Farmland Investing: Risks and Opportunities. John R. Farris Founder & President LandFund Partners 70th CFA Institute Annual Conference May 22, 2017

Transcription

1 Farmland Investing: Risks and Opportunities John R. Farris Founder & President LandFund Partners 70th CFA Institute Annual Conference May 22, 2017

2 Presenter Bio John Farris Founder & President, LandFund Partners Mr. Farris received a full-tuition fellowship to study economics and finance at the Woodrow Wilson School at Princeton University, where he was awarded a Master s Degree. Before attending Princeton, Mr. Farris studied economics and philosophy at Centre College from which he graduated Phi Beta Kappa. He has served as an economist at the Center for Economics Research at the Research Triangle Institute, as well as a senior economics consultant with both the World Bank and the International Finance Corporation. From 2006 to 2007, Mr. Farris served as Secretary of the Finance and Administration Cabinet for the Commonwealth of Kentucky. Mr. Farris is Chairman of the Board of Directors for Kentucky Retirement Systems (KRS), and serves on the Board of Directors of Kentucky Employers Mutual Insurance (KEMI), GreenBrick Partners (NASDAQ: GRBK), and Kentucky Technology Inc. Mr. Farris also acts as Senior Investment Advisor to the Centre College Endowment. 2

3 Table of Contents I. Farmland Investing Overview II. Historical Returns & Correlations III. Macro & Micro Opportunities 3

4 SECTION I: Farmland Investing Overview 4

5 Basic Overview Land Owner Owns farmland asset Pays annual fee to Farm Manager Farm Management Company Manages farmer relationship and farmland Farmer Pays rent to Landlord for the right to farm the property 5 Soybean Harvest on LandFund Property (Arkansas 2016)

6 Farmland Investment Vehicles Structure Advantages Disadvantages Examples Direct Ownership Most direct method Complex and time consuming Family Farm Ownership Managed Accounts Higher level of investor control High minimum investment ($5MM +) US Trust LandFund Partners Private Equity/ Closed-End Funds Economies of scale Lower investor control LandFund Partners Public REITs Smallest capital outlay Liquidity Dilution felt primarily by retail investors Farmland Partners (FPI) Gladstone Land (LAND) 6

7 Regional Differences Regional variation in price per acre and yield Dependence on weather patterns Flood and drought risk Access to and cost of water Cost and use of farm inputs (fertilizer, etc.) Regional diversity of crops and livestock (revenue drivers) Transportation costs to global export hubs Creditworthiness of farm operators Development of local agricultural markets 7 Image Source:

8 Farmland Subclasses Row Crop Farmland Annual planting seasons for crops such as corn, soybeans, cotton, wheat, and rice Permanent Crop Farmland Establishments such as vineyards and almond farms, which require a 3 to 12 year capital outlay period Pasture / Range Land Land leased to local operators for dairy, beef cattle, and other operations 8

9 Lease Structures Three primary strategies: Cash Lease A cash lease is the most simple form of rental agreement Typically 1 to 3 years in length Crop Share Crop shares are used more frequently on farms with excellent, or subpar soils Entitle owner to 20%-30% of crop yield per acre Blended Lease Includes a base cash rent, plus a kicker component driven by commodity prices, realized crop yields, or some combination thereof 9

10 Farmland Facts Less than 1% of U.S. farmland is owned by institutions & funds Average age of a U.S. farmer = 59 years old Only 3% of U.S. farm income is comprised of government subsidies 1 Asset class is now recognized as a viable alternative investment Harvesting cotton in Phillips County, Arkansas November Source: USDA ERS, Farm Income and Wealth Statistics, U.S. and State Farm Income and Wealth Statistics 10

