Agriculture Investing: A Diamond in the Rough?

(April 10, 2012) — Agriculture is a challenging investment with great potential, according to consulting firm bfinance. 

The reason: Rising food prices, agricultural land’s long-term inflation-linked characteristics, and low correlation to most asset classes are driving renewed interest in agriculture as an investment class.

However, according to bfinance, agricultural stocks are volatile, largely due to the fact that commodity ownership involves storage, ownership costs, and risks. “Commodity index funds are cheap and easy, but have a high correlation to equity markets and finally, direct land investment requires scale and faces major foreign ownership issues,” the firm said. 

Shedding light on the difficulties of the investment, bfinance noted that while agricultural land has the potential to provide a source of long-term fixed-income, the obstacles of the investment are not easily avoidable. “Extreme illiquidity and sensitivity to geo-political risk mean that diversification of holdings and careful selection are key,” the consulting firm stated. 

The $470 billion US asset manager TIAA-Cref is the second-largest owner of agricultural land in the United States (after the Mormon church). The scheme holds $2 billion of farmland in the US, Australia, and Brazil. “Agriculture is an important long term play, which is focused on the growing middle classes around the world and their changing eating habits,” TIAA-Cref CEO Roger Ferguson said, as noted in bfinace’s report. According to Ferguson, farmland has produced average annual returns above 10% since 1970, outstripping most other asset classes.

In May of last year, Swedish pension fund AP2 decided to establish a joint venture with TIAA-CREF, with a goal of investing in agricultural real estate in the US, Australia and Brazil. “TIAA-CREF has a well-developed platform for agricultural investment where environmental considerations and social responsibility are integrated. The Second AP Fund has carried out a comprehensive sustainability analysis of TIAA-CREF’s guidelines, policies and processes and considers that they are of very high quality,” AP2 said in a release. The fund added: “The return on agricultural real estate is expected to be stable, with low covariance with the Second AP Fund’s other investments, such as equities and bonds. This will serve further diversify the Fund’s portfolio risk.”

AP2’s CEO Eva Halvarsson further noted: “We anticipate that the newly established company’s investments will promote productivity gains and long-term, well-managed and profitable agriculture that, in a sustainable manner, will help meet the growing global demand.”