Lile Real Estate in Arkansas Democrat•Gazette Business Section
Lile Real Estate founder and principal broker, Gar Lile, was featured in the Arkansas Democrat•Gazette's Business Section on Sunday, October 17, 2010. The section highlighted the recent investing from hedge funds, pension funds, and wealthy individuals in the ag sector as a safe-haven for placing money in this turbulent economy.
Investors snapping up farms
Pension, hedge funds using land to diversify portfolios
LITTLE ROCK — Increasingly, buyers of farmland in Arkansas and around the country are not farmers. Pension funds, hedge funds or wealthy individuals are looking to diversify their portfolios and find stability as markets struggle with periodic recessions.
Farmland was one of the few assets with almost continuous growth through economic downturns in the past two decades.
From 2006 through 2009, U.S. and Arkansas farm real estategrew in value about as much as the broad-based S&P 500 stock index lost - about 5 percent a year on average.
The trend in Arkansas continued this year with a 4.6 percent increase, reaching $2,500 an acre, according to an August report from the U.S. Department of Agriculture.
Farm real estate includes cropland, pastureland and farm buildings. The value of Arkansas cropland, in particular, has increased 7 percent in the past year, to $1,990 an acre.
Gar Lile’s Little Rock based real estate firm deals mostly with clients looking to invest in farmland. Clients include local professionals and funds looking to move money out of the stock market.
Business is booming, he said.
“Farmland has provided those stable returns at a relatively low risk, when you compare it to other investments,” Lile said.
Randall Pope of Jonesboro, president and director of Westchester Group of Champaign, Ill., manages 320,000 acres in Australia and the United States, including an undisclosed amount in Arkansas. He said the firm has seen a 100 percent increase in the value of assets under its management in the past three years, as institutional investors have increasingly entered the market.
The Westchester Group helps institutional and corporate clients, as well as individuals, purchase and manage farmland.
The land it manages, like most other land held for investment purposes, is leased to farmers either for a fixed payment or a share of the costs and production. Terry Griffin, an assistant professor of economics with theUniversity of Arkansas Divi-sion of Agriculture, said the crop-sharing arrangement is dominant for rental properties in Arkansas.
Crop-share leases have been a common way for knowledgeable landowners to maintain a connection to farming, Griffin said. As more farmland is purchased by investors who have less interest in taking on the risks associated with crop production, he expects cash leases to become more common.
“A cash rent is impersonal, more like an investment. The landowner doesn’t have any direct link to farming,” he said.
TIAA-CREFF, a New York City-based pension-fund manager, bought Westchester Group earlier this month, saying in a news release that the acquisition reflects its confidence in agriculture asan investment. TIAA-CREF, which invests for 3.7 million workers and retirees, and has more than $426 billion in assets under management, has investments in more than 400 farms around the world.
Farmland nationwide is becoming more valuable in part because farms have become more profitable and are expected to continue in that direction, said Jason Henderson, vice president of the Omaha branch of the Federal Reserve Bank of Kansas City.
The U.S. Department of Agriculture has forecast farm income to increase 24 percent in 2010 from last year, to $77.1 billion. That’s $12.3 billion higher than the average annual net farm income in the previous decade, and the fourth-highest ever.
U.S. agricultural exports are expected to rise as well, because of the weak dollar and low worldwide supplies in some crops, such as wheat and cotton. Looking at longterm prospects for growth in some Third World countries, investors see opportunity for even more demand, Henderson said.
POSSIBLE THREAT
While farmland is currently a good bet, some worry that the influx of investors will make that market less stable.
Pope noted that while pension funds are large players in the market, the presence of hedge funds and private equity is growing. Pension funds might hold land for 20 or 30 years for retirement accounts, whereas hedge funds have more of a “buy and sell” strategy, looking to exit the market within 10 years.
“If you’re going to own the land for a long period of time, you’re generally more likely to make investments back into the land, capital improvements to the land,” Pope said.
Shonda Warner, whose Clarksdale, Miss.-based Chess Ag Full Harvest Partners manages funds that have bought farmland around the country, including in Arkansas, said she worries that the new investors will flee the market at the first sign of trouble.
“We’ve become concerned that ... a whole bunch of people will come in and buy high and sell low because their expectations aren’t met,” she said. “It’s not good for the land, it’s not good for the farming community, and it’s not good for the rural communities where we all live.”
Warner said investors should not buy farmland for short-term gain.
“When I hear people get this gleam in their eye and talk about farmland at a dinner party in New York, I’m like: ‘No, no, no, you don’t understand. ... Let me tell you about 1983,’” she said, referring to a year when farmland value fell sharply.
’80S DOWNTURN
In the 1980s, a global recession weakened demand for crops. U.S. exports and prices fell, causing farm income and land value to drop as well. From 1980-87, farmland lost 5.2 percent of its value every year, according to a 2008 study of farmland value by Henderson.
There are signs that farmland is currently overvalued, Henderson said in a telephone interview. Its value should be directly related to the amount of income landowners can derive from it. So land value and rent should rise or fall in lockstep, Henderson said. But land values are growing faster than rent, which can be a sign of a bubble developing.
But if farmland values do reverse course, the impact would not be as severe this time, Henderson said. Farms have less debt than they did in the 1980s, so a decline inprices wouldn’t produce the same number of forced sales that rippled through the farm sectors and devastated rural economies.
On the whole, investors are good for farmers, who are able to handle larger tracts than ever before thanks to advanced technology but need capital to afford it, Warner said.
And while farmers looking to buy land can be priced out of the market by the added competition, high prices are good news for farmers who own their land and want to use it as collateral on a loan, said Greg Cole, president and chief executive of AgHeritage Farm Credit, a Little Rock based farm lender.
“If you’re a farmer out there and you have 1,000 acres, and someone is buying farmland and it’s going up a big percent, it means you can borrow more money,” Cole said.
