Monday, October 17, 2011

Investing in Farmland


In the early 1980's, when I was just getting started in the investment business, there was widespread consensus about where all "smart" investors should have funds: gold and oil.

Gold hit a high of $850 in 1980, while oil had reached $39 a barrel in the same year. The thinking among most institutions was that commodities in general, and gold and oil, in particular, were only destined to move higher in price, especially since they had outperformed all other asset classes in the prior decades.

Then reality hit. Gold prices started to fall, and by the year 2000 gold was priced at $250 an ounce, or nearly -70% lower than two decades earlier.

While gold prices have recovered recently, investing in gold in 1980 would have yielded a return of less than 1% per annum for the past 30 years, far below traditional investments in either stocks or bonds.

Oil prices, too, had peaked in 1980, even though it was not apparent to anyone at the time. Oil prices fell by more than -75% by 1986 to less than $10 a barrel, as oil supplies far outstripped demand.

Like gold, oil prices eventually recovered, but here again the returns from investing in oil have been barely higher than 2% per annum over the last 30 years.

Which brings me to farmland investments.

The current investment du jour is farmland, according to Gillian Tett of the Financial Times. In her piece last Saturday, Ms. Tett notes that TIAA-CREF, the huge pension fund targeted largely to educational and non-profit institutions, is now apparently the largest owner of U.S. farmland today.

Other large institutional investors have joined TIAA-CREF in their appetite for farmland. According to an OECD report, notes Ms. Tett, 54 investment funds now have $7.44 billion of agricultural investments around the world, and this is "expected to double or triple in the near to long term".

The logic of investing in farmland is to me eerily reminiscent of the same reasoning that lead investors to pile into oil and gold investments a generation ago: the world is changing, the amount of farmland is finite, etc.

Oh, and the historic returns from investing in farmland have to date been far better than investing in stocks or bonds.

Now, it could be that I am too cynical, but after growing up in the Midwest I can tell you that farmers tend to be pretty good judges of the value of their land.

And if farmers are selling to the "shrewd" money managers from New York, I would be more than a little cautious.

Past performance, as people in my industry constantly remind us, is no guarantee of future results. I would be willing to bet that returns from indiscriminate farmland investments will be poor indeed relative to other alternatives in the years to come.