With the approach of the fall corn and soybean harvest, it bears remembering that cash crops aren’t the only yields of U.S. soil. The farmland beneath America’s breadbasket is an asset class unto itself, and one that has historically delivered solid returns with low income volatility, and little correlation to traditional assets like stocks and bonds, making it a durable portfolio diversifier.
Figures from the United Nations Farm and Agricultural Organization (FAO) value the global market for farmland at $9 trillion, of which $2.5 trillion is concentrated in the contiguous United States. Arable farmland is in finite supply—but with unceasing demand for seasonal income-producing crops. But because of its relative illiquidity and steep capital requirements, farmland investment as an investable asset class has been limited to well-capitalized investors with very long-term holding periods.
UBS Asset Management has been a major investor in U.S. farmland for 20 years and was one of the first companies to invest in farmland on behalf of pension funds. Today, the firm manages $1.6 billion in assets invested in U.S. farmland, across a portfolio of 228,000 acres under management and 149 individual properties, making it one of the leading institutional players involved in the acquisition, management and disposition of farm real estate.
Farmers own most farms
Even so, says Jim McCandless, Head of Farmland, Real Estate and Private Markets for UBS Asset Management, institutional farmland holdings as a percentage of the total market remains low overall.
“Sixty percent of all farmland in the U.S. is actually owner-operated, and the other 40% is rented. And of the 40% that’s rented, 80% of that is owned by non-operator landlords: absentee owners of rented land. So, institutional holdings are quite low,” McCandless says. “If you look at the NCREIF [National Council of Real Estate Investment Fiduciaries] Farmland Index, which is a peer group of farmland investment management firms, that [totals] around $11 billion. Other folks [investors] that aren’t represented in that number might be another $11 billion, so that’s only $22 billion. Farmland in the U.S. is [valued at] around $2.5 trillion, so institutional investors are really small,” McCandless says.
While overall representation of institutional ownership in farmland remains limited, the proportion of owners has grown steadily since the inception of the NCREIF Farmland Index in 1991. Today’s $11 billion valuation has come not just due to increased institutional ownership, he explains, but also from appreciation in farmland values.
Changing farmer demographics may provide an opportunity for new farmland transactions, but McCandless doesn’t see that as a watershed moment for institutional buyers to step in.
“The average age of individual farmers continues to increase, and that means that more and more are moving toward retirement,” McCandless says. “Of the group of non-operator landlords, 38 percent are actually retired farmers, so at some point, one would expect that they might want to liquidate their farmland holdings and move into some other alternative investment, or pass it on to their heirs. There is that cohort of aging landowners that at some point in time will probably be motivated to sell.”
Instead, he explains, the largest single group of farmland buyers are other farmers. This has been the case historically—and will likely continue to be in future—as individual farmers seek to expand their own landholdings.
“Economies of scale are important in farming, so there’s been consolidation going on for a number of years, with larger units held by landowner-farmers continuing to get larger. I see that continuing, and because they’re the largest group of buyers, they’re the ones that really drive the market.”
McCandless expects the increasing adoption of precision farming application [“agtech”] to further enhance the value proposition of farmland investment, as these technology increases the crop yield per acre. This, in turn, enhances the attractiveness of the farm as an income-producing asset. Crop values themselves also affect the value equation, as higher-value crops produce more income for the farm, and income is ultimately the key driver for farm prices.
But will future farmers have to choose whether to own their own farmland or to invest in the technology that enables them to maximize yield?
“I don’t see [agtech] as displacing their interest in owning farmland,” McCandless says. “I do see that they [farmers] definitely have an interest in agtech areas. There’s been widespread use of precision farming for quite a long time, GPS technology, and technology [for] irrigation. There’s a great deal of interest in all of that.”
So how do you construct a farmland portfolio? McCandless says the investable universe spans three basic crop types. Commodity crops are traded staples like corn, soybeans, cotton, wheat and rice. Vegetable properties are the leafy greens found in the produce section of the grocery store. Finally, there are permanent crops, which grow on trees and vines. A portfolio is allocated between these three types.
A ‘core’ diversified strategy is typically allocated in a 60-20-20 ratio: 60 percent to commodity crops, 20 percent each to vegetable and permanent crops. This ratio reflects the production value of those crop types, as there is no accurate measure of their respective land values. This allocation can be customized and weighted differently between the property types, depending on the individual investor’s objectives.
McCandless explains that in addition to owning and developing organic farm properties, UBS Asset Management this year enrolled all of its properties in a comprehensive, new ESG program called Leading Harvest, which just launched in April. This farmland management standard provides audited principles for sustainable management along traditional ESG metrics like farming practices and soil conservation, as well as broader issues like community involvement, labor practices, and protection of special social and cultural sites.
In addition to the shift toward more widespread adoption of sustainability benchmarks, McCandless has noted increasing interest on the part of investors to include land investment as part of a larger portfolio of related food and ag holdings. These asset mixes give investors exposure up and down the food chain. And there has been—like always—particular interest in farmland assets located closer to crop processors or terminal operators, that keep transportation costs low for agricultural producers.
“We’re starting to see more [investment] interest down the supply chain, away from the farm gates, so to speak, investing in tech firms or other types of participants in the supply chain, even things like cold storage,” he says, adding: “It’s hard to define where it starts. Do they start in the supply chain investments and then move to farmland, or the reverse? It’s hard to tell.”
Faced with the uncertain effects of climate change, demographic shifts in its ownership and workforce, technological innovation and globalization, farmland is perhaps unique among investment asset classes in being able to shrug off the potential disruptions of these phenomena. At the end of the day, people need food.
“The population continues to grow in developing countries, income continues to rise, and as that happens there’s interest in improving diet, getting more protein. Countries can’t produce all of it at home, so that increases demand for our products and exports, which has been one of the big drivers of the farm economy for a number of years and continues to be,” McCandless says. “All of those fundamentals are still in place, as well as the fact that—as we’ve seen here during covid—farmland has proven to be quite resilient, and I think it will continue.”