Agricultural REITs--short for real estate investment trusts--may be infant businesses at the moment, barely a ripple in the trillions of dollars of farm real estate. But news that Farmland Partners Inc. (NYSE:FPI) smashed real estate records last week by acquiring 120 Illinois farms totaling 22,300 acres certainly piqued reader interest, as did DTN's exclusive interview with Farmland Partners CEO Paul Pittman (see two related stories http://www.dtnpf.com/… and my October 2014 interview http://goo.gl/…).
Readers divided into two camps: Jim from Denver, a retiree from the farm equipment business, wonders if the same sort of investor phenomenon could happen in Iowa where he has made a nice living crop sharing on 2,000 acres and just bought another farm this week. (Possibly, but not likely. Iowa's attorney general says he likes the state's corporate farming ban as is, but legal scholars believe the law lacks a defense given the landmark 2006 Eighth Circuit Court of Appeals ruling that Nebraska's corporate farmland ban was unconstitutional).
"If I were buying farms, I wouldn't want to compete with a REIT. On the other hand, if I wanted to sell I couldn't take their money either," Jim said.
A farmer from northeast Colorado-southwest Nebraska who works with multiple pension funds observes investors have a sizable influence in his community. But his pension fund landlords are "large and patient," with total ag exposure just a few percent of their overall portfolio, so they don't flip land frequently to boost returns.
"It remains to be seen if traders [like Farmland Partners] will understand and value the long-term cyclical natural of agriculture," he said.
Given the aging farm population, he doubts the trend toward institutional ownership in agriculture will reverse--"especially with so many farmers wanting to cash out when land prices are near all-time highs and commodity prices are at recent year lows."
Gordon, from Brookings, S.D., agreed with Farmland Partners' CEO Paul Pittman that farmland's outlook remained bright long-term. "I too am a believer in farmland and ag processing as very good long term investments and legacy assets," he emailed.
On the other hand, other readers questioned Pittman's premise that grain producers won't need much cash rent relief for 2016, despite dire warnings from land grant economists. Pittman rationalizes that farmers will hold on to rented ground for zero profit, if they believe prices will recover in the next two or three years. He cited phenomenal crop yields for some of his tenants in eastern Colorado in 2015 as proof that growers will have deep pockets to afford tight margins in 2016.
John Higgins lives "smack dab in the middle of eastern Colorado" and emailed, "In reading your recent article on mega landlords I was struck by Mr. Pittman’s comment about dryland corn in eastern Colorado averaging 120-140 bushels per acre [in 2015]...while there could have been a field or two make that kind of yield the vast majority of corn I have heard of on a dryland basis is much closer to 70 bushel corn. Historically we beg for an average of 60 bushels on a 10-year basis. Mr. Pittman may understand Illinois farming but I feel that he has no real understanding of the environment out here on the High Plains. We have had young people cash leasing land at double the previous going rate and most of their assets have been on Big Iron or Purple wave auctions within a couple of years. It is interesting that most of these young farmers have had to go to the front range to get financing because the banks out here in our country understand the economics of the farming game in our area."
I can see both sides but the entrée of Wall Street funds into agriculture raises some policy questions worth discussing:
--Are the nine Midwest state bans on corporate ownership of farmland still worth defending in light of the 2006 Eighth Circuit Court of Appeals ruling that found Nebraska's law unconstitutional? If they are, are states enforcing bans vigorously or just ignoring toothless laws?
--Do REITs provide a public service to agriculture by increasing the pool of land buyers in the market place, or do they make it more difficult for young operators to get a foothold as operators?
--Do institutional owners like insurance companies and REITs deserve preferential taxpayer-backed credit to buy farmland? Farmland Partners' current $165 million facility from Farmer Mac includes three-year, interest only notes as low as 2.4%, something no individual farmer could garner on his own.
Given the speed of institutional money flowing into farmland, the issues are worth raising. Just this week, the New York Times reported that TIAA-CREF’s Brazilian farmland holdings climbed to 633,391 acres at the start of 2015, up from 257,877 acres in 2012 (http://goo.gl/…). That was in spite of the country's limits on foreign ownership of farmland. Will we duplicate that kind of scale of Wall Street ownership of U.S. farmland?
Follow Marcia Taylor on Twitter@MarciaZTaylor
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