Ben palen - Availability Of Farmland Around The World To Solve Hunger Problems

Much has been written about the increase in world population growth exceeding the ability of the world to feed itself.    And some observers have suggested that there are ample amounts of new lands that can be brought into agricultural production, especially in certain parts of Africa. 

There were headlines over the past several years about large investments being made in Africa, in some instances by state-owned or connected, entities, all for the purpose of agricultural production.

With reference to my four decades in farming, the reality of this goal of new agricultural production areas is far less than the ideal.  In truth, many writers who tout this idea have little experience in what it takes to get a large farming operation underway.   It’s not easy even in the developed areas of the world such as the US and Europe.  It can be a monumental challenge in remote areas.

Issues range from lack of any infrastructure (roads, bridges, power supplies), absence of data on land suitability or rainfall patterns, availability of markets for the crops, quality and quantity of local labor, and, of course, political risk.  The latter can be huge, as some recent high profile investors in Sudan have learned.   Capital requirements are often massive for new lands projects, and the risks are almost always high.  Even in areas of South America where there has been significant new lands development in the last couple of decades, there are practical and regulatory limits on expansion.

A student of history knows that food insecurity has been a long term problem in many parts of the world.   Such insecurity often equates to political instability.   Policy makers might be wise to focus on “small farming” efforts in less developed areas of the world with the modest goal of helping people with their daily requirements.  


This micro approach is realistic because it takes into account the numerous risks associated with bringing large tracts of new land into crop production in remote areas, and perhaps it is a model that should be promoted more aggressively by the UN and other world groups.    From the standpoint of, say, a global farming model, capital might best be focused on the established farming areas, and improvement of farming techniques, and use of technology, in those areas, in order to continue with low cost and high volume production sufficient to handle population growth on a global scale.  

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Considerations For Center Pivot Irrigation System Designs By Ben Palen

The focus of the article will be on the considerations for designing a LEPA (Low Elevation Precision Application), center pivot irrigation system.   

 

There is no doubt that LEPA systems are a vast improvement in the evolution of center pivot irrigation. They are in wide use in the US, and around the world, and in many cases water application efficiencies have improved to the mid to high 80^th percentiles as compared to 60-65% with prior designs.  In a nutshell, LEPA at its optimum is designed to discharge water about 18 inches from the ground, under low pressures, and with drop hose spacing of about 30 inches in most cases. 

Before a farmer can make a complete evaluation of the viability of a LEPA system on his/her farm, some questions need to be asked:

• ·         What is the condition of the soil?  What is the organic matter level?  These have to do with the ability of the soil to absorb water with little or no runoff.   As an example, a current project includes LEPA evaluation on a large Saudi Arabian farm, and one of the issues is the low organic matter content of the soil, and its hydrophobic nature, which means that water infiltration can be limited.  Further, the ability of the water applied to wick, e.g., move laterally and vertically, in the soil, is a critical component of the LEPA analysis, as noted in more detail below. 
•  ·         What crops will be grown, and in what configuration?   LEPA tends to work best with crops planted in rows with similar spacing to the drop hoses, or with a crop such as wheat that is relatively easy to germinate.  It has proven to be problematic for small seeded crops such as lettuce, onions, and carrots, and with crops such as potatoes that need good soil cover during the growing period.
•  ·         The reason for these issues is that LEPA tends to concentrate a lot of water (relatively speaking) in a small area, and fairly rapidly.  If the soil is not in good condition to absorb the water, then not enough will reach the plant roots.  Further, uneven germination of small seeded crops will likely result. For potatoes, the stream of water from a LEPA system can lead to soil washing off of the potatoes, and leaching of nutrients below the root zone of the potatoes.

With these factors in mind, one must ask the questions of whether the benefits of LEPA can be attained with a slightly modified version of the technique. The answer to that is yes, and our example below is from the Saudi farm.

That farm has a variety of crops, including some with small seed stock, and many areas where the soils are slow to allow water to infiltrate. In addition, the slope of portions of some of the fields has led to issues with run off of water.

I sought to design a system with many of the benefits of LEPA, but without creating some of the issues noted above.  Using an existing center pivot with eight foot spacing between drop hoses, a discharge height of about six feet, and 35 psi water pressure at the pivot, we undertook the following approach:

-          Lowered hoses to about 24 inches from the ground

-          Kept the drop hose spacing, but installed new nozzle packages from Nelson, along with 15 psi pressure regulators

-          Reduced pivot point water psi to about 20 pounds

The Nelson nozzles were the Rotators or Accelerators.  I have found both of these products to provide a very good, efficient water application pattern. 

