|Mike Norman, anchor, HardAssetsInvestor.com (Norman): Hi everybody, and welcome to HardAssetsInvestor.com. I’m Mike Norman, your host. Well, what about farmland as an investment? We’re going to talk about that today with my guest, Shonda Warner, who is the managing director of Chess Ag Full Harvest Partners. I hope I got that right.
Shonda Warner, Managing Director, Chess Ag Full Harvest Partners (Warner): That’s correct.
Norman: Thank you very much for coming on the show. So, farmland? It kind of makes a lot of sense if you think about the last several years.
|We got a tremendous boom in agricultural commodity prices. And you know, we’ve heard people talk about, “Hey farmland’s a great investment; let’s go into it.” But you’ve put together an actual fund that does just that. Tell me about it.
Warner: Correct. Well, the fund itself is a limited partnership. And under that limited partnership there’s a private REIT, which is quite a tax-efficient way to own farmland. And there’s some hedging companies and holding companies to deal with other assets that don’t neatly fit into the REIT structure.Norman: So you go out, you actually buy farmland. This is all around the United States.Warner: All around the United States.
Norman: Then what? You lease it out to farmers, to produce crops on that land?
Norman: And the investors receive a cash flow?
Warner: Yes, they do, every year, a coupon. They clip a coupon just like a bond.
Norman: How does that compare, let’s say, relative to, currently, stocks or bonds? Well, bonds, it must, because it’s like zero percent interest rate, but I mean to stocks?
Warner: One of the great things about agriculture is there’s this huge bucket of data. We’ve got data going back 100 or 150 years, unlike a lot of the recent financial instruments. And so if you look at land prices or agriculture between 1950 and, say, 2008 or 2009, you really break the returns up into two pieces.
One is your current yield. That’s what you get for growing crops every year. This is row crop agriculture we’re talking about; permanent crops, citrus and things are a little bit different. But you’ve got a current cash flow, and you’ve got a long-term capital appreciation. And in the 39 most popular agriculture states in the United States, what that looks like historically is about 4 or 5 percent is current cash flow. And 6 percent or so has come from capital appreciation. And that’s between 1950 and 2009.
Norman: So 10 percent total return?
Warner: Yes, 10, 11 percent total return.
Norman: That’s good. That beats the average for stocks, which I think is about 8 percent historically.
Warner: Yes, that’s correct. But it’s just not a liquid asset. It’s not been very popular. There aren’t newspapers dedicated to it on a daily basis.
|Norman: But you know what you’re doing. And we’ll get into that, because you do. Because you came from the commodity side. You were a former trader at Goldman and Cargill, right, two of the biggest physical commodity trading companies in the world. So you’ve come from that side.But the interesting thing about the way you’re structured is that you receive the product, the actual cash commodity, as opposed to a cash payment.
Warner: We can do anything. Sometimes we take cash as rent. But most often we take bushels as rent, and we aggregate our bushels up …
Norman: Why do you do that?
Warner: Well, if you think about it, hopefully after 25 years in the business, at Goldman and Cargill, I might know something about hedging. We tend to know something about hedging. And so by taking the bushels, we take a little bit of that risk off a farmer’s back. And so we get a little bit of extra return for doing so.
So we might add another extra 100, 200 basis points to our current return by taking the bushels in lieu of cash.
Norman: Interesting. Now how has the response been to this product? I mean, I know you’re out there, you’re marketing it. You’re talking, I would imagine, to high-net-worth individuals, institutions. You know, everyone, I think, in their mind says, “Hey yeah, farmland, that’s a good idea.” But how is the response?
Warner: It’s really interesting. Back when we started this business, in 2006, we went around and talked to some institutions, anyone who would speak with us, and we sort of said, “Hey, this is what we’re going to do.” And they said, “Ooh, that’s interesting. Very exotic.” And we said, “No, no, no, no, no; it’s very basic. We’ve gone full circle back to the basics.” And they were interested, but it seemed very, very out in left field.
Today, having gone through the crisis and everything, much … I mean, not that we were ever excited about a lot of securitized assets, and when I left the investment world to start this … but I never dreamt that it would be as bad as it got. And so people are burned. They’re much more receptive to farmland. “Ooh, I just want to go touch my investment.”
Warner: And I understand that. And there’s something very attractive about that. But now the issue is a lot of people don’t like illiquidity. I’m fascinated by the subject of what kind of premium should someone accept? Or, what kind of premium is correct for illiquidity vs. liquidity in investments these days? I always say yes, but, gee, if everybody’s in the same liquidity bucket, and they’re in the same Treasury bond, and there’s 50 trillion people here, when something happens and everyone runs for the door, you’re going to have a very sharp and severe reaction.
Norman: Well, not in Treasury’s because it’s backed by essential bank …
Warner: But they could go down rapidly.
|Norman: Right. But by the same token, this sort of investment … and I think it’s here to stay … I’m sure you believe the same thing, or you wouldn’t be setting up the company. But is there an aspect or kind of fad or fashion to it where people get scared because traditional investments get hit? And then they’re like, let’s run the farmland. I can touch it …
Warner: Yes, there is.
Norman: Just that statement, “I can touch it”?
Warner: Of course it’s an investment that’s here to stay. It’s been around much longer than stocks and bonds. Agriculture is one of the oldest ventures in the world. And it’s going to continue to be; we eat. But it is a little worrisome. There’s a lot of firms popping up even in the last few months. The wheat rally. It’s one of the few asset classes that has done well, or was quite stable through the financial crisis. So that makes it attractive to people.
And you worry about … I hope that people have been out in rural farming communities for a long time before they start a fund. Because price … it’s very difficult to go and buy right. You need to know what you’re doing. There’s lots of cultural issues.
Norman: There are. How would somebody … your average investor … is there a way for them to get involved in something like this? Is there an ETF? Are there stocks or companies that own farmland, and you can invest through an equity, or something like that?
Warner: In the United States there are – and globally, there are a number of listed securities. None that really invest directly in farmland. I think that there’s a company in Brazil that’s listed that does. But for the most part, there might be fertilizer companies; they would have ancillary agricultural activities associated with them.
There is an ETF. I think that there might be several now. But the one I’m most familiar with is MOO – what a fantastic name.
Norman: Which is the creation of Van Eck, which is the sponsor of this very Web site.
Warner: And Van Eck certainly … I mean, those guys have been around a long time. They’ve been through the ropes. They know about crazy speculation. I really admire the brothers; they’re great guys.
Norman: They do a great job.
Warner: They do a wonderful job. But yes, MOO is … so you can go out and buy MOO. You can go buy a farm, if you want. That probably needs a little more capital.
Norman: And do essentially what you do: then hire, lease the farm …
Warner: You could lease it out to a farmer. But you would really probably not pay the right price unless you knew the area, had done a lot of research. You might have to go hire a farm manager, all of this kind of thing. It’s not as easy as it may sort of dreamily sound. So that’s a possibility.
You can buy an index. There’s lots of soft commodity indexes that expose you to the grain or to whatever else that might be. There’s a few funds out there that invest, like ours, directly in farmland. It’s a slightly higher-ticket item.
Norman: All right, well there you go, Shonda. A whole new piece of the farm, a piece of that earth. All right; that’s it for this part of my interview with Shonda. We’ll be back next time. This is Mike Norman, take care. Bye-bye.