Agriculture is a new asset class and money is flowing into it, yet Simon Hopkins of Milltrust questions whether the industry is evolving in a way best suited to attracting the right kind of capital in a way that focuses on improving the lot of the farmer, and provides returns which meet the expectations of the professional investor. Investors have been given literally a Hobson’s choice – i.e. take it or leave it, as large pension funds or strategic investors have been the ones to dictate the terms of co-investment.

In the past couple of years, Milltrust has canvassed literally hundreds of investors with respect to their intentions to invest into agriculture. We have sponsored a number of the larger capital raises that have successfully acquired land in Australia and New Zealand, and we have banged the drum about the fundamental opportunity to be found in pockets of deep value around the globe. Funding has been difficult to come by, yet the economics of the agri-business is changing, coupled with a fundamental interest in farmland as a real assets, may represent a once in a life-time opportunity for farmers.

In recent years however, farmers have been the last to benefit from increasing demand for agricultural commodities, with the supply chain historically dominated by a small group of big trading firms, and prices often dictated by the high street, where supermarkets have become the indiscriminate price setters. With the whiff of a new class of investors, many multi-generational family investors are putting their assets on the block, although not necessarily exiting the business altogether, with many leasing the assets back from their new found acquirors.

So what has precipitated this new found interest in investing in the farm? Whilst the growth of the economies of China and other developing countries appear to be slowing down, the demographics of these nations are nonetheless changing in a way that implies ever increasing demand for higher value food. The sheer scale of this shift is often overlooked given that these nations now account collectively for over 50 percent of global GDP and 80 percent of the world’s population.

With little or no room to expand the agricultural landscape in the Western World, the only option is to look to the countries with the greatest availability of agricultural land mass. Herein it seems, lies the answer to the world’s requirements for increased protein, and the animal feedstock that goes into the protein industry. The new dynamics are creating new opportunities to scale up, and institutional investors have recognised for the first time the appeal of the asset class.

On home turf however, local pension funds in Australia have been largely absent from land investments, scared off by deeply embedded memories of weather related risks, or enticed instead into the resources sector which has been the bedrock of the transformation of countries like Brazil and Australia, and has until recently driven their stock markets to record highs.

The recent slowdown in the hard commodities boom, and the significant reassessment of growth expectations for Latin America, China, and indeed Australia, has now shifted attention back to agriculture. The building of roads, cities and high speed rail investment may have run its course in China, yet the urbanisation of vast swathes of the population has given rise to a significantly changing dietary requirement, with the consumption of meat and dairy increasing by 12 percent and 45 percent per annum respectively over the past 5 years. This. This is a structural shift that is never going to reverse and must now be addressed by increased production of meat and dairy products.

The increase in demand for protein and the increase in meat prices, especially beef, which is now a luxury for the majority of consumers, has in turn given a new impetus to the farming industry, whether in growing and transporting feedstock, building and operating feedlots and abattoirs, or processing and shipping product. Beef consumption in China exceeds 1 million metric tonnes last year, having been zero only five years back.

Indeed, Chinese investors have been acquiring agricultural assets as strategic investors, along with large international pension funds have been most active buying into large scale farms. Yet this disparate group of investors have more often than not quite different objectives, and therein lies the rub. The objectives of these investors may not always be based on the generation of short term improvements in profitability or land appreciation, and yet those investors who have a private equity mentality are usually seeking a defined return objective within a discrete timeframe.

Pension managers like the Virginia based giant TIAA CREF from the USA, or APG from Holland have been pretty visible in this new asset class with dedicated teams and a preference for internalising the management of their assets. CREF’S acquisition of Westchester has seen the pension fund manager export the model from the US into other parts of the Ag world. Typically, pension fund investors have a pretty long term (multiple decade) duration with very modest bond-like expectations in the interim.

In two of the landmark transactions that we have been involved in at Milltrust, the local farm management teams have had to compromise on the expectations that they might earn management fees and a share of the carry, and instead have been internalised as salaried employees into the business. Whether this model will properly incentivise the sponsors to remain at the helm for the life of the investment remains to be seen. Thirty years certainly seems a big ask.

The other prevalent investor that sponsors have seen join the party could be categorised as strategic investors. They are typically large industrial enterprises in the food, energy and fibre sectors, often masquerading as private equity, but more often than not with the primary objective of securing competitive and reliable off-take. This kind of investor often brandishes an attractive cheque book but their long term objectives may sometimes be at odds with the best interests of the farmer and co-investors.

Agriculture in some countries is still undergoing rapid change from a cottage industry where the same farms have often been owned by the same families for generations. These business are often in need of modern management practices, better corporate governance, and improvements in agronomy and farming techniques. The transformational phase of a land based investment is often the most challenging, but at the same time, equipped with the right team, and properly funded with an eye to the target profitability of the asset, it can also been the most remunerative.

Long-term money can be a boon to an industry that has faced many challenges over recent generations, but it doesn’t always get put to best use by improving the working practices and strategic use of farmland in a way that develops and preserves it’s long term value, and delivers the capital gains that are directly associated with this process. The lesson here is make sure you know who you are investing with, and that your interests and time horizon are both alligned.

About Milltrust

At Milltrust, we have partnered with local families in four key agricultural economies in Latin America, as well as Australia and New Zealand – all countries where farming is not subsidised and where, despite attractive land prices, yields are some of the highest in the world. We carry out extensive due diligence on the assets, and negotiate the appropriate reps and warranties to protect minority interests and ensure that our co-investors have similar objectives to the operator and our investors. Through a buy to lease strategy, we ensure we have a guaranteed income component and that our exposure to the operational risk is reduced. Often, we will seek to secure a guaranteed sell back for the assets to the vendor/operator but we reserve the right to seek the highest bid when the time comes to realise our investment. Management is essential and our local partners are all incentived through the same remuneration structure. This implies one fee and carried interest for the stewardship of the capital, and the local operator combined. In the case of buy and lease strategies the local leaseholder does not typically receive a share of the capital uplift, the incentive for them is to expand their operating capabilities without having to deploy capital in land acquisition.