Credit Suisse, Global Investor 1.15 – Illiquid Assets Unwrapping Alternative Returns, May 2015
Interviewed by Gregory Fleming

Harvesting yields from agriculture: One doesn?t often think of institutional investors and farmland in the same breath. Yet, global population growth and the accompanying demands on our food supply have made agriculture an asset class worth considering. But bridging the worlds of farming and financial services requires rather specific expertise.

Gregory Fleming: Griff, you have moved from a traditional investment career in pensions and investment funds into advising on and structuring of farmland investments. What motivated this move?


Griff Williams: A desire to make agriculture investment accessible to institutional investors. Agriculture is an asset class that delivers real benefits to savings and retirement portfolios, but lamentably, it is very difficult to access it in a pure-play format.


It is also an asset class that requires specific expertise that generally does not reside in the financial services sector. As a farmer who has spent over 20 years in the asset management sector, I am blending the two worlds to deliver this objective.


What kind of investor considers farmland?

Griff Williams: Investors seeking expo- sure to assets that benefit from long-term secular themes such as population growth, changing dietary habits, growing middle classes, water and conservation management. Farms offer a hedge against inflation, combined with an income yield. At the same time, investors need to be able to trust the farm managers, or at least the partner selecting them. No one really wants to have to go down to the farm and check what?s happening there in person.


Is agriculture sufficiently exposed to the modern, services- based economy to offer good returns?

Griff Williams: The global population is expected to increase by 50%, to more than nine billion in the next 40 years, while food demand is set to grow by over 60% as the world becomes wealthier. Shifts in diet preferences toward protein foods are well-attested in enriching societies, and this will increase the demand for land resources. So investors can potentially benefit from value-added gains in food or crop quality, but also from the very limited expected increase in the world?s available arable land.


The investment time frame is important in illiquid assets. What is the best time frame for taking a stake in farming?

Griff Williams: Farming lacks the thrills of daily commentaries on network television. The farmer is almost the archetype of a patient investor, and non-farmers also need some patience. Much depends on the mode of investment, but an investment horizon of five to ten years or a longer-term, strategic allocation is reasonable. For investors preferring the fund route to a direct investment, between three and five years is the shortest time frame to see results, but that renders the investment rather prone to the fortunes of just a few growing or production seasons. Capital gains on farmland are also likely to accrue more reliably over longer horizons.


What kind of return can investors expect?

Griff Williams: A good internal rate of return would be around 12% to 15% per annum. This is likely to be split between a ?Maximizing sustainable yield and minimizing environmental risks means that it is critical to cash yield on the farm products of 6% to 8% and a similar appreciation in the capital value of the farmland, as it is improved.


Would you say that any one kind of crop or product is superior, from an investor?s point of view?
Griff Williams: I have looked at opportunities in dairy, livestock, cotton, sugarcane and fruit, soya, grains, and other rotational crops. Each has unique and demanding characteristics that require very solid experience on behalf of the farm managers. Investors may have an affinity with a particular farm product, which is legitimate, but it shouldn?t bias the objective judgment of their returns and risk levels across the cycle. All the farm products benefit from intractable global demographic trends, but within this rising demand trend, some crops are considerably more volatile. Alternatively, some are more demanding ? for instance, dairying requires much more investment and stock management than sheep farming.


What approach should investors take?

Griff Williams: Maximizing sustainable yield and minimizing environmental risks means that it is critical to partner with real farm operators. The skills the investor should try to access are centered on rural productivity, rather than on land speculation or investment vehicles that mainly back trades in the agricultural futures markets. These markets have quite distinct returns time frames and performance drivers from the farmland itself.


What are the special characteristics of investing in farmland globally?
Griff Williams: The key point is that agriculture, in many countries, remains a politically defined investment universe. Certain governments restrict direct farm ownership to residents, while others link subsidy payments to the farm?s output. A set of agricultural economies, however, has liberalized its farming sector to reflect global market prices, and these countries have seen substantial efficiency gains. New Zealand is the classic example here, ditching farm subsidies virtually overnight in the mid-1980s. The New Zealand dairy sector is now the most efficient in the world, and few farmers would seek a return to government involvement in the price-setting process. Australia has also largely cut out farm support. Other countries, such as the USA, have more recently and gently modified farming subsidies. The 2014 US Farm Bill took the positive, though modest, step of lowering direct payments and replacing them with crop insurance provisions. Globally, rich-country transfer payments to the agriculture sector have been a major obstacle to free trade agreements. It?s important to stress that agriculture can survive and thrive in a high-income country, without state price support. Finding those liberalized land opportunities, and conducting the vital due diligence on legal systems, security of title, environmental and marketing systems, does require a broad range of skills.

Have you identified some best-practice markets, or does it vary from farm to farm?
Griff Williams: The set of undistorted farm product opportunities is quite small, in country terms. The best operating environments are seen across Australasia and in selected Latin American countries such as Uruguay, Paraguay and Brazil. Once a number of farmers in a given country adopt the best technologies and practices, the pressure on the other farmers builds up rapidly. This is as true of yield-enhancement techniques as it is of sustainable farming practices. Still, there are enough underperforming farms in countries with sufficiently good investment conditions to provide opportunities for a portfolio approach.

Griff Williams is a New Zealand national comes from a farming family on the North Island, where he continues to have dairy farming interests. At Milltrust he is responsible for designing and co-managing the globally diversified agricultural strategy with special focus on Australia and New Zealand. Prior to Milltrust, he was Head of Europe and Interim CEO of Ita? Asset Management.