Pensions show interest in farmland investments

Staff at the Iowa pension are in the process of reviewing potential farmland investments and plan to have a recommendation ready for their Sept. 21 investment board meeting
FundFire via Farmland Forecast | 31 August 2011

Pensions show interest in farmland investments

By Matt Gunn

The $23.6 billion Iowa Public Employees’ Retirement System and the $600 million Tucson Supplemental Retirement System are currently exploring potential investments in farmland as a means of diversification. They’re among a group of institutional investors that are showing a small but steady interest in agriculture investments.

Indeed, experts say institutional investors’ appetite for farmland – or at least for the returns generated by leasing investor-owned land in agricultural hotbeds to local farmers – has steadily increased over the past 12 to 18 months. Still, at least one manager believes the wave of interest might not be as significant as some think.

The Tucson pension is looking to allocate about 5% of its total assets toward farmland within the next 18 months to two years as it ends a commitment to a separate real estate investment, says pension administrator Mike Hermanson.

“Our view of the future is, we need to be in that business,” he says. “We know some of the family operations are shrinking in farming – theyhave been, for some time – and the world demand for food is not going to go down. It’s just a natural hedge against what we think will happen in the future.”

James McCandless, head of global real estate/farmland for UBS Global Asset Management, says interest in the asset class appears to stem from its performance amid economic instability.

“It’s been fairly widely published that the farm economy is doing quite well, and has done well through the 2008 financial stress period,” McCandless says. “Farmland investment returns over time have shown a negative correlation with stocks and bonds, and a fairly attractive positive correlation with inflation.”

He adds that investors tend to see farmland as an attractive diversifier for a fairly traditional investment portfolio, and that the outlook for farm economy is favorable. For the most part, pensions, endowments and fund of funds managers that have talked with UBS Global Asset Management about the asset class do not have any money tied up in agriculture right now, though most do have investments in timber and commercial real estate.

Staff at the Iowa pension, meanwhile, are in the process of reviewing potential farmland investments and plans to have a recommendation ready for its Sept. 21 investment board meeting.

“IPERS is interested in real assets because they can provide a hedge against inflation, provide income, as well as the potential for capital appreciation, and real assets’ returns have historically shown little correlation to other asset class returns,” says a spokeswoman for the pension. “In other words, it’s a good way to diversify.”

But, she adds: “Farmland is like any other asset – it is important to buy at the right price. Prime farmland prices are currently quite high in some areas due to high commodity prices, and that can make farmland investment less attractive in the current environment in terms of expected return.”

The spokeswoman did not indicate whether an RFP will follow the recommendation. The IPERS farmland investment could be more than $100 million.

For Tucson, the farmland discussion is ongoing, and could represent an investment of about $30 million. “It’s a future opportunity for participating in a commodity that we’ll likely see value from in the future,” Hermanson says.

McCandless cautions that, despite the increase of interest in farmland, it’s still very much a niche among pensions.

“Institutional investment in farmland is really very small today, compared to the size of the universe,” he says. “The biggest buyer of farmland has been, is today, and will be other farmers. We don’t really compete with them.”
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