Art by Klaus Kremmerz
Agriculture is very much a long-term investment, notes PGIM Real Estate’s head of agriculture, Jamie Shen. Some assets, like trees, can take decades to mature. The story of the Swedish navy planting 300,000 trees on the island of Visingsö in 1831 for use in ship construction alludes to the patience needed to reap returns from certain natural assets. The trees did not mature until the 1970s. While investors certainly are not planning to wait more than a century to reap the returns of their investments, agriculture certainly is a long-term asset class.
“It is important also to think of the portfolio as [being] a diversified portfolio,” Shen says. “Each commodity has its own cycle, and it’s important to build a portfolio with a lot of different commodities so that you can try to smooth that return and meet your objectives consistently over a long time period.”
A Utilitarian Asset Class
According to data provided by Preqin, agriculture-focused private capital funds have returned an average net internal rate of return of 7.4%, according to data of reported funds over the past five quarters. The top quartile of funds has returned 12.5% net IRR, with the bottom quartile at 1.4%.
Agriculture has a fixed-income-like component: It can provide satisfying income returns while also serving as a strong inflation hedge. The asset class is also uncorrelated with stocks and bonds, acting as a strong diversifier, says Jeff Conrad, a partner in and founder and president of AgIS Capital, an asset manager with a focus on agriculture investing.
Another upside to agriculture, Conrad says, is the appreciation of the value of farmland over time. As productivity increases, investors and operators can squeeze more net income per acre, which gets capitalized into the land values, which then increases the value of the farmland.
Marc Drouin, senior managing director, real assets and global head of natural resources investments at PSP Investments says the fund has achieved an annualized 10-year return of 9.7% in its agricultural portfolio, compared to an 8.3% return for the total portfolio.
“The natural resources portfolio benefits from significant downside protection through its ownership of land, water and biological assets, an effective hedge to inflation, and limited correlation to other asset classes,” Drouin. “Since its inception, the portfolio has demonstrated the benefits of this diversification with a resilient performance, even during times of sustained high inflation, interest rates and input costs.”
The Largest Investors in Agriculture
Pension funds, sovereign wealth funds and endowments are among the largest institutional investors in the asset class. According to a 2016 report from Preqin, public pension funds make up the largest share of institutional investors in agricultural and farmland investments, at 20%.
Another 14% comes from endowments, while private sector pensions and foundations make up 12% of all investors. Family offices and government agencies make up 6% each, while asset managers and investment companies each comprise 5% of total investors. Another 20% of investors are listed as ‘other.’
Chinese foreign investment in agriculture grew to $27.115 billion in 2021 from $3.956 billion in 2013. PGIM Real Estate, amongst the larger institutional U.S. investors in agriculture, holds $10.3 billion in assets under management in the asset class.
“When we are investing in farms, we have a direct operating approach for our permanent plantings, and then we lease out to tenants our row crop properties,” Shen says. “We do invest in both row crop properties and permanent planting operations, and we typically operate the farms that are in the permanent planting crop categories.”
Other large institutional investors in the asset class include TIAA and its subsidiary Nuveen, which, combined, invest more than $11.6 billion in agriculture assets.
According to data from Pitchbook, some of the largest venture capital and private equity investors in agriculture include Chicago-based SG Ventures, California-based Plug and Play Tech Center, San Francisco-based Unigrains, and Bethesda, Maryland-based ImpactAssets.
ses is one on healthier diets in richer countries, making agricultural investments to support those trends. In wealthier countries, there is higher demand for healthier foods and organics, but the firm also invests in large-scale production to support food security.
“We need global food security for everyone, and so we have a diversified portfolio that plays into both of those segments,” Shen says.
The Canadian Public Sector Pension Investment Board is also among the largest investors in the asset class in the world. PSP Investments holds more than 4 million hectares of natural resources investments, 2.9 million of which are farmland, with the rest timberland.
Challenges and Risks
In the U.S, the agriculture industry is in somewhat of a downturn; a strong U.S. dollar has hurt American agricultural exports. For AgIS Capital, which has agriculture investments including almonds and pistachios—both highly exported crops—a strong dollar might make these crops less competitive.
A strong dollar has hit U.S. farmers hard but has helped markets in other countries thrive. In Brazil, soybean and corn farmers have enjoyed some of their strongest profits in years, and the country recently outpaced the U.S. in corn production and exports.
The effects of climate change have had a notable effect on the sector. According to Conrad, volatility in weather patterns is much more volatile now than when he started investing in agriculture 30 years ago.
“You can’t be investing in agriculture today without having climate change being top of mind,” Shen agrees. “We think about sustainably investing into the future in agriculture, and you have to take climate change into account with that.”
PGIM Real Estate considers water and natural resource security in an area as part of its investing strategy. At the property level, the strategy also considers property-specific climate risks, such as in California, where water shortages might be a concern, or in Florida, where flooding and hurricane risk may be a problem.
According to PGIM Real Estate and AgIS, both take steps to mitigate these problems, whether it be through irrigation or through insurance., preparing for climate related risks is key to managing farmland.
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Tags: AgIS Capital, Agriculture, Farmland, food, Jamie Shen, Jeff Conrad, PGIM, PGIM Real Estate, PSP Investments