11 SECTION II: Historical Returns & Correlations 11

12 Historical U.S. Farmland Returns Farmland returns are driven by: 1) annual rent and 2) change in farmland asset value Yr Avg. Office Farm S&P 500 Apartment Apartment Farm S&P 500 S&P 500 Retail Industrial Farm 20.5% 15.8% 25.9% 18.2% 15.5% 18.6% 32.1% 13.5% 15.3% 12.3% 13.2% Timber Timber Farm S&P 500 Farm S&P 500 Farm Industrial Industrial S&P 500 Retail 18.4% 9.5% 6.3% 14.8% 15.2% 15.9% 20.9% 13.4% 14.9% 11.7% 8.7% Hotel Retail Timber Retail Industrial Retail Retail Retail Hotel Retail S&P % -4.1% -4.8% 12.8% 14.6% 11.6% 12.9% 13.1% 13.2% 9.0% 8.6% Farm Industrial Retail Office Retail Apartment Industrial Farm Office Apartment Industrial 15.9% -5.8% -10.9% 11.7% 13.8% 11.2% 12.3% 12.6% 12.5% 7.3% 7.9% Industrial Apartment Apartment Industrial Office Industrial Apartment Office Apartment Farm Apartment 14.9% -7.3% -17.5% 9.4% 13.8% 10.7% 10.4% 11.5% 12.0% 7.1% 7.1% Retail Office Industrial Hotel Hotel Office Office Hotel Farm Office Office 13.5% -7.3% -17.9% 9.0% 11.8% 9.5% 9.9% 11.1% 10.3% 6.2% 6.9% Apartment Hotel Office Farm S&P 500 Hotel Timber Timber Timber Hotel Timber 11.4% -9.4% -19.1% 8.8% 2.1% 8.3% 9.7% 10.5% 5.0% 4.7% 6.0% S&P 500 S&P 500 Hotel Timber Timber Timber Hotel Apartment S&P 500 Timber Hotel 5.5% -36.6% -20.4% -0.2% 1.6% 7.8% 7.7% 10.3% 1.4% 2.6% 5.4% 12 Data Sources: NCREIF, NYU Stern Note: S&P 500 returns include dividends Past performance does not guarantee future results

13 Low Correlation with Traditional Real Estate Farmland returns exhibit low correlations to traditional real estate, and almost no correlation to equities and treasurys Farmland Farmland Timberland Hotel Apartment Office Industrial Retail S&P 500 Nasdaq Yr Trsy. Timberland Year Correlations ( ) of Annual Returns for Selected Asset Classes Hotel Apartment Office Industrial Retail S&P Nasdaq Yr Trsy Data Sources: NCREIF, Morningstar, NYU Stern Note: S&P 500 and Nasdaq 100 returns include dividends Past performance does not guarantee future results

14 Risk Adjusted Returns U.S farmland displays strong risk adjusted returns and may be utilized to increase portfolio efficiency 16% Annualized Risk & Return AVG. EXCESS RETURN 14% 12% 10% 8% 6% 4% 2% US Farmland Retail Apartment Timberland 10 Yr US Treasury S&P 500 BRK-A NASDAQ Emerging Markets 0% 0% 5% 10% 15% 20% 25% 30% 35% 40% STANDARD DEVIATION 14 Data Sources: NCREIF, Morningstar, NYU Stern, Berkshire Hathaway Note: S&P 500 and Nasdaq 100 returns include dividends Past performance does not guarantee future results

15 Current Yields from Farmland Current yields from farmland have been attractive to many investors in recent years when compared with yields from other assets Yield 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Current Yields from Selected Assets 10 Yr JGB 10 Yr Bund 10 Yr Gilt S&P 500 Div. Yield 10 Yr Munis (AAA) 10 Yr T-Note 30 Yr T-Bond 20 Yr Corporate (AAA) US Row Crop Farmland 15 Data Sources: NCREIF, Bloomberg (as of April 2017) Past performance does not guarantee future results

16 Inflation & Farmland Returns Farmland returns act as a hedge against inflation For the period , farmland s positive correlation with inflation (0.65) was higher than treasurys, gold or stocks 1 For the period , farmland returns show a 0.63 positive correlation with CPI 2 Annual Change (%) 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 1992 CPI & Farmland Returns: CPI NCREIF Farmland Returns Private real assets: Improving portfolio diversification with uncorrelated market exposure, TIAA Global Asset Management, Winter Purdue University s Center for Commercial Agriculture Data Source: NCREIF, InflationData.com; compiled by LandFund Partners

