The world's agriculture sector has increasingly gained interest from leading Asia Pacific asset owners, not least because it possesses several strengths as an asset class. But new investors hoping to generate yields from it face a number of daunting challenges and risks.
A particularly evident one is the danger of climate change.
“We believe agricultural assets are riskier than generally perceived,” noted an industry adviser at industry consultant Mercer. “The problem is that two of the biggest risks impacting agriculture – weather and government policy – cannot be controlled, even by the best managers."
Extreme weather conditions that have been on the rise globally in recent years are closely linked to climate change. The danger is that sudden droughts, violent storms, wildfires or just far higher temperatures, ravage investors’ agricultural assets.
“Climate change is generally a huge challenge and it’s difficult to predict with any certainty at a very granular level, say at a farm level or a sub region level,” Neil Woods, a portfolio manager for New Zealand Superannuation Fund told AsianInvestor.
Investors looking to buy agricultural assets will have to consider the risk that climate change plays in affecting the future productivity of the land, said Alistair Nicholson, director of Valic, an avocado grower in New Zealand, and a representative of several family offices globally through the Singapore-based Vulpes Investment Management..
“If those extremes are going to increase in time, just to invest in land in itself and to ignore this risk is a bit short-sighted,” he added.
That said, investors can overcome some of these climate-related hurdles by factoring these risks in their analysis, cautiously building out their exposure and by diversifying to different climate zones, noted Dania Zinurova, head of manager research for Australia, Willis Towers Watson.
“I wouldn’t say, because of the climate risks, don’t invest in agriculture,” she said.
On the flipside, as the climate changes what proves to be undesirable for a certain type of crop could be beneficial to another.
Germany, for example, had its hottest, driest spring and summer on record last year. That was detrimental to many local farmers, river boat captains and foresters – but a blessing to winemakers, which had a record harvest, reported the New York Times.
Another issue prospective investors into agriculture need to consider is the role that regulations play.
Zinurova said investors should be mindful of local rules relating to land ownership, especially in emerging market such as Brazil and Chile. On the contrary, property rights around agricultural land in countries including the UK, US, Australia and New Zealand are well defined, secure and defendable in court, noted Nicholson.
That said, there are also potential benefits to investing into emerging countries. The cost of labour is one.
“If I buy a large cattle ranch in the pampas of South America, where skilled labour may not be as strong a requirement, I can take more risks around my property or the price of the land such that it’s attractive relative to my ability to secure my property rights,” Nicholson told AsianInvestor.
Given the recent political instability in South America, Woods said that, although opportunities remain attractive in the continent, New Zealand Superannuation is more comfortable in its home ground.
“We are in a long way from investing in South America as part of our rural strategy and certainly won’t be all of South America, it’d be targeted geography, maybe Chile,” said Woods.
For new investors into the asset class, a number of access possibilities exist.
One is for investors to buy farmland and lease it to an operator to manage it. This lend-lease strategy is more common for row crops but can be seen sometimes for permanent crops too, said Zinurova.
Investors can adopt a more hands-on operational strategy to increase the value. Or they can adopt a private equity style to access the market, targeting agriculture businesses from across the entire value chain.
“There are quite a few private equity fund managers who target specifically agriculture/agribusinesses or add this to their broader strategies,” Zinurova noted, adding that they tend to be regionally focused.
Another niche natural resources strategy investors can consider is timberland. Mercer’s specialist said that timber assets are relatively low risk, compared to agriculture and farmland.
“If current market condition are unattractive for harvesting, timber can be stored ‘on the stump’ and biological growth increases the size (and eventually value) of one’s inventory every year, no matter what is happening in the world around us.” the adviser told AsianInvestor.
This story was adapted from a feature in AsianInvestor's Spring 2019 magazine edition.