Friday, December 23, 2011

A Farmland REIT

Why are there no (or no major) REITs built on farmland? There are REITs constructed around timber, healthcare property, malls, almost any other type of property, but no major farmland REITs. I’ve seen farmland purchased by limited partnerships, pension plans, and private equity funds, but I have yet to see a major REIT presence in agriculture.

For a long time, I have toyed with this idea, and for many years I assumed it was because there wasn’t a demand (as well as "compliance" problems noted below). However, with the price of farmland skyrocketing (see the December 15, 2011 WSJ article A Bubble Down on the Farm?) now would seem the ideal time to create such a REIT. Note, I say “ideal” time from a product marketing perspective – the capital should be easy to raise. I do not say “ideal” time from an investment perspective – anytime an investment is hitting all time highs, commanding interest from major publications like the WSJ, and the topic of cocktail conversation, the value boat has likely sailed. With all that fanfare, a Google search revealing only a handful of potential farmland REITs is perplexing.

Again, although I’m not championing a farmland REIT at current valuation levels – I think the idea has long-term merit / viability. Perhaps we can hash out the details of how to construct one now and be prepared for down the road when/if farmland becomes a good value – you know, when we bang our heads against the wall to raise capital in a great out of favor value investment. 

 A few bullet points on how I think a farmland REIT could be structured:
  • Focus on a geographically and seasonally advantageous product – wheat for instance (or more broadly, small grains). The wheat belt runs from central Texas up through the western Midwest and on into the Canadian prairies. The life cycle of wheat, particularly harvesting, follows the same south to north progression, with harvest beginning in Texas (late May) and running sequentially north until early September at the Canadian border. More so than other commodities like corn, soybeans, or cotton, wheat follows a sequential progression north, ideal for exploiting economies of scale. 
  • Although REITs are typically rent takers, whereby they simply own and lease their properties (be they malls or condominiums) to end users, economies of scale can be realized by an operating subsidiary. Under the REIT Modernization Act of 1999, a REIT can own 100% of a taxable subsidiary that provides service to tenants and others. In other words, a REIT could buy up acres strategically located at intervals throughout the wheat belt, lease the acres back to a local farmer, and provide an operating subsidiary that furnishes labor, equipment, and ancillary services back to the lessee. 
  • In modern agriculture, (most) farmers are price-takers. A REIT operation acknowledges this and instead puts the focus on what can be controlled – costs. Spreading costs around through geographic diversification, higher equipment utilization, and buying/selling power. 
  • Equipment and technology costs are the biggest single line item expense for most modern farms. A REIT that could provide well maintained, modern machinery in a timely and cost efficient manner that could save precious pennies per bushel (think of a more focused version of
  • It is estimated that 40% of farmers in the U.S. are 55 years old or older. Some of those operators may not be ready to retire, but they are ready for some “help.” These farmers are good managers, but they are looking to transition their careers toward more of a management role. They may not have family interested in farming, are sick of trying to find reliable seasonal help, and they would like a partner. A sale leaseback with these operators would likely prove ideal. 
  • Of course, we can’t ignore FSA payments. We can argue whether they are good or bad, but they are a fact of modern agricultural life. Although the REIT would be cash leasing the ground to individual farmers who would be charged with complying with regulations and staying under payment cap levels, the link to the REITs operating subsidiary may be deemed material and thus cause for loss of payments. Just throwing out numbers, but if somewhere between 5 – 30% of top line farm revenue comes from the USDA, loss of this revenue would be catastrophic to a REIT model. 
Again, all of the above is just theorizing on the merits of the business model itself, not whether it is a good investment opportunity today. Also, I haven’t set pencil to paper (or in my case, cursor to excel spreadsheet) to see about the financial feasibility of such an enterprise. Finally, I have no direct knowledge of the legality and/or insurability of such an operation.

Bottom-line, I haven’t talked myself out the idea that a farmland REIT could be an efficient and margin improving business structure. I don’t think now is a good time to invest in a farmland REIT, but structured correctly, it could be a good way to apply the Wal-Mart model to another highly competitive business.

And yes, I talked about destroying the American farm, building up corporate agriculture, mimicking Wal-Mart, and how much revenue farmers receive from Uncle Sam all in one article. That should be enough to get me banned from the Farmers Union for life. Enjoy!

Harvest Investor © 2011. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advices, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.


Anonymous said...

Interesting post - thanks

tinbox said...

I know someone who has tried this (in Canada) and it was a pretty time/labor intensive process to acquire the land.

Further, leases should be renegotiated annually. And the land is worth a lot more to adjacent farm operators than anyone else, no? Nobody wants to drive 100 miles to work another piece of land in addition to their current operations--so the leasing options may be constrained.

Lastly, the farm industry is not short of capital and/or credit to spend on farms, so there isn't a business need for a REIT in this sector to supply capital.

It's a big market, though...and there must be some way to crack it. Estate planning is a big issue for farmers, so if the REIT was able to bring tax advantages to a farmer or his/her descendants, then that would be a huge plus.

tinbox said...

HAIG has been around for quite a while. Here is their link:

and in Canada, AgCapita is aggressively trying to raise capital:

tinbox said...

I believe that CRP was launched on the basis of great investor demand for ag exposure through equities. Since the launch was at the peak of interest, the performance has been pretty bad.

FWIW, there is a small listing on the TSE, HAY.UN, that is designed to track the ag sector. That has so far failed to catch on.

Spike said...

Tinbox - you bring up some very valid points. Estate planning and tax advantages would be a huge benefit in addition to any economies of scale a farmland REIT could offer.

HAIG and AgCapita both occupy the institutional / private equity area of the market, but have never gone the next step to move into a REIT. Perhaps you're right and there isn't enough economic incentive to propel a REIT forward. I do find it interesting that HAIG claims to own 1,000 acres of farmland in Quebec - it had been my understanding that only Canadian citizens / corporations could own Canadian farmaland - perhaps I'm wrong on this issue (occam's razor would point to this explanation).

HAY.UN is new to me - interesting concept.