Outlook for Investing in Farmland

EMS:
Absolutely. Kim, to kick off the conversation, tell us a little about XA Investments and how you got to where you are today.

KF:
Absolutely. XA Investments is a Chicago-based investment manager and we're focused on alternative investments. Alternatives are really in demand across the investor spectrum from large institutions to individual investors. We have a product platform. We have a listed closed-end fund that invests in private credit. And we also have an interesting consulting practice where we actually help asset managers launch new investment products that are in demand. And right now that is largely focused on institutional alternatives that can be put into fund structures that allow individual investors to have access to strategies that they did not just a few years ago.

EMS:
Kim, during this podcast we're going to discuss farmland and love to hear your top of mind thoughts on why it's a compelling investment opportunity right now.

KF:
Absolutely. So I spent a number of years working at Nuveen Investments and Nuveen and many other large investors have long known the importance of having real assets like farmland in a diversified investment portfolio. And what's interesting about farmland, we've spent the last year and a half working with a US-based farmland manager on developing ways to allow investors to access farmland in America. That really up to this point has been only something that the largest investors can do, or maybe it's you have a family farm. The way farmland in the US has been largely held is within families. And so it's interesting that now we're at a point where there's a lot of new interests in gaining access to diversified holdings of farmland as opposed to owning a single farm. And farmland generates attractive income and additional return above that income. And so in an inflationary environment, which we've been in for the last year or so, farmland investments, I think, are back top of mind with real asset investors.

EMS:
Kim, as a follow-up question, what characteristics do different types of farmland investments offer? I'd love to hear your thoughts.

KF:
Sure. Well, you might be thinking about corn or wheat or some of the other row crops that you see driving through Nebraska or driving through Iowa, but maybe you're from the Pacific Northwest and you're more familiar with seeing apple orchards or farms that grow permanent crops. And so as an investor in farmland, you have a number of options. You can invest in row crops, you could invest in specialty crops. As a farmland investor, we've seen some interesting investments outside of just holding crops. There's also interesting infrastructure investments like cold storage or investments along the agriculture supply chain as well. And so there's a lot of interesting areas for investment in agriculture and AG business. So it's a whole interesting area and we're going to talk about some of the AG tech and innovation that we see in this space as well.

EMS:
Yeah, that leads nicely to the next question I had for you is love to hear all about the innovation in farmland.

KF:
Sure. There've been interesting articles in The Wall Street Journal or the Financial Times about vertical farming just because land is so precious. The US has some of the best farmland in the entire world, but there's a lot of locations where it might make sense to go vertical with farming, maybe in the northeast of the United States where we're seeing some investment in those types of innovative techniques in farming. There's more risk in vertical farming and potentially more return as well. So it just depends.

The beauty of farmland investing is you have to have a deep understanding of the region and the land that you're investing in. And even just from two neighboring farms, the analysis that's done by sophisticated farmland investors to help assess what crop is best planted on this farm in this square footage to maximize profit and return. So you have to have really sophisticated tools to understand what's going to grow best in different microclimates and on different farms. And that's what some of the modern growing techniques that we're seeing, we're seeing a lot of application of technology in just that. We all understand the importance of having access to sufficient water supply and knowing where the water source is going to be for a new plot of land and making sure that it's secure for the life of the investment.

So there's a lot of work done even prior to buying a piece of farmland. And then there's also the ongoing investments in irrigation, for example, which might allow a farm to grow a different crop that's more profitable that if it didn't have that technology investment in irrigation. So a lot of interesting innovation in farmland, which is really not only driving profit in return, but it's also making sure that the land is left better than when the farmers first started farming the property. So making investments that are really going to drive value for years to come because a sustainable farm is a farm that continues to operate efficiently, and so that's why some of these investments are necessary.

EMS:
Kim, to shift gears a little bit, love to hear what types of investors are most interested in investing in farmland?

KF:
Well, with the advent of, there's now farmland REIT, there are private funds that allow access to farmland. There's also crowdsource funding platforms, FinTech platforms like AcreTrader or FarmTogether. So I think that in the last few years there are more entry points than there had been in the past. And we're also seeing developments in the interval fund space, real asset funds that have diversified investments in farmland.

And so there's a lot of points of entry. The institutional ownership of farmland is still percentage wise, relatively low if you compare it to commercial real estate. But if you read some of the headlines, there are some really interesting investments being made in farmland by Bill Gates and his foundation, by Warren Buffet and his family members. Some of the biggest investors in farmland in the US are also churches like the Mormon Church. With the advent of some of these new product types, the average individual investor now can do what these large institutions have been doing for a number of years. And so while insurance firms and large institutions have had the benefit of commercial real estate and farmland investing, it's just only been recently that this space has been opened up to a broader group of investors.

EMS:
Kim, on the other hand, we haven't discussed the challenges of investing in farmland. Love to hear what people should be aware of or hurdles when it comes to investing in this asset class.

KF:
Sure. I think that from a diversification perspective, we've long seen family offices being active in the farmland space. They tend to have portfolios which skew towards illiquid alternatives, and they're fine with some of those larger concentrated exposures. And so I think if you're considering farmland as an asset allocation, one of the challenges is still getting access to an institutional manager who is capable of selecting and managing these farms in a portfolio. And so that way, for example, you're not just exposed to citrus crops in Florida or apple trees in the northwest, but rather on a geographic diversity perspective, you have crop diversity.

And so that's really the challenge here, I think, with farmland investing, because farmland in the US since 1991, has generated returns of about 10.8%, and that beats the S&P 500 for the same period. Those returns are achieved with a lot less volatility, about 50% of the volatility. Farmland returns have been positive each and every year since 1991. So that's the reason these investors have long invested in farmland, and it's those investment characteristics along with the fact that farmland highly correlated to inflation. So that means farmland's going to do better in an inflationary environment, particularly high periods of inflation when we see inflation north of 4%, like the environment that we've been in most recently. The total returns from farmland are even higher in a high inflationary environment. So it's got all the right investment considerations, I think, for investors looking for diversifiers, and it's a compelling real asset alternative.

EMS:
Kim, we've covered a lot of ground here, so one final question for you. Why are interval funds a good fit for farmland investors? Love to hear your thoughts on that.

KF:
Sure. I would say that infrastructure and real assets, we're just now seeing new types of interval funds open up in those categories. To date, what you're probably familiar with are like credit or real estate type funds. But one fund I'll mention is the Versus Real Asset Fund. It's a type of interval fund, and they allocate to a number of leading farmland managers. Really interesting what they're doing. Versus has been in the market for a number of years. And we are actually seeing, we study closely new entrants to the interval fund market, it's a growing market. There's a lot of both traditional and alternative firms coming into the marketplace. And we've now seen a number of really interesting filings. For example, Brookfield filed for an infrastructure fund most recently.

So there's a lot of real asset interval funds with this sort of inflationary environment. And investors looking for alternative sources of income as well as return, farmland produces attractive levels of income. That 10.8% total return that I quoted, 6.4% of that was income and the rest was capital appreciation. So that's what investors are looking for is diversified sources of income. And the interval fund market has a lot of interesting choices for people looking for less liquid or alternative investment options.

EMS:
Well, Kim, I wanted to thank you so much for sharing your perspective with our listeners.

KF:
Absolutely. Thanks for having me, and thanks for taking some time to think about US farmland investing.

EMS:
And thank you for listening to the EisnerAmper Podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper Podcast when we get down to business.

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