US Farmland Investment and Why There Aren’t More Sustainable Agriculture Funds
June 22, 2012 | Nicola Kerslake
When TIAA Cref – which describes itself as “the leading retirement provider for people who work in the academic, research, medical and cultural fields” – announced a $2 billion investment into farmland last month, it barely caused a ripple despite its size. Large investors expanding their exposure to farmland has become commonplace. There’s likely around $3-5 billion worth of US farmland held by investors according to consulting group Highquest Partners and this represents less than 1% of total farmland, yet sustainable agriculture advocates have focused so much attention on trying to deter investors from buying farmland that they have frequently neglected to ask a bigger question: “how sustainable are these investments?”
The impetus for investors moving into farmland is simple: Baby Boomers began turning 65 last year, and as the Pew Research Center characterizes the situation: “Every day for the next 19 years, about 10,000 more will cross that threshold”. As Baby Boomers retire, they will need income from their investments on which to live. Returns on retirement savings haven’t come close to the 7-8% per year that most planned on, so pension managers are looking elsewhere to make up the shortfall. Pension managers have noted the same fundamental trends that draw others to agriculture; rising protein consumption globally and higher food needs in emerging markets mean more demand, while urbanization curtails farmland availability and stagnating yields constrain long-term supply. For some pension managers, this looks like a good backdrop for a steady income stream from farmland investments. Farmland is also traditionally a good hedge against inflation, important at a time when many fear an impending uptick.
Despite the widespread belief that large numbers of investors are buying up US farmland, there are actually only a handful of major investors in the sector, such as Connecticut-based UBS Agrivest and Boston based Hancock Agricultural Investment Group ($1.6 billion in investments). To date, there is no major investor with a “pure” sustainable farmland fund, though several smaller ones such as Farmland LP, which purchases traditional farmland and converts it to organic use, are springing up.
Larger fund managers often argue that their scale enables them to afford more sophisticated farm management systems allowing them to monitor the fertilizer, water and pesticides that are administered on their fields more accurately than smaller farms. Thus, they believe that they are more sustainable than smaller operations.
Beyond this, several funds have committed to voluntary codes of conduct; for example, TIAA Cref has signed up to the U.N. Principles for Responsible Investment that includes sustainability conditions. The creation of such standards within farmland investing is a positive, as several farmland investors have been confused by the plethora and diversity of demands from those purporting to represent sustainable agriculture and frustrated by the inaccuracy of accusations thrown at them.
In some quarters there remains a perception that sustainable agriculture is a more expensive way of farming than “traditional” agriculture. Those that argue that pension managers should go ahead and pay this higher price miss a significant point; institutional funds are governed by lengthy and legally binding multi-year contracts with their investors which frequently constrain managers’ leeway to make decisions that could lead to lower returns to investors. In other words, pension managers’ hands are tied once mandates are signed.
A more fruitful argument is that farming sustainably is no more expensive than the alternative, and that it may add value to the land in some cases. It’s an approach that’s worked well in impact investing, where groups such as San Francisco-based HIP Investor have demonstrated that the listed companies that behave sustainably have a performance edge over those that don’t. Fund management is subject to highly complex sets of regulations, and one way of ensuring that you don’t fall afoul of these is to use data to prove that you’re behaving responsibly. It’s tough to implement sustainable agriculture practices without a quorum of data to illustrate that it is consistent with the ever-expanding list of regulatory requirements.
That said, the largest explanation as to why there are so few sustainable agriculture funds is that clients just don’t ask for them. Putting together a fund is an expensive and risky proposition; it can consume a couple of years’ of a fund manager’s life and rack up millions of dollars in legal fees, all before anyone is sure that the fund will be viable. As a consequence, knowing that clients are anxious to invest in the fund is paramount. “If I had a large number of clients knocking on my door asking for a sustainable ag fund – rather than the bond ones they’re buying at the moment – then I’d be setting them up as fast as I could,” concluded one fund manager.