Timber Too Tame an Alternative for You? Try Dairy Farms.

(February 6, 2011) – New Zealand’s US$13.5 billion Superannuation fund has purchased the first of what is expected to be many farms, further proof that farmland purchases by institutional investors will likely rise as funds seek uncorrelated assets to protect against inflation and another 2008-style drawdown.

The purchase of a medium-sized farm in New Zealand is unto itself of little note. However, the purchase is part of a larger plan to buy, both domestically and abroad, more than US$380 million in both dairy and crop-yielding farms.

While farmland may seem a slightly esoteric investment for large institutions, long-term trends – population growth being a primary driver – and unique risk profiles make them increasingly enticing for liability-focused funds. For one, farm investments are thought to be inflation-resistant to a significant degree, and historically are largely uncorrelated to stocks and fixed-income returns. The returns of a farm-based investment are often thought to be similar to that of timber holdings, said Matt Whineray, general manager of the New Zealand fund, according to the New Zealand Herald. (Like many other large institutional investors, the New Zealand fund holds significant amount of timber in its portfolio – in this case 7%.)

There are risks involved, of course. Farmland returns can be affected by droughts, and long-term climate change risks are also considered serious. Federal Deposit Insurance Corporation Chairwoman Sheila Bair recently commented on such risks, noting that “one candidate [for a bubble] is US farmland values, which remain some 58% above their 2000 levels in inflation-adjusted terms.” In her testimony, given in October of 2010, she made clear her worries about farmland investment values. “Strong agricultural conditions have spurred renewed interest in farmland on the part of investors. But today’s positive fundamentals are subject to change,” she said.

However, returns may be just too enticing for institutions looking to diversify and boost returns. Looking backwards, the returns (in America, at least) have been solid: according to the National Council of Real Estate Investment Fiduciaries Farmland Index, there has been only one negative quarter since 1992 in the American farmland sector, and average annualized returns approach 15% over the past ten years.

Because of such returns, it will come as no surprise that those who service America’s largest pension plans are creating or looking to create farmland investment vehicles as well. According to The Progressive Farmer, TIAA-CREF – a heavy-hitter in American pension management – has allocated $2 billion towards this asset class. Numerous smaller investment firms have also been advertising vehicles through large pensions.