Country Corner

Hedging toward food’s future

by Steve Fairchild

Worldwide investors turn toward farmland

When Optima Fund announced that it would launch a private equity vehicle called American Farmland Co. a couple months ago, it made a few ripples. American Farmland Co. is a hedge fund built for buying farmland. Chatter in investment trade publications put it down counting for future inflation.

What caught my eye was that the company’s CEO said farmland consistently made 15 percent return over the past 5 years, even under constricted credit conditions.

That’s when I found out that American Farmland Co. looked to purchase 10,000 acres of vineyard in California and mixed farm ground in Arizona.

Of course, using farmland as protection against inflation is nothing new. Have a look at your county plat book and see how many bank trusts and insurance companies own sizeable chunks of land. It usually gets cash rented back to locals. Don’t think much of it is returning 15 percent per year around here.

While big-block purchases of land in Arizona and California don’t raise many alarms in the Midwest, we are in for some real changes in the coming decades. Optima Fund’s American Farmland Co. isn’t unique. In fact, land-buying funds have blossomed in the rest of the world, especially targeting emerging countries in Africa.

Moscow-based Pharos Financial Group, a George Soros concern, has a fund expected to use some $350 million to buy land in Eastern Europe, Central Asia and Africa.

London-based Barclays Capital started a farm fund in 2008.

While private money from these funds is a pittance compared to the deals being struck by China and Middle Eastern oil-rich states, there is common language in each pitch.

Listening to an archived speech from Emergent Assets Limited’s CEO Susan Payne, you get the general gist. As the leader of another land-buying fund, Payne reasoned that the world’s population had quadrupled in the past 100 years. Commodity prices of 2008 caused food riots in 15 countries while there were threats of food riots in some 30 countries. Payne said the world’s population grows by 200,000 people per day. 2007 was the first year that the world’s urban population was larger than its rural population. According to Payne, in just China, some 75 million people urbanize—every month. And Chinese meat consumption, which was 20 kilos per person per year is now 40 kilos per year. She said oil will go back up; biofuels will consume 30 percent of US corn.

It’s a story of demand, then. Emergent just launched the second capital drive for its African Agricultural Land Fund. Big players only. You’ll need 500,000 euros.

For that investment, you’ll join Emergent in bringing together:

…the key themes of agriculture/food security, Africa, socially-responsible investing and economic sustainability, purchasing and managing a wide spectrum of agricultural properties across the sub-Saharan region, with investments diversified across both geographically and across agricultural sectors—including crops, biofuels, livestock, game farming and timber. Returns, based on those successfully achieved through a four-year pilot project, are projected to be approximately 30 percent per annum over the fund’s five-year term.

So there you have it. Why bother with 15 percent in Arizona and California when you can get 30 in Africa?

I’m skeptical of such returns, at least in the long run, because land booms, and subsequent busts, have been a part of the agricultural landscape for too long. Buying land to avoid inflation only works, at least for the investment class, if there is inflation.

Moreover, it only works in places where property rights are ingrained in society and respected by law enforcement. Some of Africa’s best land is in Zimbabwe, where Robert Mugabe’s thuggery has not only caused the worlds’ worst inflation (think trillion-dollar notes), but has also made a mockery of private land ownership, and made ruins of once-productive farmland.

Will private investment firms who buy land defend it when needed? And who will decide what to grow? Should global commodities be grown in favor of local food staples?

These are the questions that come with big-fund and foreign investment in farmland. And we’ll be wrestling with them for a while. Because regardless of the pilot project that returned Susan Payne’s company 30 percent per year, we’ll be adding two billion souls to the world in the next 40 years. Big investment funds or simply holding onto the back 40, it’s a question of scale. But the odds-makers are speaking. So bet long on food.

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