FarmInvestor.com

SOURCE: http://www.cnbc.com/id/101499945 Richard McGill Murphy, Special to CNBC.com

Investors continue to buy up farmland like this in Bulgaria as a long-term investment plan. Source: Black Sea Agriculture Investors continue to buy up farmland like this in Bulgaria as a long-term investment plan.

From his office on Broad Street in lower Manhattan, Jeff Notaro oversees a modest portfolio consisting mainly of dirt. Specifically, Notaro’s Black Sea Agriculture fund invests in farmland in northeastern Bulgaria, near the Black Sea. The $1.5 million fund buys prime agricultural land and leases it back to local farmers.

Notaro is riding a growth market. Since 2004, Bulgarian farmland has been appreciating at an average annual rate of 19 percent. Yet Bulgarian land is still cheap compared to the United States. The average price per acre for good-quality land is $1,850 in Bulgaria versus $5,000 an acre in Kansas.

Land along the Black Sea coast commands higher prices because it’s especially fertile and also close to deep-water ports. Black Sea wheat land costs $4,300 an acre on average but yields an average of 71 bushels of wheat an acre, compared with 42 bushels an acre in Kansas. “That’s about half the cost per acre on a yield basis,” Notaro said.

The rise in local land prices has been fueled mainly by a worldwide agricultural commodity boom that has driven food prices up by more than 100 percent since 2003, according to the Food and Agriculture Organization of the United Nations (FAO).

“More people need to get into farming; otherwise, we won’t have any food,” said commodity investor Jim Rogers, who launched the international Quantum Fund with George Soros in the early 1970s and went on to create the Rogers International Commodities Index, which tracks the performance of numerous commodities in global markets, ranging from agriculture to metals and energy products.

Rogers and Notaro belong to an increasingly active community of farmland investors hoping to profit from the world’s growing need for nourishment. “I’m still wildly optimistic about the future of agriculture worldwide,” said Rogers, who has served as an advisor and as a director to companies that hold farmland in Australia, Brazil and North America.

The outlines of the investing case for farmland are well known at this point. The global population is expected to peak at slightly more than 9 billion by 2050, up from 7 billion today. On a per capita basis, the FAO projects that the amount of arable land available will decline steadily over the next few decades, from 0.218 hectares per person today to 0.181 hectares per person in 2050.

On the demand side, much of the growth in population and food consumption will occur in the developing world. As income levels rise in developing countries, consumers there are consuming more meat. Livestock production consumes massive quantities of grain and water, spurring farmers to boost both crop yields and land under cultivation.

Soaring demand for biofuels is another significant demand factor. In the U.S., for example, ethanol production accounts for 23 percent of total corn utilization, according to the Renewable Fuels Association.

Average U.S. corn prices tripled between 2005 and 2012, from $2 a bushel in 2005 and 2006 to $6.22 a bushel in 2011 and 2012. The price surge was partly caused by a rising demand for ethanol, along with other factors, including flooding and drought, higher prices for inputs like fuel and fertilizer, rising demand for meat, and upward movement in commodity markets.

In turn, rising agricultural commodity prices have driven a 128 percent rise in average Midwest farmland values over the past decade, from $1,270 an acre in 2003 to $2,900 an acre in 2013, according to USDA figures.

(Read more: America in 25 years: Here’s what to expect)

The world’s insatiable appetite On the supply side, crop yields have been leveling off since the dramatic advances of the last few decades, starting with the Green Revolution that transformed agriculture in China, India and elsewhere in the developing world from the 1960s onward. Today 40 percent of global wheat land is experiencing either flat or declining yields, according to a 2012 article in the journal Nature Communications.

In China, local scientists recently warned that smog levels around the country have risen so high that they are blocking natural light, potentially impeding photosynthesis and creating conditions that resemble nuclear winter.

What is your farm’s value proposition?

There was a time when purchasing land was part of a farm’s growth strategy. That strategy is quickly changing as land values increase and demographics shift. Today, land is trading well above its capacity to provide a return on investment through agriculture. At the same time, we’re now seeing the first generation of children removed from the farm who now own the land assets. In addition, we now have more corporate ownership of lands, those who have no ties to the land or our country.

First, the reason land leasing makes more sense here is simple economics. Land values in my area are roughly $2,600 acre and rising. I could lease that land for $70.00 an acre or 2.7% of its value. To buy 1,000 acres of land with 25% down at 5% on a 25-year mortgage it would cost me $146.00 an acre to cash flow before I put a seed in the ground. That’s twice the value of land rent plus the capital tied up in the $520,000 down payment.

Secondly, we have started to see a shift in land ownership where parents in their 70-80’s are passing down the family farm to be managed by the children. The children may or may not know who is farming their land and may not even live near the farm they now own and manage. The tenants go from a strong relationship with the owners to none in a heartbeat and it’s a very uneasy feeling. In the case where the land is sold, we are starting to see more outside investment in farmland, so once again, the relationship starts at ground zero.

We know that leasing more land than you own is the new model, so how do you reduce the risk of losing that land with new ownership? How do you attract those owners as someone they would like to lease land to? Simple, you offer a better value proposition than your competitor. Competing on cash rent alone is a losing, short-term strategy so it’s time to find out what corporate farms and the younger generation wants from a tenant.

