(Bloomberg) — The wave of inflation sweeping the global economy is playing a role in the investment field that a small group of people in finance have spent years developing: farmland.
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Farmland has become attractive to institutional investors and wealthy households in recent years because returns tend to be stable and poorly correlated with other asset classes, according to Purdue University agricultural economist Todd Quethe. Asset managers say more investors are now looking at it as a potential inflation hedge, with consumer prices rising at the fastest pace in decades.
“Every institutional phone call I’ve had in the past six months has included a discussion about inflation. Five years ago, it would have been zero,” said Stephen Johnston, managing partner at Calgary-based Veripath Farmland Partners LP, which owns 90,000 acres in Western Canada across its portfolios. “.
That sentiment is echoed at Fiera Comox Partners in Montreal, where about two-thirds of the C$1.7 billion ($1.3 billion) it manages is invested in farmland from the United States to Australia. Chief Executive Antoine Besson McLernon said inflation protection was becoming “increasingly important” for clients.
The value of US farm real estate grew 7% in June from the previous year, to an average of $3,380 an acre, the largest increase since 2014, according to a survey by the USDA.
Historically, there has been a “very strong” relationship between inflation and farmland, which benefits when the price of food commodities rises, said Purdue’s Kota. But he said other factors are increasing the value of land as well, including lower interest rates and easing global trade tensions.
Investments in farmland tend to be reserved for larger institutions, such as endowments and pension funds, or wealthy individuals. Bill Gates and his ex-wife Melinda French Gates owned the largest private portfolio of farmland assets in the United States last year, according to a ranking by Land Report magazine. Agriculture-focused funds benefit from an appetite for assets that require specialized knowledge that many investors do not have.
“In infrastructure, you can buy a road for a $4 billion pass. In agriculture, the market is still very fragmented, mainly family owned,” said Bison McClernon. “You have to have the right model to actually go and build a scale.”
The 100 largest landowners own a large piece of America the size of Florida
Bison-McLernon and Johnston have different approaches. Fiera Comox partners with farmers who have expansion plans and become co-owners. Its investments range from almond orchards in California to dairy operations in New Zealand, across 200,000 acres. You have not made land investments in Canada.
By contrast, Firepath, which started under a different name in 2007, is leasing the land it owns back to farmers and has focused on the Canadian Prairies. Both companies use their network of contacts to identify potential sellers.
Farmland has not always been an attractive investment. Many US companies dedicated to investing in farmland ownership emerged in the 1980s and 1990s, but had a hard time competing with the burgeoning stock market, according to the 2020 book “Fields of Gold: Financing the Global Land Rush,” by Madeleine Fairburn of the University of California, Santa Cruz. . Fairburn writes that rising commodity prices in the mid-2000s drove up farmland values, increasing its appeal as a safe haven.
Bisson-McLernon saw the boom firsthand. In 2011, he launched the Natural Resources Unit of the Canadian Public Sector Pension Investment Board, and oversaw the purchase of two million acres of timber and farmland.
Five years later, he and two former PSP executives teamed up with global asset management firm Fiera Capital Corp. to create their own company. Fiera Comox, which also invests in private equity and private credit, plans to double its assets under management, including farmland, in the next two to three years.
Discovering and striking a deal could take years, including months of due diligence on everything from water consumption to growth prospects. Bison McClernon said farmers also want to make sure investors are committed over the long term.
The global land rush has caused some concern among development researchers, especially as investors – and sometimes governments – have acquired or leased land in poor countries. Critics refer to this trend as “land grab.”
Some Canadian provinces restrict foreign ownership of agricultural land. In 2015, Saskatchewan introduced measures to ban the purchase of farmland via pensions, scrapping plans by the Canada Pension Plan Investment Board, which had just bought tens of thousands of acres there and was planning to add more.
Fiera Comox’s shared profit and shared risk model helps the company understand its business in accordance with environmental, social and governance standards.
In agriculture, responsible practices include getting rid of pesticides, selling them locally rather than exporting them, and paying good wages, according to François Boutin Dufresne, managing partner at Standard Market Strategies, an ESG research firm in Montreal. To make sure the commitments are real, he said, investors should appoint their own evaluators.
Bisson-McLernon says he and his colleagues serve on the boards of all of their businesses and spend a lot of time on due diligence. The company pays special attention to reducing the use of resources, especially water. In a 4,000-acre orchard growing almonds, a notoriously thirsty crop, teams planted more efficient roots and changed the irrigation infrastructure, he said.
“If you’re going into this space, you want to make sure that you can improve the situation,” Bison McClernon said. “You will win in this industry if you are able to reduce the amount of water you use.”
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