My career has been entirely in farm management, farmland investment, farm consultancy around the world, and managing in businesses in the food supply chain. I know that successful farmland investment is entirely possible. Yet farmland and farming are niche asset classes. Why do so few investors have an allocation? And why do those who deploy capital so often get it wrong?
Because it is complicated, and because too many investors who expect it to be easy get it wrong and then blame the asset class for poor outcomes, rather than acknowledge their mistakes. They have a wealth of interesting research and what proves to be meaningless diligence to support their decisions.
Farmland is heterogenous in the extreme. Every farm is different. You cannot find the ideal farm and order another hundred like it. Farming is a very local industry; knowledge and expertise are local, and impossible to retro-fit. Local buyers of farms know why one farm is good and the one next door less so. Local buyers, and most farm buyers are local, know what to buy, and, more importantly, what not to buy. Outwitting the locals is unusual.
Farming is not easy; ask any farmer. So why should it suddenly become easy for an investment banker? Farmers deal with the most extraordinary range of variables and areas of expertise on a daily basis. Successful farm management is about making 20 small decisions every day and getting 19 right.
Scale does not automatically create solutions. Typical asset (farm) size is small; building a portfolio of good assets requires patience and the point at which economies of scale become diseconomies can be sooner that many expect.
Few asset classes suffer from political interference as often as farming. The original source of wealth and power, it is often overwhelmed by history, and strangled by vested interests. Structures are incoherent and property rights may be negligible, lacking the support of the rule of law. Expropriation remains a risk in many countries (I write as someone who is currently taking the Hungarian government to the International Court for expropriation). Subsidies create perverse outcomes, tax and regulation lock in the past, and protectionism is rife. The list of political interferences in the sector is long indeed. And that is all for an asset class that has a long-term horizon, requires long-term and patient capital, and thrives off stability.
Then you have the weather. The biggest single impact on farm output is variable rainfall. Not just annual rainfall, but seasonal, monthly, weekly or even daily. One man’s floods can be perfect spring rain for another. One week’s difference of an inch of rain is a spoilt harvest, or the perfect germination of the next crop. At the country level output of a product can be pretty consistent; while at the farm level, it may be fluctuating wildly from year to year. The difference between success and failure for a farmer is a week.
The marketplace is unforgiving. Most farm products are traded globally, or at least face a price, which is driven by global supply and demand. Very few farmers are in a position to influence prices. They are the ultimate price-takers, exposed to huge harvests elsewhere in the world driving down prices, and always hoping that someone else is having a drought. In a world that is fundamentally adequately fed, with aggregate demand rising slowly year on year, supply variability drives periodic and substantial price volatility.
So, it should be no surprise to those of us, who sit in the interface between the farm and the capital markets, that the asset class is niche and not widely supported.
Craigmore manages somewhere north of $650 million of farming and forestry assets in New Zealand across half a dozen sectors, and milking in excess of 17,000 cows.
What makes New Zealand attractive for farmland investment? Political risk is low, with a Westminster-style government, strong rule of law and property rights. The weather risk is also low, with the sunshine of Spain and the rainfall of Ireland, backed-up in many cases with plentiful water for irrigation. The absence of farm subsidies and a small population means that the industry has to be completely commercial in approach to markets (more than 90 per cent of farm produce is exported). If a crop cannot be produced competitively, it is not produced. As a result, New Zealanders face most global commodity markets in which they operate as the global low-cost producer.
Farm management is seen as a serious career choice, so there is a wealth of talent and enthusiasm coming into the sector; and there is a high-degree of innovation in structures and relationships between management and expertise, creating strong alignment and appropriate incentives.
Nick Tapp is chair of Craigmore
