moon said that the recent downturn in agriculture had required his firm to shift tack on how they talked to investors about farmland investing. He said some investors who had entered the market over the past decade were not used to such periods of dampened returns.

“That’s been a challenge lately, to focus the narrative not just on yield, but also on the diversification benefits of owning a great asset like farmland as an inflation hedge. That’s been a narrative that we’ve always talked about that has had to become more of a focal point of the conversation,” he said.

Panelists agreed that the ownership structures of US farms have changed dramatically over the past 20 years, pointing to demographics as a major force shaping the market in years to come.

LongView Farms partner Scott Henry said that only in the last two years have the number of acquisition opportunities arising from generational change on neighboring farms outpaced his family’s capacity to finance their acquisitions.

“This is the institutional roll-up that’s happening. It’s not like timber, which was owned by the paper companies and was easily transferred – for a price – to pension funds and endowments,” Moon added. “I think 20 years from now, as you see this roll-up happen, institutional ownership could be 8 to 10 percent of the market.”