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Institutional investments in livestock ventures

Brett MacNeil for Progressive Forage Published on 27 February 2019

In a white paper co-authored by HighQuest Partners and Julie Koeninger (2017), the authors summarize in their opening sentence, “Over the past three decades, farmland investing has grown exponentially from a ‘niche’ investment dominated by a few large pension plans and insurance companies to a mainstream institutional real asset class that increasingly can be accessed by retail-oriented investors.”

Since 1985, when the farm crisis was more visible in the rearview mirror than in the windshield, a handful of institutional investors focused on farmland has grown to an ever-increasing pool of domestic and international public and private institutional investors. In a 2018 report by Valoral, the authors mention over 440 funds operating in the food and agriculture sector, compared to only 38 in 2005 – closing in on nearly $100 billion in assets.

Competition has increased significantly, while volatility and declining commodity prices together with uncertain global geopolitics are more the norm today. More importantly for the producer, the opportunities to source capital beyond the customary debt channels has increased exponentially.

Catalysts

The National Council of Real Estate Investment Fiduciaries (NCREIF) developed a Farmland Index (established in 1995 and now with 23 years of history) that helped increase the acceptance of and confidence in the asset class, enabling institutional investors to compare farmland investments regionally and across crop types to other more seasoned asset classes, including commercial and industrial real estate, equities and bonds, for example. Unfortunately, the index does not track investments in animal proteins but focuses exclusively on permanent and row crops.

This will require anyone seeking capital in the animal protein space to obtain, analyze and defend their own historical data. If you are not involved in a peer group or benchmarking program, you might consider it, as the benefits are invaluable – some less obvious than others.

Current environment

We have conducted our own internal analysis of regional farmland returns, which are commonly referred to as income (rent) and appreciation, which when combined represent a total return (typically presented as an IRR). Depending on the region, we have from 10 to 25 years of history for appreciation and, using farm-specific cash flow budgets, we have determined what is a reasonable and sustainable income or rent value depending on whether it is a joint venture, directly operated by the investor or leased to a tenant.

Generally speaking, a pure commodity farmland investment will typically offer the investor a 3 to 4 percent cash income return and appreciate from 2.5 to 7 percent annually over time, for a total return of 5.5 to 11 percent. For permanent plantings that require increased capital improvements, more limited cropping variety and a longer-term investment horizon, we see the income return requirements and performance increase to nearly double row-crop cash returns.

Appreciation (or depreciation) follows more of a bell curve as permanent plantings, similar to a mama cow, come to maturity and eventually decline in productivity. Looking forward, we would like to expand our analysis to include purely livestock ventures and are narrowing our regional and operator focus in order to help prepare operators and investors for the underwriting process unique to the animal sector.

As noted, competition is increasing on a fixed asset base and, as a result, the later entrants to the food and agriculture class are seeing compressed returns as a result – hence, looking downstream and making vertically integrated investments, investments in ag tech and more offshore investments. Notably, we are also witnessing significant investments in animal protein businesses offshore and more interests domestically.

Consider the recent investment by Pinnacle Asset Management (aligned with Arcadia Asset Management and Ospraie Management) of the JBS cattle feed unit early in 2018, for reportedly $200 million including 11 feedlots located throughout the U.S. and representing 900,000 head of cattle.

Or consider the purchase of a 38,000-acre ranch in Florida by Dubai SWF in partnership with Optimum Agriculture for $136.5 million. Let’s not overlook Oceania, where investors’ interests in the cattle sector is mature and ongoing. Animal protein investments there are a regular occurrence. Rural Funds Management, for example, is reported to have just completed its third acquisition this year involving two cattle operations and one cotton farm, all of which are tenant-operated.

The number of domestic and foreign funds expressing or indicating an interest in investing in animal protein ventures is increasing. A search of the Prequin database (a reliable source of data spanning private equity, venture capital, hedge funds, private debt, real estate, infrastructure, natural resources and secondaries) reveals 21 domestic fund managers (91 separate investors) indicating they have interests in animal proteins (beef, dairy, poultry, sheep or swine). Globally, this list increases to 85 fund managers (186 separate investors).

Clearly the pendulum is swinging and, with the experiences offshore, it is only a matter of time until we start to see investors move more deliberately into the animal sector domestically. The earliest entrants will position themselves as impact investors seeking similar returns, as noted above, but in sustainable grazing operations, using holistic, regenerative grazing techniques.

Animal protein hurdles

We are often told the risks in animal protein investments are bothersome to the institutional investors. However, after doing an in-depth comparison of the variety of risks in both sectors, we do not see an overwhelming risk in animal sectors when compared to other farmland opportunities. Sure, if it eats, it could die, but we have seen our share of crop failures.

Consider the greening in Florida citrus or the red blotch in California vineyards, or blight, nematodes, weather, waning and waxing consumer preferences, etc., that affect many crops. We feel the true barrier is knowledge-based, or rather a lack thereof, tied to perceived risks rather than real risks and can be overcome with a better understanding of the business and benchmarked data.

Certainly a valid concern for the investor is the professional level to which operators manage. Those who have a well-defined organizational chart, use GAAP accrual accounting and a written growth and risk management plan, for example, take preference.

The depth of the tenant pool in the animal proteins class is less than in, say, central Illinois farmland. To overcome this, the investor will need to refine their organizational due diligence efforts and put more emphasis on the operator, their strategic positioning and operating systems, and their ability to execute.

Warren Buffett is often quoted as saying something like, “Invest in business managed by leaders you like, trust and respect; then get the heck out of their way.” We know many of these types of livestock managers and are working with them to develop the data while positioning them to attract capital for growth while educating investors.

Overcoming barriers and positioning

Success favors the prepared. When looking to attract investors, farmers and ranchers can:

  • Professionalize their operation by being disciplined stewards of not only the natural resources but the business in general

  • Have a succession and transition plan (this is key, especially in ranching and livestock operations) to address the limited operator pool

  • Create key performance benchmarks and keep them up-to-date

Pricing or investment return pressures are catalyzing investors to look outside their usual sand boxes and consider niche investments in areas like animal protein.

If you are looking for capital to fund growth, affect succession planning or to facilitate other strategic moves, consider institutional investors who we predict are more willing today to consider investments outside their core. Approach them with a partnership mentality.  end mark

Brett MacNeil is the President and CEO of Scythe & Spade Company. Email Brett MacNeil.

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