I’ve just decided to put some money into a new placing, the Global Sustainable Farmland Income Trust. I’ve already mentioned this new IPO in this blog before, but I’ve now had a chance to dig around inside the investment presentation. I’ve listed some of the key points about the fund below but for me, this looks like it might just be a way of accessing a previously inaccessible investment space for the mass market. Of course, the endowments and pension funds have been putting money to work in this space for decades but there’s not really been a suitable vehicle for agricultural land and this MIGHT be it. I’m hoping it’ll be a boring fund that does what it says on the tin and provides a relatively uncorrelated return over the very long term.

First off, some basics on the fund

• The fund has identified a pipeline of 30 assets with a total value of c.$1 billion, out of which 18 preferred Target
• Assets with a total allocation value of c.$330 million
• Targeting an annualized initial dividend of 2.5% p.a., growing to 4.25%+ p.a. when fully invested
• Capital Advisory Partners is the fund manager. They seem capable and experienced although existing AuM on their funds at $94m isn’t very large
• The fundraising target is an ambitious $300m
• Management fee’s are between 1 and 1.25% depending on size of fund and no performance fee
• In terms of geographical exposure we’re looking at North America 64%, Australasia 23%
• The pipeline of actual projects? 50% committed within 9 months and mostly committed within 18 months

A bit of background

I’ve long been interested in farmland and I think the first chart from IM nicely sums up why. This suggests that although $83 trillion is tied up in global securities, a staggering $27 trillion is in farmland – not that much less than in commercial property. Yet outside of big institutional structures, there’s barely been easy to access vehicle available.

The next graphic also shows that a global approach to investing in farmland is viable. There are big differences in land values per hectare with France and the UK showing much the highest values compared to developing countries such as Brazil. What’s interesting is the aggregate average for US land which is well below that for Australia and Europe. Sure, farm land has shot up in value in the last few years in the US but prices are still fairly low, even more so in Canada.

The last chart fleshes out those long term, largely positive returns for US farmland – at the aggregate level. Cash incomes have been fairly steady around the 3 to 7% range, and most of the time homing in on 5%. Capital returns have zig caged around as we’d expect, with the last few years showing fairly subdued prices. What’s interesting is that for the majority of years in the time frame of the graphic below, total returns have been around 10% – for much of the last forty to fifty years.

Under the bonnet of the fund

Assuming the fund pulls off the IPO, what’s the practical investment strategy? The key idea here is that the fund will be buying farmland around the world and then in effect renting or leasing out the farms to operators (usually other farmers) who will pay a combination of a fixed rent and some performance fee. That takes much – though not all – of the operational risk away form the fund and also deals with my concerns about having enough expertise to manage dozens of different locations.

Another key point to make is that the fund isn’t targeting conventional farms full of say wheat or barley or soy i.e annual cropland. Its real focus is on specialist land – we’re talking grapes and cherries, avocado, blueberries, mixed nuts, bell peppers, tree fruits and lettuce. Looking in detail at the project list, this means the biggest investments will be in growing peppers in the East coast of the US, mango’s in Australia, apricots, and cherries on the west coast of the US, blueberries in Portugal and pistachios and walnuts on the west coast of the US – and perhaps even a bit of vineyard consolidation.

The last crucial consideration is that buzzy word sustainability. The IM is very specific that I will focus on “Sustainability out of necessity”, which means it’s core concern is on topsoil. I’d suggest this is a bit obvious, but the investment team wants to build a sustainable approach to topsoil in the land and not just milk output without any concern for the long term. I say this is obvious because all my family members involved in farming say exactly the same thing – and then seem to forget about it when pumping chemicals into the ecosystem. I suspect that the fund managers will also be relentless in their focus on water and aquifers, especially on the West Coast around mixed nuts and almond farms. Without water and long-term aquifers, the land will be worthless.

There are some obvious risks that don’t need to be labored. Just because you are outsourcing doesn’t mean you’;’ escape all the possible practical issues that can go wrong with the weather/water/labour supplies/commodity markets. I’m also slightly cagey about the sheer international diversification and the investment management expertise required to look after all these investments.

Nevertheless, overall, I think the approach of focusing down on these specialist farms, whilst sub-contracting out the operational process sounds sensible. I also like the diversified international approach and think that the anticipated level of returns sounds achievable. One for the long term – a boring buy and hold investment, I hope.