Between the Neolithic Era and the 19th century, the wealth of settled populations was measured and preserved for posterity in the form of agricultural property. Today’s institutions have limited exposure to farmland (holdings are less than $4 billion in the U.S. and less than $16 billion worldwide), but interest in this asset class is growing. CalPERS, TIAA-CREF, universities, insurers, foundations and sovereign wealth funds have agricultural investment programs.
Agricultural property offers current income and inflation protection, has minimal risk of supply shocks and benefits from well-established demographic trends. Exposure may be through direct ownership of property or livestock, real estate investment trusts, conventional equity, private commingled structures and related infrastructure. Most institutions invest in established agricultural regions, but developing-world agriculture and Eastern Europe’s historically important grain belt are attracting attention.
Farmland is diverse, ranging from unimproved pasture to land under perennials such as oil palm. It may be owner-operated or leased to independent farmers. Leases may be fixed or participate in a percentage of the realized value of the crop.
The risks
Each of these assets and strategies has distinct risk and return characteristics. The factor inputs required and the demand picture for the crop produced determine some of them, but biology and its commercial implications are crucial. Other things being equal, pasture generates the lowest, least volatile returns and perennials the highest and most volatile.
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