We conduct research on an ongoing basis to identify the most undervalued regions and agricultural assets. Being opportunistic in our investment style, our investment criteria are constantly evolving.
Flexibility in setting investment criteria also allows us to accommodate different agricultural investor’s’ objectives and appetite for risk and return. Gaining an understanding of this is the first step we take with new clients.
Besides the obvious variables such as climate, land quality and management expertise, there are four key elements which dictate risk and return within farmland investment portfolios. Even in the case of fixed rental agreements where the tenant effectively shoulders the commercial, climate and commodity risk, these factors still need to be considered because the tenant’s ability to maintain rental payments over the mid to long-term may be contingent upon them.
1. Asset Mix
Here the choice is between permanent crops (perennial / tree crops like fruits, nuts, vines etc) and non-permanent crops (arable / rotation crops like wheat, maize, soy and other cereals). As a general rule, permanent cropping strategies are higher risk although the return in good years can be higher than for non-permanent crops. There are a number of reasons for this:
- The cost of developing permanent crops is higher with little or no income being produced in the early years as plants mature; although once they mature, incomes can be high.
- Because permanent crops take a number of years to reach maturity and produce viable yields, any major infestation of pests or disease will impact income for a longer period.
- A single permanent crop type is more vulnerable to downward fluctuations in the price of that particular commodity, whereas rotational planting of non-permanent crops can be more responsive to market conditions.(Click here for more information on the benefits of arable investing.)
2. Business Strategy
Here the choice is between Greenfield (development of new farmland from undeveloped land) or established farmland. Although the investment horizon in Greenfield is longer-term and the risks higher, the rewards can be significant in the case of a successfully implemented strategy. Acquiring a fully developed enterprise carries less risk as the investor is buying into an existing and proven income stream. In a Greenfield arrangement the farmland element will often constitute less than half of the overall investment, with the majority of the capital invested being apportioned to development.A halfway house between these two extremes is to acquire an established enterprise which has some development potential (e.g. development of irrigation, drainage or other infrastructure) or where new management practices can increase the farm’s productivity (e.g. soil remediation, development of, or diversification into, new crops, conversion from conventional to organic etc).
3. Deal Structure
Here the choice is between fixed rental agreements where the tenant bears all the agricultural enterprise risk (and returns are capped at the rental rate), or variable / income linked agreements where the enterprise risk is shared between farm operator and the investor (and there is no cap on returns or floor on losses).The third option is a hybrid of these arrangements involving a lower fixed rental rate with a revenue linked top up component allowing the investor to capture part of the higher returns on a good year whilst still receiving a base rate of income on a bad year.
Higher levels of diversification in terms of geography, crop type, tenant / farm manager and business strategy will obviously all help to reduce risk (although extensive diversification would obviously require a substantial portfolios size). On the other hand, focusing on one particular specialist crop in one particular region where the supply picture indicates there is a strong opportunity can also be a highly rewarding strategy.
If you would like to have a preliminary no obligations discussion with us about these choices and how an agricultural asset portfolio might be constructed to meet your own investment requirements, please feel free contact us. If you would prefer us to contact you, please click here to complete the contact formand we will be happy to have the appropriate member of staff call you to begin discussions on a strictly confidential basis.