(DTN) -- Wall Street remains enamored with U.S. and international farmland, speakers at a Farm Foundation meeting in Louisville said last week. But while some funds and institutional owners have billions of dollars to spend on that romance, it will take time for them to own a significant share of the U.S. farm real estate market.
GROWTH SPURT
Since 2007, the mutual fund company TIAA-CREF has reportedly dedicated $8 billion to farmland purchases in the U.S. and overseas. Insurance companies like Prudential manage $1.2 trillion of farm assets, mostly for pension funds and institutional clients. Lenders like Bank of America also manage farmland ownership for wealthy individuals and families. That doesn't count new entrants like Farmland Partners Inc., one of the first cropland-only real estate investment trusts (REITs) that launched on the New York Stock Exchange in April 2014 and now owns about 111,000 acres of cropland in more than a dozen states. It hopes to double its footprint in the next few years.
"High-net-worth families have always known that real estate is a good place to have a chunk of your portfolio," said Corny Gallagher, a senior vice president managing the $36 billion portfolio of food, ag production and processing for Bank of America Merrill Lynch. After 47 years in banking, Gallagher still co-owns his family's sixth-generation farm in west-central Iowa.
"Yes, farmland values have come down," Gallagher said, "but in the West, land values are driven by water not by commodity prices." The price of all California commodities is down by at least 50% recently, he noted, but land with 3 acre feet of water has nearly doubled in price in that same time frame since it can sustain permanent crops.
LACK OF ALTERNATIVE INVESTMENTS
With miserable returns on conservative investments like bonds or CDs, investors will seek out farmland as an alternative because it's still a category that earns a reasonable rate of return, Gallagher added.
Bruce Sherrick, director of the University of Illinois' TIAA-CREF Center for Farmland Research, cited farmland's robust long-term performance with attracting Wall Street's attention. Between 1980 and 2015, Iowa farmland owners averaged annual returns of 10.5% (capital gains and cash rents), versus 8.17% for the S&P 500. Insurance companies and other institutions that report returns for the NCREIF index bested both of those with an average 11.62%. That was also far better than the NASDAQ index, bonds and most other conventional investments. Compared to the stock real estate crash in 2007-2008, for example, farmland looked like a safe harbor in the midst of a hurricane.
"It's clear farmland is gaining credibility as a New York asset class," Sherrick said. However, it took 10 or 15 years for shopping malls and commercial office buildings to become an individual investment category known as REITs. As a group, non-ag REITs returned an average of 12% a year since 2000, according to J.P. Morgan Asset Management, dominating the second-place finisher, high-yield bonds at 7.9%. Ag REITs hope to ride on those coattails.
Moderation in farm real estate values since 2014 only adds to farmland's appeal. "Institutional owners see the price reset as an opportunity," Sherrick said. "I expect they have money on the sidelines ready to invest when the price is right."
Paul Pittman, CEO of Farmland Partners (NYSE: FPI), stressed that institutional owners aren't typically bidding at auctions or paying the highest prices for grain-based real estate. Instead, their target sellers are heirs of farm estates who live off farm and lack an emotional attachment to the land. By the time the great-grandchildren inherit property, they never knew the original farmers. Such "remote" owners stand to inherit 280 million acres of farm real estate, Pittman estimated.
Whether institutional owners are "here today, gone tomorrow" is another issue. Pittman said his REIT intends to own farmland long term, much like insurance companies do now. However, a number of private funds need to flip property frequently to return profits to investors.
"If one of my investors wants his money back, he calls his stockbroker," Pittman said. In contrast, many private institutional investors often have a seven-year life built into their contracts, requiring land liquidation in the process. That doesn't give tenants much security.