He says it’s not a matter of the climate. So why is Bill Gates buying so much farmland?

For many investors, farmland was not on the radar as an investable asset class until the start of the year, when it was revealed that America’s largest farmland owners were not. other than Bill and Melinda Gates.

Many were speculating on Gates’ motivation for the acquisitions – was this part of his larger sustainability strategy? In this case, Gates argues that these investments are, in fact, not climate related. This may have surprised some, even the most savvy investors. But for those familiar with farmland, it’s easy to see why this asset class is so attractive to investors.

Institutional investors crave farmland

For many years, farmland was not a common asset class among financial investors. Even after the spread of alternative investments, few funds have scrutinized the sector carefully. There were many barriers to entry, including a highly fragmented market in which most of the farmland was owned by families; and a lack of investment professionals with the knowledge to appraise investments in agricultural land.

The tide began to change in the early 2000s, when institutional investors began to take a closer look at farmland. Momentum picked up during the great financial crisis of 2008-2009, when investors desperately needed alternatives to traditional safe-haven investments like bonds and gold. During this short period, there has been a proliferation of funds specifically geared towards investing in agricultural land. In 2020, there were 166 such funds worldwide, almost 9 times more than 19 in 2005.

Evolution of the number of agricultural land funds by region

Farmland Focused Investment Funds, 2005-2020. Source: Valoral Advisors

The Teachers Insurance and Annuity Association of America-College Retirement Equities Fund, for example, holds $ 1.2 trillion in farm assets through its asset management arm, Nuveen.

Bill Gates’ investments in farmland can be seen as part of this trend. The Gates have been quietly acquiring farmland through their investment manager, Cascade Investment, for over 10 years. When the fund has been profiled by The Wall Street Journal by 2014, it was already a major investor in farmland, with “at least 100,000 acres of farmland in California, Illinois, Iowa, Louisiana and other states.”

Following this profile, Cascade has made several other significant investments in farmland. In 2017, they paid $ 520 million to the Canada Pension Plan Investment Board (CPPIB) for a portfolio of farmland previously owned by the Agricultural Company of America (AgCoA). When the Board acquired the AgCoA portfolio in 2013, it was one of the largest institutional investors in row crop farmland in the United States. Another notable acquisition was Cascade’s $ 170 million purchase of 14,500 acres of farmland in Washington state from John Hancock Life Insurance in 2018.

Today, Bill Gates owns 242,000 acres of farmland in 19 states. In addition, it owns 25,750 acres of transitional land and 1,234 acres of recreational land for a total of 268,984 acres. Its largest property is in Louisiana (69,071 acres), followed by Arkansas (47,927 acres) and Arizona (25,750 acres).

Farmland provides solid returns for investors

Farmland has historically generated strong real returns from two distinct sources: rents and crop payments, and appreciation when the underlying asset is sold. Between 1992 and 2020, the average annual yield from farmland was 10.9%, compared to 7.87% for the stock market and 6% for gold. Additionally, farmland is an asset class with extremely low volatility. During this same period, the volatility of farmland was 6.84% while the volatility of the stock market was 16.9% and that of gold was 14.8%.

Performance of listed assets and real assets

NB: Data is based on total annual returns from January 1, 1992 to December 31, 2020. Asset classes are represented by the following indices: US private farmland – NCREIF Farmland index; Private Commercial Real Estate in the United States – NCREIF Real Estate Index. Indices are unmanaged and are not available for direct investment. Source: NCREIF, publicly available data

Farmland also adds to the diversification of a portfolio, which is crucial for building long-term wealth. Investors achieve diversification by investing in multiple uncorrelated asset classes. Farmland is not correlated with other major asset classes including stocks, bonds and gold, which means it is unaffected by shocks that affect the price of other assets. For example, during the Covid-19 pandemic, the stock market fell 19.8% between the fourth quarter of 2019 and the first quarter of 2020. In contrast, farmland decreased by 0.1% – only its second quarter. negative since 1992.

Farmland is a sustainable asset class

While sustainable agricultural development is one of the main focus areas of his nonprofit Gates Foundation, the Microsoft co-founder says his investments in farmland are not climate related. But while Gates might just focus on yields, the potential of investing in farmland to drive sustainability at scale should not be overlooked.

{Bill and Melinda Gates can create the world’s largest food technology test bed, but they have to win over farmers first. Read more here.}

High-tech and sustainable approaches are needed to ensure that farmers will be able to meet the agricultural needs of the 21st century and the growing population of the planet, in a changing climate and increasingly scarce resources. These sustainable and productivity-enhancing improvements include organic or nature-based farming methods, water conservation, and other agronomic innovations to improve farm efficiency. Despite the growing popularity of these methods, many transitions are prohibitively expensive for farmers.

This is where investments play a crucial role. By providing an injection of cash, farmland investors facilitate much needed capital improvements and increase long-term farm sustainability.

In addition, sustainably managed agricultural land will enhance the value of the land over time. Farms with healthy soils, plentiful water and efficient infrastructure are worth more, and this will be even more true in a future where high-quality farmland is increasingly scarce.

You no longer need Gates’ wealth levels to reap the benefits of farmland

For too long, investment in farmland has been restricted to a handful of institutional investors and high net worth individuals like the Gates due to high barriers to entry – including dark markets and large minimum investments. Fortunately, this is no longer the case.

Crowdfunding investment platforms, for example, allow accredited investors to own a portion of farmland with low minimums starting as low as $ 15,000. These platforms remove many barriers to investing in farmland and provide access to a selection of investment opportunities, from apples to nuts and citrus.

Another way to invest in farmland, while not direct, is to invest in real estate investment trusts (REITs) such as Farmland Partners or agricultural commodity ETFs. While these funds expose investors to some of the benefits of farmland, they are ultimately tied to the stock market and its unpredictable fluctuations.

The potential reasons behind Gates’ investments in farmland are vast. From its vital role in the global food supply to its historically strong financial performance, farmland can play an important role in any portfolio. Now it’s easier than ever to invest, even without being one of the richest men on the planet.

Editor’s Note: The author of this article is Jack Ellis. This story originally appeared in AgFunderNews. Rebecca Bauer is public relations and communications manager at FarmTogether, based in San Francisco, California. The views expressed in this guest article are those of the author and do not necessarily represent those of the AFN.

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