Agriculture is a great thematic investment, tapping into the trends of a growing global population and rising affluence. If you've already bought the tractor (Deere & Co.), the seeds (Monsanto Co.) and the fertilizer (Potash Corp. of Saskatchewan Inc.), farmland looks like a natural next step.
The good news: It is an easy step to make, thanks to the recent arrival of investments that give you a slice of land without the early mornings.
The bad news: These investments are off to a rough start, and they don't look like a buying opportunity just yet.
Farmland Partners Inc. began trading in April and has since fallen 20 per cent (not including cash distributions). Gladstone Land Corp. began trading in January, 2013, and has already slumped 17.5 per cent.
These are real estate companies, aiming to become real estate investment trusts, that hold a portfolio of farms instead of more typical REIT holdings such as hotels, apartment buildings and shopping malls.
Farmland Partners has a portfolio of 41 farms, producing corn, soybeans and wheat in Illinois, Nebraska and Colorado, along with three grain storage facilities. Its shares yield 3.8 per cent, with income generated by rents.
Gladstone has stakes in 28 farms in five U.S. states, with an emphasis on berries and vegetables. The shares yield 2.9 per cent.
The concept is great as a long-term play: Farmers do the work, the world eats the food and you get the money. Indeed, the idea has long attracted institutional investors such as global asset manager GMO, especially over the past decade.
Julie Koeninger, GMO's product strategist for timber and agriculture, recently outlined the advantages of adding farms to a portfolio: "Farmland has historically generated attractive returns, with excellent capital preservation and portfolio diversification at a low to moderate level of volatility," she said in a July white paper.
The National Council of Real Estate Investment Fiduciaries reports that its Farmland Index has produced average annualized returns of 12.5 per cent over the past 20 years. That beats the average of 9 per cent for the S&P 500 and 8 per cent for the S&P/TSX composite index, to the end of 2013.
What's more, farmland tends to have a low correlation to assets such as stocks and bonds, which means that it can provide stability during rough times for more mainstream assets.
So what explains the poor returns from farmland real estate companies?
Perhaps part of the reason for the underperformance is simply farmland's low correlation to other assets; stocks and bonds have been doing well.
But there's likely more going on here. These investments tap into at least three red-hot trends that are now sputtering.
Farmland values had soared in recent years, raising concerns that they were forming an asset bubble. Now, though, they are levelling off as lower prices for corn, soybeans and other crops put a serious dent in farmers' incomes.
Last year, these incomes hit their highest level in four decades (in inflation adjusted terms), but the U.S. Department of Agriculture projected in February that they will fall 27 per cent this year, to their lowest level since 2010.
And third, while farmland is a play on agriculture, it also appeals to income-seeking investors who have had to endure slim bond yields for years. However, the market is anticipating rising U.S. interest rates next year, which could threaten yield-bearing investments like REITs.
Add it up, and you get the feeling that farmland hit the public market at a time when everything was lined up in its favour.
The declining share prices are an encouraging sign that enthusiasm is cooling and the sector is growing more attractive – but it is important to watch how these companies navigate the shifting environment over the next year.
Just as planting seeds too early in the season isn't going to produce crops, buying stocks too early won't produce gains.