Putting Money Out To Pasture…

Via DTN’s Progressive Farmer, a look at the growing frenzy among pension and fund managers, investment bankers and some of the world’s largest farmers around one of the hottest institutional investment opportunities – farmland – based on the belief that global food demand will double by 2050 and skepticism that seed companies and agribusiness can engineer higher yields to solve the problem. As the article notes:

“…The Who’s Who of Wall Street financiers now interested in channeling billions of new dollars into cropland ownership in the U.S., South America, Eastern Europe and even Africa include heavy hitters like UBS, Franklin Templeton, Morgan Stanley, TIAA-CREF, Rabobank and John Hancock.

Underlying the investment frenzy is the knowledge that global food demand will double by 2050 and skepticism that seed companies and agribusiness can engineer higher yields to solve the problem. In that case, millions of new acres will need to be brought into cultivation and current cropland pushed to its max for productivity, which is why investors are interested in both farmland and virgin land that can be planted to crops. The need to bring more land into soybean production is especially acute as China and India improve their diets and yield advances have lagged corn.

“People really do believe agriculture is headed for a super cycle,” said Kenneth Van Heel, global director of Dow Chemical’s pension fund, which is stepping up its land investments, primarily in the U.S. “Across the industry, there are so many investments to be made.”

Many of the would-be farmland owners are no neophytes to U.S. or global agriculture. Gary Taylor, former president of Cargill Cotton, spent 38 years immersed in the commodities business worldwide and already owns 7,000 acres in his personal portfolio. Now he and a partner have launched a farm real estate investment firm to purchase farmland in the Mississippi River watershed. They favor corn, soybean, cotton and rice land with good access to water and the benefit of Mississippi River basis for the best market prices. With what he knows about growing world trade in agriculture, Taylor expects U.S. farmland to double in the next five years.

A soon-to-be-released study by the World Bank found that institutional investors already have announced plans to acquire up to 125 million acres in global farmland, about the land mass of Germany. In the big scheme of things, that might not sound like a lot, but the issue is that it’s just the beginning, said John Lamb, World Bank agribusiness team leader.

Foreign ownership of land is so sensitive in some countries that news that an Asian corporation wanted to buy 3.25 million acres in Madagascar in 2008 led to riots, the death of 130 people and the overthrow of the government. Now the World Bank is trying to develop ethical standards for investors so they don’t turn Third World countries into neo-colonial plantations. “It’s like the California gold rush. The initial investors are not the most savory characters in the world,” Lamb said.

Insurance companies and pension funds romanced U.S. farmland in the 1970s, only to exit the business when values cratered during the 1980s debt crisis. What’s different this time is interest is more widespread, Lamb added. For example, Saudi Arabian interests are securing land bases in Islamic countries instead of growing wheat with fossilized irrigation water in the desert, Brazil is attracting corporate-style farming with firms traded on public stock markets and the former Soviet Union and Eastern European bloc now offers a frontier for private investment that didn’t exist during agriculture’s last golden age in the 1970s.

One constraint that keeps investors as pure landlords and not operators in the U.S. is investors of this scale are ineligible for U.S. farm programs. What’s more, a handful of states such as North Dakota, Minnesota and Iowa outlaw corporate ownership of farms. What gives institutions hope is that Nebraska’s anti-corporate farming law was recently overturned by the state Supreme Court, and they believe other states could lose if challenged. In the European Union, there are no eligibility or payment limits on farm subsidies, so farms like Spearhead International, Europe’s largest farming corporation with 150,000 acres in the United Kingdom, Poland, Romania and the Czech Republic, can collect EU farm subsidies worth about $90 per acre annually.

“We’ve waited 40 years for something like this,” said Tom Hertz, of Nevada, Iowa-based Hertz Farm Management as he eyed the enthusiastic crowd during a coffee break. But he doubts outsiders will hike U.S. farmland values as high as some expect, since institutions need cash returns of about 5 percent and rarely can afford to outbid established farm operators in prime grain belt locations. Farmers still buy and own the vast majority of America’s farmland, he said. Institutions like to step in to buy only when there aren’t two bidders at an auction.

“Maybe they’ll just keep land from the price correction everyone in agriculture’s been expecting,” he said.

This entry was posted on Monday, May 10th, 2010 at 12:07 am and is filed under Uncategorized.  You can follow any responses to this entry through the RSS 2.0 feed.  You can leave a response, or trackback from your own site. 

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About This Blog And Its Author
Seeds Of A Revolution is committed to defining the disruptive geopolitics of the global Farms Race.  Due to the convergence of a growing world population, increased water scarcity, and a decrease in arable land & nutrient-rich soil, a spike of international investment interest in agricultural is inevitable and apt to bring a heretofore domestic industry into a truly global realm.  Whether this transition involves global land leases or acquisitions, the fundamental need for food & the protectionist feelings this need can give rise to is highly likely to cause such transactions to move quickly into the geopolitical realm.  It is this disruptive change, and the potential for a global farms race, that Seeds Of A Revolution tracks, analyzes, and forecasts.

Educated at Yale University (Bachelor of Arts - History) and Harvard (Master in Public Policy - International Development), Monty Simus has long held a keen interest in natural resource policy and the geopolitical implications of anticipated stresses in the areas of freshwater scarcity, biodiversity reserves & parks, and farm land.  Monty has lived, worked, and traveled in more than forty countries spanning Africa, China, western Europe, the Middle East, South America, and Southeast & Central Asia, and his personal interests comprise economic development, policy, investment, technology, natural resources, and the environment, with a particular focus on globalization’s impact upon these subject areas.  Monty writes about freshwater scarcity issues at www.waterpolitics.com and frontier investment markets at www.wildcatsandblacksheep.com.