With the stock market in disarray and the U.S. economy teetering toward a recession, large institutional investors are looking for a haven for their money. Will farmland become a part of more portfolios? That depends on who you ask.
"I've been in this business for 31 years," says Murray Wise, one of the most respected experts on farmland values and president of the Westchester Group, the Champaign, Ill.-based real estate/farm management investment company he founded.
"There's never been a time in my life when there has been so much investment looking to buy a piece of agriculture," he says.
This isn't typical real estate agent hyperbole—the ready assurance that "there's never been a better time to buy than now." No, Wise may be onto something.
In fact, Westchester Group has been working to put together a $400 million portfolio of row-crop land in the U.S. and Australia as part of what's known as the International Agricultural Investors L.P. farmland fund. The biggest retirement fund administrators in the country, TIAA-CREF, are the primary investors in the fund.
"Ag real estate is increasingly being viewed as a legitimate asset category for investment funds," says Michael Fritz, the editor of the Farmland Investment Letter (www.farmlandinvestorletter.com).
In December alone, TIAA-CREF bought more than 2,300 acres in Illinois for more than an average $5,500 per acre—purchases totaling nearly $13 million. The fund's administrators are also believed to be looking for land in Mississippi and Louisiana, as well as Brazil.
Solid returns. Certainly, almost unheard-of land price appreciation in many areas and strong commodity prices are playing a role. But Wise also credits the nearly 20 years worth of statistical data for showing risk-averse institutional investors and pension funds that farmland has good multi-year returns.
Additionally, funds worth hundreds of millions of dollars have managers who want to diversify their holdings. Investing even half of 1% of that money in farmland means land worth millions of dollars.
"When you have the kind of run-up in land prices we have seen the past three to four years, the big money notices and begins to move in," says Porter Martin of Martin, Goodrich & Waddell, an Illinois-based ag real estate firm that does business in several states.
Now Illinois land near Macomb, Peoria and Champaign is selling for $7,000 to $8,000 per acre, according to Martin. A few years ago in those areas, the idea of $5,000-per-acre land would have been considered ridiculous.
Illinois isn't alone. The $7,000 per acre is being paid in Iowa and one recent sale in North Dakota, mind you, was at $5,700 per acre.
Since last October, Martin says his firm has been contacted by several people representing large funds based on the coasts or in Chicago. In each case, the funds were looking to amass anywhere from $100 million to $400 million in assets.
When property does come up for sale, the market is ravenous, according to Martin. "There's very little inventory out there for good-quality land," he says.
Cooling interest. Though farmland may be enticing for investment groups, that doesn't mean they're about to flood the farmland market. Dan Basse, president of the commodity analysis firm AgResource Co., says interest has slowed since this past summer.
The price of inputs—fertilizer, seed, equipment and especially petroleum—have all ridden the land value train up the hill, according to Basse.
Fritz, of the Farmland Investment Letter, says interest from institutional and private investment groups had increased into last fall. But much of that "exploratory activity" dropped off in the wake of the subprime credit crunch.
In explaining the investment interest, Fritz also cited the farmland index compiled by the National Council of Real Estate Investment Fiduciaries (NCREIF).
The farmland index was created in 1990 as a gauge to track the return of farmland held in pension fund investments. It is this index that is cited as a major reason that investment fund managers have some confidence in farmland as a solid long-term investment.
The index numbers (see table) show a total return on farmland in 2007 of 16.74%. That return takes into account a 7.82% appreciation in land values and 8.45% income generation. (The percentages don't add up to 16.74% because of the way the returns are computed.)
The NCREIF index is based, to large extent, on the holdings managed by three companies: the ag division of John Hancock Natural Resource Group, UBS AgriVest and the alliance of Westchester/Cozad Asset Management. And the Mormon Church is believed to be the biggest institutional investor in farmland nationally, with an estimated $5-billion-plus portfolio.
"Farmland is not a quick buy and flip type of thing," says Jeff Conrad, president of John Hancock's Ag Investment Group, which has more than $800 million in farmland. "It takes time to work a return—periods of seven to 10 years to hold the investment."
As a result, "a lot of large institutions look at this asset class as way too much work to put their money to work," says Conrad.
In the end, large investment groups see the same advantages to owning farmland that individuals do. Kenny Kerr, who farms near Mount Sterling in western Illinois, bought 80 acres 35 miles from where he regularly farms—paying $7,200 per acre at auction.
"I had been on several farms near me over the past several years, looking to buy," says Kerr. But he kept losing out to higher bidders willing to go to $4,000, $4,300 and even $5,000 per acre. "I believe hard assets like gold and Class A farmland are a good investments. They are going up."