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First Mid Ag Services News

Why big finance is betting on farmland

August 25, 2023

Why big finance is betting on farmland

Land Values: Your retirement fund — and those of your neighbors — are driving the next agricultural revolution.

By: Michael Lauher

On the wind-swept plains of the heartland, an agricultural revolution is quietly underway. This one’s not led by advances in machinery or biotech, but rather by the inconspicuous behemoths of financial institutions: the institutional investor.

Who are these institutional investors?

Everyday individual investors make up the entities buying farmland, bringing together funds from people of various professions and backgrounds. Individual investors are people just like you and me: teachers, health-care workers, civil servants contributing to pension funds, or affluent individuals or families engaged with mutual funds or private equity funds. They can also be linked to religious, academic or cultural organizations with sizable endowments.

The attraction of institutional investment vehicles lies in their ability to unlock opportunities that would otherwise be unreachable for individuals.

Institutional investors leverage professional expertise, including financial advisers and fund managers, to make informed investment decisions. They employ a systematic approach to investing, involving rigorous analysis, complex strategies and risk management practices. They garner the benefits of scale, driving down costs, granting access to opportunities not available for smaller investors and potentially boosting returns for those who invest.

The HighQuest Partners report Farmland Investment History by Julie Koeninger provides a comprehensive account of the evolution of institutional investment in farmland. Over the past three decades, institutional farmland investing has grown from a niche dominated by a few large pension plans and insurance companies to a mainstream institutional real asset class.

The early 2000s saw the start of global population growth and increasing meat consumption in developing countries driving demand for food and farmland amid declining farmland acreage and decreasing rates of productivity growth. This, coupled with busts in the 2008 residential real estate market and the subsequent dot-com debacle, increased interest in the farmland asset class dramatically, bringing new investors and investment managers to the market.

Why Illinois farmland?

Institutional fund managers bear the responsibility of ensuring the safety and growth of the funds to which they have been entrusted. When deciding where to place money in the farmland investment universe, they consider many fundamental criteria which Illinois meets and surpasses. Some of them are:

Size of market. Illinois is one of the two most significant agricultural states in the U.S. for growing two of the most significant crops cultivated by humans. Iowa doesn’t allow corporate ownership of farmland. If you’re looking for corn and soybean exposure in farmland real estate that is available for institutional investment, Illinois offers a lot of room to grow.

Regulatory environment. Think what you may about the current administration, but Illinois has a regulatory environment that is generally favorable to farming, with tax policies such as the farmland assessment law designed to support agricultural activity. On a broader level, there is safety available for investments here that you don’t always get abroad. Just ask those who invested in Ukraine a few years ago.

Crop diversity, stability and water availability. When considering where to invest and in what crops to invest, fund managers like to diversify their portfolios, putting their eggs in multiple baskets. When returns in other regions and crops fluctuate wildly, Illinois returns remain relatively stable with plentiful free water that (in most years) falls from the sky. It is the bedrock that supports the investment class.

Infrastructure. Illinois boasts a robust infrastructure for agriculture, including access to major transport routes for crop distribution, such as the Mississippi River, railways and numerous interstate highways. It also benefits from a network of grain elevators, processors and other elements of the agricultural supply chain that add value to farmland investments.

Research and support. Illinois is home to world-class agricultural research institutions, like the University of Illinois at Urbana-Champaign, which continually work toward improving crop yields, farming practices and agricultural technologies. This supports continued higher returns on farmland investments.

All told, Illinois farmland is a safe, stable investment environment where lots of money can be put to work for people who are looking for a long-term investment.

So, what does the future of institutional investing look like?

According to Koeninger, one of the key game-changers within agricultural investing in recent decades was the turnaround in attitudes toward institutional investors by farmers and those in farming communities. Today, institutional investors are viewed as a solid source of long-term, patient capital to the agricultural segment of the U.S. economy.

The future of institutional investment in farmland is likely to grow and expand in scope as investors seek new sources of uncorrelated, differentiated returns in a market increasingly focused on passive investing.

Reprinted with permission by Prairie Farmer.