Associated Press
05-06-07
Private equity seeks farmland for profit
NEW YORK — Private equity firms are starting to look for profits on the farm.
In the last year, the soaring price of farmland, fueled by demand for corn and
ethanol — which is created from corn — and increased popularity of ranch land
has attracted a small but budding group of private equity investors.
A number of deals for private equity firms to buy farm and ranch land have
closed or are in negotiations in states like Illinois, which has some of the nation's
best farmland.
Obstacles remain. Quality farmland is difficult to find, the investment isn't liquid,
and not everyone is convinced that the ethanol craze won't burn out, despite
massive investments by some agricultural giants.
Despite potential hurdles, a lot of people are betting that farmland thrives for at
least the next several seasons. The returns on both farmland and crops have
been good, and producers are able to lock in high corn prices.
"Farmland has very little volatility, and it has very consistent earnings," says Joel
R. Hertz, chairman of the board of Hertz Farm Management, in Monticello, Ill.
The annual return from crops has been 3 percent to 5 percent a year, not
counting land appreciation.
While private equity "can't trade in farmland like they do in stocks and bonds,"
says Hertz, "they're now getting into it because of ethanol and (land) prices going
up."
In some parts of Iowa, he says, land values have increased 20 percent to 30
percent in the last 16 months.
"It's a sellers' market," says Hertz. "There's very little land, and a lot of people
looking to buy."
Steve Wright, vice president of the Midwest region for JPMorgan and a senior
farm manager in Lafayette, Ind., says, "I think the American farmer is going to
make more money in 2007 than ever."
Wright, who is giving a private equity firm advice about farmland, says the
numbers speak for themselves. The demand for ethanol pushed the price of a
bushel of corn from $2.20 in early harvest last fall to $4 by the end of harvest. It's
currently about $3.25 to $3.50.
At the same time, land prices have soared. High quality farmland in places like
Indiana, Illinois and Iowa climbed from about $4,200 or $4,400 an acre to $5,200
an acre.
"The last six months I've definitely gotten a lot more calls from private equity
managers and hedge funds," says Jeffrey Conrad, president of the Hancock
Agricultural Investment Group, a farmland investment advisory firm in Boston. Its
clients are all institutional and often pension funds.
Don McCabe, president of Soy Capital Ag Services, is working with an East
Coast brokerage firm to establish a private equity fund before the next buying
season, which typically runs after harvest.
He anticipates an 8 percent to 10 percent annual return, which while lower than
many private equity investments, is very stable.
"It's a consistent, steady type of return," says McCabe. That, he says, makes it a
good match for pension funds, which want predictability and don't mind investing
for long-term returns.
"One of the dilemmas is whether the farmland will have the capacity to support
the extra dollars," says McCabe.
That's because farmers aren't selling and, in several states, "anti-corporate
farming" laws prohibit corporations or non-U.S. citizens from buying the land.
However, in recent years the courts have thrown out several of the laws, and
more are expected to go.
Carl Palmer, co-founder of Beartooth Capital Partners, in Bozeman, Mont., has
raised more than $16 million for the one-year-old private equity firm. The
company invests in "ecologically important" ranch land.
Beartooth makes improvements in the ranch land it buys. It then sells the
conservation rights to environmental groups and the actual land to individuals,
who want a ranch for hunting, fishing and horseback riding.
The fund requires a $500,000 minimum investment and expects a return of more
than 15 percent.
Investors "love the fact that it's a diversification opportunity," says Palmer, an
environmentalist, who worked on the investment model for the company while
receiving his MBA at Stanford University. "This is a great real estate investment."
The price of farmland had been increasing steadily in recent years, often
because it gets snapped up to feed urban sprawl. But the value has continued to
climb even as the residential market has cooled, says Mike Duffy, an
economics professor at Iowa State University in Ames, Iowa.
In 2006, the average value of an acre of Iowa farmland climbed 10 percent to an
all-time high of $3,204. In some counties, the price jumped to more than $4,000
an acre, and in eastern Iowa it was more than $5,000, the highest ever recorded.
The U.S. Department of Agriculture's National Agricultural Statistics Service in
March said that U.S. farmers intended to plant 15 percent more acres of corn in
2007. Producers plan to plant 90.5 million acres — 12.1 million more acres than
in 2006 and the largest area since 1944.
The report attributes the increase to favorable corn prices because of the greater
demand from ethanol producers as well as strong export sales.