Investment Thesis

U.S. Farmland is an enormous asset class offering many investment opportunities. The value of the farm land in the United States has been estimated by the USDA to be worth close to $2.6 Trillion in 2015, which is more than the value of all the small capitalization stocks in the US (as measured by the Russell 2000 Index) and is not too far off from the assets under management in the hedge fund industry.

*Capital IQ, FTSE/Russell
**https://www.usda.gov/nass/PUBS/TODAYRPT/land0815.pdf
***https://www.barclayhedge.com/research/indices/ghs/mum/HF_Money_Under_Management.html

However, the vast majority of U.S. Farmland is still family owned. Institutional investors play a small role. Many of those who argue for the attractiveness of the asset class site farmland’s low, or even negative, return correlation with other asset classes or they make the case that a growing population will need more food and there is not enough farm land to supply it. As will be discussed in later posts, both of these arguments can often be overstated.

An aspect of farmland investing that makes sense from more of an institutional perspective is the benefits of farmland diversification. Some of the issues that can affect the industry as a whole will have a more acute impact on each individual farm with exposure to one region, climate, water issues, and maybe even one crop. This is perhaps one of the most bullish cases for the asset class as most holders of farmland are bearing risk not only associate with farmland in general, but are also over exposed to the specific risks affecting their individual holdings. In the coming years as the industry consolidates, farmland holdings will as well, and the average investor will become more diversified, and therefore exposed to less risk. In this case an even higher earnings multiple will be justified.

Another compelling reason for why farmland is an attractive asset class is that farmers are increasingly achieving economies of scale in their operations. While each crop has its own productivity trajectory, by and large, farms are now able to achieve greater economies of scale with growing, harvesting, and processing. As such, the industry is slowly moving away from one in which a farmer would own and farm his or her own land, and towards a model where a farming company farms a greater number of acres, but who may not have the ability or desire to own all the underlying farmland.