Upload
others
View
9
Download
0
Embed Size (px)
Citation preview
Farmland Investing: Risks and Opportunities
John R. Farris Founder & President LandFund Partners
70th CFA Institute Annual Conference May 22, 2017
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
Table of Contents
I. Farmland Investing Overview
II. Historical Returns & Correlations
III. Macro & Micro Opportunities
3
SECTION I: Farmland Investing Overview
4
Basic Overview
5 Soybean Harvest on LandFund Property (Arkansas 2016)
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
Farmland Investment Vehicles
6
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)
Regional Differences
7 Image Source: https://www.ncreif.org/data-products/farmland/
• 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
Farmland Subclasses
• Row Crop Farmland – Annual planting seasons for crops such as
corn, soybeans, cotton, wheat, and rice
8
• 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
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 sub-
par 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
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
10
Harvesting cotton in Phillips County, Arkansas – November 2013
1. Source: USDA ERS, Farm Income and Wealth Statistics, U.S. and State Farm Income and Wealth Statistics
SECTION II: Historical Returns & Correlations
11
Historical U.S. Farmland Returns
• Farmland returns are driven by: 1) annual rent and 2) change in farmland asset value
12 Data Sources: NCREIF, NYU Stern Note: S&P 500 returns include dividends Past performance does not guarantee future results
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 10-Yr Avg.Office Farm S&P 500 Apartment Apartment Farm S&P 500 S&P 500 Retail Industrial Farm20.5% 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 Retail18.4% 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 50018.1% -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 Office13.5% -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 Timber11.4% -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 Hotel5.5% -36.6% -20.4% -0.2% 1.6% 7.8% 7.7% 10.3% 1.4% 2.6% 5.4%
Farmland Timberland Hotel Apartment Office Industrial Retail S&P 500 Nasdaq 100 10 Yr Trsy.
Farmland 1.000
Timberland 0.644 1.000
Hotel 0.332 0.705 1.000
Apartment 0.318 0.388 0.818 1.000
Office 0.329 0.584 0.917 0.918 1.000
Industrial 0.324 0.512 0.877 0.941 0.960 1.000
Retail 0.430 0.421 0.701 0.861 0.765 0.824 1.000
S&P 500 0.035 0.207 0.321 0.156 0.236 0.178 0.175 1.000
Nasdaq 100 -0.104 0.128 0.145 0.006 0.106 0.018 0.045 0.812 1.000
10 Yr Trsy. -0.084 0.049 0.183 0.208 0.236 0.195 0.083 -0.593 -0.567 1.000
20 Year Correlations (1997-2016) of Annual Returns for Selected Asset Classes
Low Correlation with Traditional Real Estate
• Farmland returns exhibit low correlations to traditional real estate, and almost no correlation to equities and treasurys
13
Data Sources: NCREIF, Morningstar, NYU Stern Note: S&P 500 and Nasdaq 100 returns include dividends Past performance does not guarantee future results
Risk Adjusted Returns
• U.S farmland displays strong risk adjusted returns and may be utilized to increase portfolio efficiency
14
S&P 500
10 Yr US Treasury
Emerging Markets
BRK-A
Apartment Retail
Timberland
US Farmland
NASDAQ
0%
2%
4%
6%
8%
10%
12%
14%
16%
0% 5% 10% 15% 20% 25% 30% 35% 40%
AV
G. E
XC
ES
S R
ET
UR
N
STANDARD DEVIATION
Annualized Risk & Return 1997-2016
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
Current Yields from Farmland
• Current yields from farmland have been attractive to many investors in recent years when compared with yields from other assets
15
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
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
Yie
ld
Current Yields from Selected Assets
Data Sources: NCREIF, Bloomberg (as of April 2017) Past performance does not guarantee future results
Inflation & Farmland Returns
• Farmland returns act as a hedge against inflation – For the period 1970-2014,
farmland’s positive correlation with inflation (0.65) was higher than treasurys, gold or stocks 1
– For the period 1914-2011, farmland returns show a 0.63 positive correlation with CPI 2
16
