Pension funds join forces to invest in farmland

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Major asset managers, cowed by the cost, the risk and the controversy involved in investing in farmland, are joining forces to increase investment in the historically under-capitalised sector.

In one example, Swiss fund of funds Adveq is in talks with three European pension funds, a private family and a Korean asset manager to buy farmland, in which it will act as the originator and lead investor.

Last year one of the world's largest institutional investors, TIAA-CREF, partnered with pension funds including British Colombia Investment Management Corporation and AP2 to create a $2 billion investment vehicle to buy farmland.

The new approach is likely to attract significant amounts of money from pension funds and other institutional investors into farmland, a sector in which they are reluctant to go it alone.

"We see agriculture and farmland as an asset class that's still being shaped," said Biff Ourso, director and portfolio manager of farmland investments at U.S. asset manager TIAA-CREF.

"It (working together) creates alignment for investors, economies of scale, cost-sharing and the transparency that a lot of investors want today," he added.

Adveq expects three institutional investor club deals to close in the next 12 months, each between $200 million and $400 million in size.

Investors are attracted into farmland by the rising global demand for food and a low correlation of agricultural land prices with traditional asset classes.

Pension funds have been cautious in how they approach the sector, however, because charities worldwide have voiced concern that large-scale land grabs by foreign investors could push up food prices, push farmers off the land and increase hunger.

"Agriculture is a very sensitive subject for two reasons, one is the fundamental human right for food in a food-insecure world, and secondly land is sacred to every country. To sell land in some societies is not acceptable," said independent consultant Mahendra Shah, member of a panel advising Adveq on agricultural investment strategy.

"My personal view is these pension funds are afraid to go into the field alone, and they want to spread their bet or their risk by having partners join them."

Fledgling Asset Class

By working together, pension funds aim to create bespoke investment vehicles in a fledgling asset class that meet requirements for responsible investment in a sensitive area.

Research by Macquarie in 2012 showed institutional investment at a meagre $30 billion to $40 billion out of a total global value for farmland of $8.4 trillion.

Most farmland is owned by family farmers, giving institutional investors huge scope for buying up individual properties to form larger operations.

Institutional investors say that by working together they have a much better chance of being successful in terms of social responsibility as well as economic returns.

But some agricultural experts questioned the benefits.

"It's not absolutely clear to me that the simple fact that just a few of them come together is going to produce a better overall result," said David Hallam, director of trade and markets at the United Nations food agency (FAO).

"Unless the nature of the actual investments changes substantially, then I don't see the fact that a few companies get together would necessarily improve things," he added.

Rich Seam

Institutional investors have generally focused on regions that are net exporters of food including North America, Australia, South America and Central and Eastern Europe.

"We like to be a in a situation where we're not taking food from the local market, where we are not taking food away from its natural value chain for speculation purposes, (where) on the contrary we contribute to increasing food production," said Berry Polmann, executive director at Adveq.

"While doing so, we don't want to undercut local farmers by producing more at lower costs, eroding their competitive power and wiping them out. That's one of the reasons why Africa for us is very difficult."

Adveq's group is looking for farmland assets in North America, Central and Eastern Europe, Latin America and Oceania.

Through partnering, institutional investors aim to become more efficient and share knowledge.

"We prefer to go with other institutional investors," said Ibrahim Abdulkhaliq, portfolio manager, alternative investments at MASIC, a Saudi Arabian institutional family office.

Abdulkhaliq cited two reasons for the trend - more difficult governance and due diligence in farmland and the ability to reduce costs, making investments more viable.

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