A look at the role of farmland in pension portfolios
There are different ways that pension funds can think about how farmland fits within their portfolios, says Bernice Miedzinski, president of StarBridge Capital Ltd.
For instance, many large plans would consider it as part of a natural resources allocation and other plans might consider it as part of their real asset allocation, she says.
Farmland can compliment an investment like real estate because it’s inflation-protected, it stores value and can offer a stream of income, yet it has different risk-return drivers, making it a diversifier within a portfolio, adds Miedzinski.
Also, farmland isn’t as frothy as real estate or infrastructure, she notes. “I actually think long term, especially Canadian, farmland is actually undervalued. I don’t think it reflects the true long-term value, so it’s an opportunity to buy some assets within the real assets buckets at a better price.”
Pension funds can also use farmland as part of a liability-hedging allocation or in a growth allocation. “I’m actually a fan of putting farmland as part of your liability-hedging bucket because I see it more as a real return bond with a better coupon,” Miedzinski says.
Where a pension fund decides farmland fits best will be specific to its needs, she adds, noting this may depend on whether the fund is invested purely in the land or it’s invested in the land plus operations. Of course, there are risks when it comes to investing in farmland, including those related to the quality of the land, the soil and the climate.
If the investor is assuming some operation of the land rather then just leasing it out, this could include additional risks, she says, noting regulatory and political risks are present as well.
“Then, of course, you’ve got things like economic risk, like financing, access to financing to acquire land or to lease your equipment, whatever it is. You’ve always got commodity prices, you’ve got currency risks. These are all the economic issues you’ve got to think about.”
It’s all about what role farmland is playing within a portfolio and if the plan is comfortable with the risk, says Miedzinski. For instance, a plan can take a low-risk strategy of investing in core Canadian farmland that isn’t levered and can be leased out to high-quality farmers with a certain return expectation.
“Now that would be a fairly low-risk strategy, in that you don’t [directly] have currency risk,” she says. “Indirectly, the farmers do, but if you’re not assuming any of that operational risk, your core risks are really the credit risk of the farmer and then the key is, when are you collecting the lease rentals, etc? So that’s a fairly low-risk strategy and then it’s really the fundamental drivers of the productivity of the land over the long term.”
However, an investor can go to the opposite extreme and invest in permanent crops that may have specific risks or take on operational risk, she adds, noting that if it does this, it will want to get paid for the additional risk with a private-equity-like return.