1. Private real assets: Improving portfolio diversification with uncorrelated market exposure,” TIAA Global Asset Management, Winter 2016 2. Purdue University’s Center for Commercial Agriculture
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
An
nu
al C
han
ge (%
)
CPI & Farmland Returns: 1992-2016
CPI
NCREIF Farmland Returns
Data Source: NCREIF, InflationData.com; compiled by LandFund Partners
SECTION III: Macro & Micro Opportunities
17
Macroeconomic Fundamentals
18
• Supply of row crops is constrained due to: – 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 0
10
20
30
40
50
60
70
80
90
1964 1974 1984 1994 2004
Mil
lion
Ton
s
Chinese Soybean Imports
Chinese Consumption
Chinese Production
Total Imports
0
5
10
15
20
25
30
35
40
45
50
1964 1974 1984 1994 2004
Th
ousa
nd
Ton
s
US Soybean Exports
Source: USDA ERS Database; compiled by LandFund Partners
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: OECD, IMF, FAOSTAT, World Resources Institute Source: OECD, IMF, FAOSTAT, World Resources Institute
Source: IMF, United Nations Food and Agriculture Organization, World Resources Institute
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
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1961
19
64
1967
19
70
1973
19
76
1979
19
82
1985
19
88
1991
19
94
1997
20
00
2003
20
06
2009
20
12
Tot
al H
ecta
res
(1,0
00s)
Arable Land on Earth (Hectares)
Source: United Nations Food and Agriculture Organization; compiled by LandFund Partners
1 hectare = 2.47 acres
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
21
0
20
40
60
80
100
120
140
1985 1990 1995 2000 2005 2010 2015
Day
s
Global Crop Surplus by Days of Consumption
Source: USDA ERS Database; compiled by LandFund Partners
Global Opportunities
• Considerations: Rule of Law, Infrastructure, Geopolitical Risk
22 World map of change in cropland area, 1960-2000 – Alston, Babcock, and Pardey [eds.] (2010)
U.S. Farm Sector Financial Health
• Key farm sector debt ratios have trended upward in past 5 years, but remain at historically normal levels
23 Source: USDA ERS Database; compiled by LandFund Partners
0
5
10
15
20
25
30
35
40
45
50
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
F
Per
cen
t
U.S. Farm Sector Solvency Ratios: 1960-2017F
Debt/asset ratio
Debt/equity ratio
Debt service ratio
International Trade
• Roughly 20% of total U.S. agricultural production is exported • Policies that reduce competitiveness of U.S. exports pose a risk
• 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
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%
Source: USDA ERS Database
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 2018
25 Source: USDA ERS Database; compiled by LandFund Partners
Niche Strategies
• Supply of organic crops has not kept pace with consumer demand. 2016 U.S. organic soybean production only 20% of consumption.1
26
0%
50%
100%
150%
200%
250%
300%
350%
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
Organic Price Premium (as % of Conventional Price)
Corn Organic Premium
Soybean Organic Premium
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
27
1. Source: Morgan Stanley Institute for Sustainable Investing 2. Source: Rodale Institute, “Regenerative Organic Agriculture and Climate Change” 3. Source: Science News, “Fertilizer produces far more greenhouse gas than expected”
1. Source: Morgan Stanley Institute for Sustainable Investing 2. Source: Rodale Institute, “Regenerative Organic Agriculture and Climate Change” 3. Source: Science News, “Fertilizer produces far more greenhouse gas than expected”
1. Source: Morgan Stanley Institute for Sustainable Investing 2. Source: Rodale Institute, “Regenerative Organic Agriculture and Climate Change” 3. Source: Science News, “Fertilizer produces far more greenhouse gas than expected”
1. Source: Morgan Stanley Institute for Sustainable Investing 2. Source: Rodale Institute, “Regenerative Organic Agriculture and Climate Change” 3. Source: Science News, “Fertilizer produces far more greenhouse gas than expected”
1. Source: Rodale Institute, “Regenerative Organic Agriculture and Climate Change” 2. Source: Science News, “Fertilizer produces far more greenhouse gas than expected”
Contact Information
John R. Farris
Founder & President LandFund Partners
615-678-8331 [email protected]
@LandFundLP LandFundPartners.com
28