We used this approach because it was the best all purpose solution. The farm needed flexibility to grow a variety of crops under the pivots, and we used this design to ensure uniformity of water application, a gentle water droplet size, and reduced evaporative loss.   Whereas the system was operating at 60% efficiency before the upgrades, we raised that percentage to about 85, all with some simple modifications that cost less than $30 per drop hose.  All of this still leaves open the option of converting to a true LEPA system with closer drop hose spacing at some point down the road.   This is but one part of a farming program that is designed to improve soil characteristics over the next few years, with better water efficiency going hand in hand with that.

Farmland Investment Strategies By Ben Palen, Ag Management Partners

 For decades, the US farmland market has been dominated by local farmers as the primary buyers of land, especially in instances where nearby land was added to an existing farm operation.   These farmer buyers used a practice which is still prevalent today, and that is cost averaging of the land price with their other holdings, and the spreading of fixed costs, such as equipment, over more acres.

 There were limited attempts in the 1970s and 1980s by investment managers to form farm investment funds, but they were met with limited success in the financial marketplace, and with opposition by rural interests in some parts of the country.  That began to change, slowly, as significant commodity price increases occurred in the mid 2000s, and other important factors, such as the ethanol mandate, and organic crop production, came into the picture.  

  From barely a blip on the meter ten years ago, the institutional investor role in the US farmland market has reached several billion dollars in invested capital.  In addition, individual investors have been active, either through direct investments, or through the two publicly held REITs that were created in recent years with the specific purpose of investing in farmland, or through private funds.

Farmland is viewed by many investors as a safe haven, an inflation hedge, and as an asset class that, over the long term, has outperformed most other investments.  It does not have the volatility of the stock market.   This is also an asset class that is not well understood by many non farm investors, and gaining such understanding cannot be done via “book learning.”   There are nuances about this asset class that can only be learned from experience, or by investing with someone who has that knowledge base. Further, the US farmland market is highly fragmented, and there are often differences in land quality, pricing, and other farms, from one side of a county to another.

For an investor considering the purchase of a farm, it makes the most sense to utilize the services of a professional in the sector who can quickly provide the investor with a sense of the market in a certain area, along with advice on the most sensible operating method given the investor’s appetite for risk, and an evaluation of various properties.   As we have noted, the market is highly fragmented, and unless an investor gets “grass roots” level advice, he or she may be misguided. 

There are several types of operating methods for a farm owned by an investor, and we will touch on three of them here.  One is a cash lease of X dollars per acre.  The tenant receives all of the crop, and takes all of the operating risk. Another is a crop share lease, where the landowner receives a % of the crop, and may pay a proportionate share of some crop input costs.  

Third, there is a custom farming arrangement, where the landowner pays all production costs, and receives all of the crop.  The cash lease is the lowest risk, and the custom deal is the highest risk, of the three approaches.   There are ways to mitigate risk using irrigation,  multi-peril crop insurance, and crop marketing strategies.   There are also hybrids of these farming arrangements that are in use on some crops in certain areas of the country.

Whether an investor decides to spend money directly on the purchase, or to invest in a private fund that buys farms, questions to consider include the following:

·         What is the crop yield history of the farm as compared to others in the area, and how do the sales prices compare?

·       

          If the land is irrigated, what is the reliability factor for the water source(s), and what is the cost per acre for the water?

·     Are there regulations currently in place, or likely to be at some point, that could impact the value of the land?  (This is especially important in California, where pending regulations will impact the ability to use groundwater to irrigate land in many areas).

·         If the investment is via a fund, what is the track record of the fund as far as purchase prices of other farms in the portfolio, and what is the crop mix in the fund?  What have been the annual cash distributions in the past three years?

·         What is the quality of the tenant pool in an area if a farm is expected to be leased to a third party?

These are but a few of the many questions that an investor should ask before putting money into farmland.  The importance of utilizing the services of an independent professional advisor cannot be overstated.

Ben Palen is a fifth generation farmer with deep experience in many phases of agriculture.  He can be reached at ben@agmgmtpartners.com.