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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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.