Institutional Farmland Investing Growth

In 1981, a study by the United States General Accounting Office analyzed the portfolio of seven pension fund fiduciaries. The report found that of the $93 billion in pension fund assets, only $21 million - 0.02% of assets under management - was directly invested in farmland. Forty years later, the landscape couldn’t be more different. Of the almost $1 trillion of capital that goes into the total U.S. agriculture value chain each year, over 60% comes from institutional investors. It’s also estimated that $52 billion is invested directly into farmland every year.

What has caused this growth, and what does the future have in store for institutional investors and farmland? Let’s find out.

From Humble Beginnings To Prevalence

The rise of institutional farmland investing started in the 1980s when early syndicate investment opportunities began providing initial accessibility to passive debt and equity investment opportunities. At the same time, investment companies began forming dedicated spin-offs focused specifically on agriculture and timberland investments. The 1990s brought about the creation of the NCREIF Farmland Index, often one of the most cited farmland indexes currently consisting of over 1,200 investment-grade properties. This important index began providing institutions a benchmark to gauge their own portfolio returns.

As new products like the first publicly traded land REIT continued to spur investor engagement, funds began allocating larger portions of their portfolio to more unique offerings. The California Public Employees Retirement System began investing in premium vineyards, while the Canadian Pension Plan Investment Board acquired 115,000 acres of farmland in a single transaction. Countless other funds began committing portions of their portfolio as well, and the adoption of farmland investments has steadily grown since. Over the past 15 years, the NCREIF Farmland Index has grown in market value every year.

Broad Adoption Across Firms

Regardless of their investment goals or timelines, all types of institutional investors are incorporating farmland into their portfolios. Many pension plans have publicly stated their plans to hold or increase their portfolio allocation. Insurance companies are starting to boast billion-dollar portfolio allocations in impact investments. University endowment funds also have a history associated with farmland investments. The University of Illinois endowment pool - which returned over 27% for their fiscal year ending June 30 - diversifies its portfolio with farmland. Even Harvard University’s $53 billion endowments once allocated 9% of its portfolio to natural resource investments.

Why Institutions Are Getting Involved:

1. ESG Growth / Impact Investing

What has caused farmland’s rise to prominence? There have been several major factors, so let’s start with the growth of ESG. Impact investing is now a top priority for many institutional investors, as every respondent to Harvard’s annual institutional survey said ESG has played an increasing role in their investment decision-making. COVID-19 is also making firms look at their portfolios differently as a majority of national pension plans, private banks, insurance companies, and foundations all state they now view sustainability investing as more important as a result of the pandemic. It helps that investors are finally catching on that ESG may enhance portfolio performance. ESG funds outperformed their non-ESG rivals by 4.3% during the pandemic, while farmland has outperformed the S&P 500 since 1992 by 3%.

2. Financial Stability

In response to risk or uncertainty, institutional investors tend to seek out stable assets. That’s why 90% of institutional investors changed their portfolio allocation during the first six months of the pandemic and generally sought safer investments. Unlike retail investors, institutional investors consider risk and returns as one of the most important areas to consider when evaluating investments. With a long-term standard deviation of only 6.9% - less than half the volatility of equities or gold - farmland has proven to be that hedge against uncertainty. This includes periods of economic downturn, as farmland almost generated a positive financial return every quarter from 1992 to 2020.

3. Portfolio Diversification

Surveys show insurance companies and pension plans tend to prioritize investments with low correlation and increased risk protection. How have institutions diversified? First, they’ve sought after new ways of investing. The average alternative investment allocation for pension funds more than tripled from 2001 to 2016 and currently sits around 30%. Another strong diversification hedge has been private investments. 80% of institutional investors currently invest in private assets, with 73% saying diversification drove this decision. For those looking to diversify, farmland’s negative correlation to both equities and bonds has provided that hedge. Research also shows that farmland investments significantly improve the risk-efficiency of mixed-asset portfolios.

4. Hedge Against Inflation

Wary of looming implications of recent economic stimulus activity, institutional investors have inflation in mind as they prepare their portfolios. Over half of institutional investors say they are “very concerned about the threat of inflation”, with another 36% saying they are “quite concerned”. In response to repeatedly high CPI reports, investors have already begun preparing their portfolios. With inflation in mind, farmland slots in perfectly to hedge this risk. Commodities hold a strong positive correlation with inflation, providing investors with flexible operating income that responds to rising prices. In addition, farmland’s continual decrease in arable supply provides the asset class naturally increasing purchasing power.

What The Future Might Entail

More and more institutional investors are beginning to incorporate ESG concepts not only in their investment decisions but in their overall company operations. 78% of institutional investors want to discuss sustainability topics as part of their overall core business plan. In addition, a majority of institutional investors say they currently invest in ESG to align their investment strategies with organizational values. The future of impact investing is bright - today, many view it less as a strategy but more of a corporate identity that drives decision-making.

From a financial perspective, 75% of institutional investors believe the current stock market’s current pace of growth is unsustainable. As they consider new ways to protect their client’s wealth, firms will likely continue to look to farmland as an investment - especially now that a majority of institutional investors believe ESG investments will outperform their counterparts in the future. As firms continue to diversify their portfolios, they’ll likely turn to real assets as 22% of global institutional investors plan on increasing their real asset portfolio allocation in the future. Farmland will also continue to be a strong option for the majority of institutional investors that cite inflation as their number one concern for the future.

Institutional Investing and Farmland

It’s not often you see investment opportunities that better the planet, improve the lives of others, average double-digit returns, hedge inflation, and diversify an investment portfolio. In so many ways, farmland offers exactly what institutional investors are looking for.