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Will hedge fund managers make good farmers?

Will hedge fund managers make good farmers?

hallfarmlandIn a recent article in the New York Times, Cash Crops With Dividends: Financiers Transforming Strawberries Into Securities, Alexandra Stevenson wrote about the hedge funds’ interest in farmland purchase. Hedge funds have already been eyeing farmland with purchases in recent years, now up to about $14 billion. But now Stevenson reports that there is a new twist, they are creating a “new asset class that ordinary investors can buy a piece of.”

A real estate investment company has been formed called the American Farmland Company. Its founder D. Dixon Boardman reported to Stevenson that, “It’s like gold, but better, because there is this cash flow.” The cash flow comes from rent farmers pay to lease the land.

The Wall Street Journal has also noticed investor interest in farmland. In the article More Individuals Are Looking to Invest in Farmland and Timberland, Liz Moyer reported that Farmland returned 20.9% in combined appreciation and income last year, and timberland returned 9.8%, according to an index compiled by the National Council of Real Estate Investment Fiduciaries in Chicago. Over 20 years, farmland has returned an average 12.5% a year and timberland has returned 8.3%, the group says.”

old farmer.morgue.file.For those who care about family farms, this new interest by hedge funds could not come at a worse time. The USDA predicts that 70 percent of U.S. farmland will change hands in the next 20 years. If so, will farmers (particularly beginning farmers) have a chance to compete for ownership of the land?

The USDA ag census documents farms by size in thirteen different categories. Between 2007 and 2012, the number of farms in all farm size categories decreased except for the top two (2,000 to 4,999 acres and 5,000 acres or more) and farms in those two size categories now control 56% of all U.S. farmland.

usda 2012 ag census farm size excerpt from table 9
Excerpt from Table 9 of Maryland 2012 Ag Census

In their USDA report, Farm Size and the Organization of U.S. Crop Farming, James MacDonald et al report that farm consolidation is a product of technology, farm organization and location and government policies. That analysis is certainly worth a read.

The report concludes that these large farms require increasing levels of technical and investment skills. They say that families now operate over 86% of all farms with at least 10,000 acres and the authors predict that they will continue to do so as long as they can manage the financial risks and as long as the strengths of family farms remain necessary to crop production.adv.

I will add that if these skills are no longer needed (or effective) or if family farms do not have adequate transition plans, then hedge fund managers may be there to step in.

In 1795, Thomas Jefferson wrote that “cultivators of the earth are the most valuable citizens. They are the most vigorous, the most independent, the most virtuous. . .” Will the same be said for hedge fund owners of farmland or their tenant farmers?

In the past, government policy has played a role in the trend toward farm consolidation. My hope is that implementation of the 2014 farm bill will allow independent family farms to continue to prosper, including the next generation of farmers.

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