When you look at the mission statements of corporate or large family owned farms with international footprints, they focus on three things:

1) Social 2) Economic 3) Environmental

The first pillar is a social responsibility. What are you doing to make your community better? How do you treat your employees and the people you deal with? Are you just a farm who crops land around a community or do you engage that community with your brand by sponsoring sporting events and supporting local businesses? Ask yourself this. What would your employees or people in the community say about you and your farm? The answer should tell you if you need help in this area or not.

The second pillar is economic. Do you employ the best farming techniques available today? Is your farm team engaged and pushing efficiencies and productivity higher? Can you prove it? How do you compare against the area average? If you farm like everyone else, then what sets you apart?

The third pillar is a key driver in almost every farm mission statement and that is environment. Though we don’t talk about it much in Western Canada, farmers do many things that are environmentally positive like no-till farming, less cultivation, few equipment passes, less fuel, smaller carbon footprint, etc. Take it a step further and consider harnessing a wetlands project or creating a project by leasing a site to promote wildlife or biodiversity on your farm. It may sound odd to have this in place but if your new landlord is from outside North America, they are going to ask about your environmental stewardship plan or projects.

The reality is, demographics point to a more removed type of landowner. In order to remain competitive and reduce the risk of losing land to owners who don’t know you, you have to sell your story. The future is not about who can pay the highest cash rent. It’s about landowners partnering with the right farms who tick the right boxes. I suggest we all have a sit down and plan out how that looks on your farm. SL

CPP buying company’s farmland portfolio in Saskatchewan Dec 12, 2013 6:14 PM – 0 comments TEXT SIZE By: Euan Rocha and Rod Nickel TORONTO/WINNIPEG | REUTERS Alberta, Crops, Markets The Canada Pension Plan Investment Board (CPPIB) said Thursday it had agreed to acquire the assets of Assiniboia Farmland, a fund that owns and manages a large portfolio of farmland in Saskatchewan, for about $128 million.

CPPIB, one of Canada’s top pension fund managers with more than $192.8 billion in assets under management, said Regina-based Assiniboia’s diversified portfolio consists of 115,000 acres of farmland that produce crops such as wheat, barley and canola.

The existing management team of the fund, which was created in 2005, will continue to manage the land portfolio, said CPPIB.

“We have always said that we would sell into a rising market and not wait until after the farmland market had peaked to create a liquidity opportunity for investors,” Doug Emsley, president of the Assiniboia Farmland partnership, said in a release Thursday. “The timing has culminated in an excellent selling opportunity for the partnership.”

Sovereign wealth funds and large pension funds like Canada’s CPPIB, seeking long-life revenue generating assets, are making a number of big bets in physical assets like farmland and forests, along with investments in ports, hydro-electric power projects and other such assets.

Last year, CPPIB launched its agriculture investment program which is initially focusing on farmland opportunities in Canada, the U.S., Australia, New Zealand and Brazil.

This is CPPIB’s second investment in farmland since setting up its agriculture investment program. Last year, CPPIB made its first foray in the sector, buying a large parcel of land that is spread across different parts of the U.S.

“Agricultural land is an important asset class for us,” Andre Bourbonnais, CPPIB head of private investments, said in a phone interview. “Such investments align well with CPPIB’s long-term investment strategy, while further diversifying our portfolio.”

Canadian farmland values have risen steadily over the past decade, with the average value jumping 10 per cent during the second half of 2012, according to the latest data from Farm Credit Canada (FCC), the country’s biggest agricultural lender.

The jump was the largest half-year increase measured by FCC since it began reporting on farmland values in 1985, coming the same year that U.S. corn prices rocketed to an all-time high.

Population growth in developing countries like China and India, and a move to higher-protein diets, have boosted demand prospects for grains and oilseeds.

Bourbonnais noted that farmland is an attractive asset class that has historically delivered stable, risk-adjusted returns. He also highlighted that the global outlook for agriculture in general is positive due to increasing demand for food products.

Western Canada this year produced the region’s biggest-ever wheat and canola crops, and Saskatchewan is the largest provincial grower of both. Canada is usually the world’s second- or third-largest wheat exporter and the biggest canola shipper.

Soaring land prices

Canada is not the only major crop producer where farmland prices have soared.

In the U.S., prices of Iowa farmland set a new record in 2013 for the fourth year in a row as farmers paid top dollar. But most land brokers and industry specialists there expect weakness ahead due to falling crop prices, an Iowa State University researcher said on Wednesday.

A study last year argued that the amount of land needed to grow crops worldwide is at a peak, and a geographical area more than twice the size of France will be able to return to its natural state by 2060 as a result of rising yields and slower population growth.

Bourbonnais, however, said CPPIB is comfortable with investing in the area, despite some such concerns in the market.

“The macro drivers, quite frankly, support our investment thesis,” he said. “We view this as a secular growth story.”

In 2009, investment firm Sprott Resource Corp. created One Earth Farms on land across Saskatchewan and Alberta that it leases from aboriginal bands and private landowners

Saskatoon-based One Earth now bills itself as one of Canada’s largest farms, growing grains and oilseeds and raising cattle.

The average Canadian farm grew to a record size in 2011, and the number of farms shrank to a record low, according Canada’s most recent census data.