By Joel Kranc

Not unlike other industries that are consolidating under one roof (medical, law etc.), with large-scale investor interest, a relatively new area is also catching the eye of large investors. That asset class is farmland.

In fact, results from the 2024 Nuveen EQuilibrium Institutional Investor Survey found that that 49% of investors surveyed held farmland allocations and that over the last three years, investors are increasingly planning to allocate to farmland investment strategies. Of the group, the highest planned allocation to farmland is from North American public pensions with 26% planning to increase allocations over the next two years.

A separate study from Preqin confirms that there is a growing interest in natural resources amongst private and public pension funds, a group, which now makes up 25% of active investors in the space.

“Farmland performance is uncorrelated to traditional asset classes and provides investors with attractive risk-adjusted returns,” explains Joseph Villani, senior Farmland portfolio manager with Nuveen Natural Capital. “Farmland investments also provide institutional investors with a strong inflation hedge. Historical farmland returns have outpaced inflation in a variety of market environments.”

The Globe and Mail has reported that after 30 consecutive years of growth, Canadian farmland values increased again in 2023 and are forecast to rise in 2024, quoting an expert at Farm Credit Canada, a Crown corporation that monitors land sales.

“Limited availability of farmland for sale and expanding demand for what we’re growing in Canada” will continue to propel appreciation in 2024, says FCC’s vice-president and chief economist J. P. Gervais. Farmland values across Canada rose by approximately eight percent in 2023, compared with 12.8 percent in 2022, according to the FCC figures by the media outlet.

Some of the reasons investors are seeking out farmland as an investment include diversification, as an inflation hedge, risk management, volatility hedge, capital appreciation, and for carbon benefits.

Some investors, like Bonnefield see the opportunity due to a lack of investment in the industry. “We looked at finding a way to give investors isolated access to the underlying real asset and the land base,” says Andrea Gruza, managing partner at the firm. “So we have set up a structure whereby we’re doing a leaseback on the land. We’ll acquire some farmland and we’ll lease it back to the farmer on a long-term basis. Our investors are getting exposure to a very diversified portfolio of really high-quality farmland assets, completely unlevered. And then they’re exposed to the long-term value appreciation of that land base, as well as some of the income through the lease,” she adds.

Gruza also says that the model works well and has allowed the firm to work with really high-quality, strong, growth-oriented partners.

“They don’t necessarily want an operating partner,” she says. “They’re very good at what they do. They view us as a financing solution as a way to expand their land base. Rather than going out and taking on more mortgage debt, or using their equity to buy more land as they grow, they have other uses for that capital.”

Nuveen’s Villani says that investing in agricultural land also allows investors to benefit from the growing worldwide demand for food. We believe the case for investing in this asset class is not only strong now but becoming stronger, due to several positive fundamental factors:

  • Growing populations will require more food
  • Developing countries continue to increase protein consumption
  • Regions with secure water resources will become increasingly valuable
  • Development and industrialization will continue

Gruza says that the past five years have seen an increasing awareness of alternatives of real assets, and a growing number of investors looking at agriculture. The reason for this is connected to issues of climate change, water and food security issues that have to come to light through COVID and the Russian invasion of Ukraine.

“I’d say typically an institutional investor would have their standard 60-40 split equity and fixed income, and then they may move into traditional real estate.  Once they’ve done that then they’ll start to look at some other alternatives. I think every institution is different. But in terms of when farmland would be added, I’d say it kind of comes a third group of post-traditional real estate.”

Farmland is only appreciating in value, with some estimates of Ontario farmland selling at $30,000 an acre. As prices continue to rise, the sky, or in this case, the earth’s the limit.