17 SECTION III: Macro & Micro Opportunities 17

18 Macroeconomic Fundamentals Supply of row crops is constrained due to: 18 Availability of arable farmland Access to water Ability to export Demand for row crops such as soybeans is increasing due to: Population growth Demand for protein 3-5 oz. grain = 1 oz. meat Source: USDA ERS Database; compiled by LandFund Partners Thousand Tons Million Tons US Soybean Exports Chinese Soybean Imports Chinese Consumption 10 Chinese Production Total Imports

19 Population Growth & Protein Consumption Current population is 7.3 billion people à 8.5 billion people in 2030 à 9.5 billion people in 2050 Multiplier effect as more wealthy global population consumes meat 19 Source: IMF, United Nations Food and Agriculture Organization, World Resources Institute

20 Land Supply is Limited There is a finite supply of farmland with fertile soil and an adequate supply of fresh water Globally arable land per capita decreased by more than 50% between 1950 and 2000 Worldwide more than 75 million acres of farmland are lost each year to industrialization, urbanization and desertification 20 Total Hectares (1,000s) 1,600,000 1,400,000 1,200,000 1,000, , , , ,000 - Arable Land on Earth (Hectares) 1 hectare = 2.47 acres Source: United Nations Food and Agriculture Organization; compiled by LandFund Partners

21 Global Food Stocks Chart displays how many days the world could continue at normal rates of consumption, assuming that grain production ceased entirely at year end Production, consumption, yield improvement baked in Trendline shows global production unable to keep pace with consumption Global Crop Surplus by Days of Consumption Days Source: USDA ERS Database; compiled by LandFund Partners

22 Global Opportunities Considerations: Rule of Law, Infrastructure, Geopolitical Risk 22 World map of change in cropland area, Alston, Babcock, and Pardey [eds.] (2010)

23 U.S. Farm Sector Financial Health Key farm sector debt ratios have trended upward in past 5 years, but remain at historically normal levels U.S. Farm Sector Solvency Ratios: F Percent F Debt/asset ratio Debt/equity ratio Debt service ratio 23 Source: USDA ERS Database; compiled by LandFund Partners

24 International Trade Roughly 20% of total U.S. agricultural production is exported Policies that reduce competitiveness of U.S. exports pose a risk Trading Partner U.S Agricultural Net Exports Percent of Total China $22.3 billion 16.4% Canada $21.3 billion 15.7% Mexico $18.3 billion 13.5% Trade and tax policies are likely to impact value of U.S. Dollar, which has a direct impact on farmer revenues and cost structure (oil, fertilizer, etc.) 24 Source: USDA ERS Database

25 Government Programs 2017 government payments are projected at $12.5 billion while U.S. farm revenues are forecasted at $412.4 billion This amounts to only 3% of U.S. farm revenues 2014 Farm Bill removed the direct payment subsidies to landowners and replaced it with a crop insurance subsidy program Only actual farm operators now eligible for support Opt into Agricultural Risk Coverage (ARC) or Price Loss Coverage (PLC) products à set a revenue floor for U.S. farmers New Farm Bill expected to be passed by Republican congress in Source: USDA ERS Database; compiled by LandFund Partners

26 Niche Strategies Supply of organic crops has not kept pace with consumer demand U.S. organic soybean production only 20% of consumption % 300% 250% Organic Price Premium (as % of Conventional Price) 200% 150% 100% Corn Organic Premium Soybean Organic Premium 50% 0% Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 26

27 ESG / Impact Investing with Farmland Opportunities exist for impact & ESG investors to meet goals through sustainable, non-gmo, and organic farming practices Many environmental benefits from sustainable farming practices: Carbon Footprint & Greenhouse Gas Reduction Organic farming produces 35% less carbon dioxide per year than a conventional farm, saving roughly 247 tons of CO2 per 1,000 acres. 2 Conventional fertilizers also cause the production of nitrous oxide, which is a greenhouse gas 300 times more harmful than CO2. 3 Ecosystem/Biodiversity Soil Health Water Protection Source: Rodale Institute, Regenerative Organic Agriculture and Climate Change 2. Source: Science News, Fertilizer produces far more greenhouse gas than expected

28 Contact Information John R. Farris Founder & President LandFund Partners LandFundPartners.com 28