In short, it appears assumptions about row crop land values are surging ahead of evolving investment fundamentals.
Row crop assets can continue to play a role in institutional farmland portfolios because they can generate steady and predictable cash flows and provide diversification. However, for the reasons just outlined, it is unrealistic to expect row crop investments to generate total returns of 8% or higher in the upcoming years. Given the prevailing circumstances, row crop assets should only be acquired and held if an investor is very optimistic about future row crop commodity prices or is willing to accept very modest returns from those investments.
Institutional investors that are focused on maintaining or expanding their hard asset exposure by investing in agriculture, and that hope to produce returns consistent with those generated by farmland over the past decade, will need to step away from passive “buy-hold-lease” strategies that have characterized the row crop sector for the last two decades. They will need to invest more heavily in permanent crops, in niche and developing global markets and perhaps even in “greenfield” crop establishment opportunities.
They also will need to move downstream in the supply chain and consider structured, hybrid agricultural investments. These private equity-like opportunities entail capitalizing integrated agricultural operations that include both quality farmland assets as well as processing infrastructure and, or distribution resources — outside the farm operations that prepare and bring agricultural commodities to end-use commercial and consumer markets.
Cody Dahl is an agricultural economist and senior investment strategist at AgIS Capital LLC, a Boston-based private equity firm that makes investments in farmland and agricultural assets. Brent Gloy is a member of the firm's advisory board.