Insights from Stuart Donald, head of agriculture, GMO Renewable Resources, LLC, (GMORR).
GMORR is the forest and farmland investment arm of Grantham, Mayo, Van Otterloo & Co. LLC, (GMO), which has USD116 billion in assets under management as of 31.12. 2013.
Why invest in farmland?
It is a real asset that combines solid fundamentals: there is a growing demand for food, energy and fibre, with a potential for inflation hedging. Farmlands have maintained their value over long time horizons. By providing yield in the form of marketable commodities, the value of the yield is protected from local currency devaluation.
Farmland fundamentals are driven by positive demand forces (growing populations and incomes globally) vs. a fixed supply of land. According to the Food and Agriculture Organization of the United Nations (UNFAO) there are 1.5 billion hectares of arable land. It estimates that by 2050 world food production will need to increase by 60 percent - for the most part, from land that is already being cultivated.
Besides when you invest in farmland, and to a certain extent, you can be in control of your own destiny. An investment in farmland could provide an annual income stream coupled with potential capital appreciation opportunities. You could make money by growing and selling that crop - but the way you manage that process also can influence the capital appreciation of land.
What is your investment approach?
It is important to identify farmlands at prices reflecting their biological yield and the productive capacity of the land. By employing such a value-oriented approach, we seek to invest in attractively-priced farmland where productivity can be improved and returns enhanced through the addition of capital, optimising the mix of activities on the farm and achieving scale. Carefully managed land-based assets can also be a good fit for investors committed to responsible investing.
How does GMORR define farmland investments?
Farmland investments are investments in the land, the crops and livestock that are on the land. They are not investments in commodity-traders or in companies such as John Deer or Syngenta that provide services or products to the agro-industry. Institutional investments tend to be focused around three different areas of agriculture:
- Row crops (corn and soya bean are the most common ones in the U.S.) wheat, cotton.
- Permanent crops - nut and citrus (especially in the State of California, New Zealand, Australia, South Africa).
- Livestock - in the dairy - beef, sheep, dairy farming (especially in New Zealand).
How do you make money from investing in farmlands and what are your sources of return?
GMORR targets investments in both row and permanent cropland, as well as in livestock. The focus is on agricultural properties in lower-risk geographies where commercial agriculture is well-developed and good title, high-quality management, and adequate infrastructure are available. As we invest in agriculture globally, we leverage our timber operations and long-standing relationships with property managers and other local service providers in each region.
Properties are either leased to local farmers for a stable cash rent, directly operated where GMORR assumes yield and price risk, or some combination of approaches where both GMORR and the operator share in upside and downside potential. Because of our long experience in timber investing, we believe we can find value in mixed use properties by optimising land use between timber and agricultural operations. As in our timber operations, we are opportunistic buyers and sellers.
Where are you seeing investment opportunities?
In the U.S. (excluding the Corn Belt), South America, Australia and New Zealand.