Illiquid assets

GLOBAL INVESTOR 1.15 — 43
the shortest time frame to see results, but
that renders the investment rather prone to
the fortunes of just a few growing or production
seasons. Capital gains on farmland
are also likely to accrue more reliably over
longer horizons.
What kind of return can investors expect?
Griff Williams: A good internal rate of
return would be around 12% to 15% per
annum. This is likely to be split between a
cash yield on the farm products of 6% to
8% and a similar appreciation in the capital
value of the farmland, as it is improved.
Would you say that any one kind of crop
or product is superior, from an investor’s
point of view?
Griff Williams: I have looked at opportunities
in dairy, livestock, cotton, sugarcane
and fruit, soya, grains, and other rotational
crops. Each has unique and demanding
characteristics that require very solid experience
on behalf of the farm managers.
Investors may have an affinity with a particular
farm product, which is legitimate, but
it shouldn’t bias the objective judgment of
their returns and risk levels across the cycle.
All the farm products benefit from intractable
global demographic trends, but within
this rising demand trend, some crops are
considerably more volatile. Alternatively,
some are more demanding – for instance,
dairying requires much more investment
and stock management than sheep farming.
What approach should investors take?
Griff Williams: Maximizing sustainable
yield and minimizing environmental risks
means that it is critical to partner with real
farm operators. The skills the investor
should try to access are centered on rural
productivity, rather than on land speculation
or investment vehicles that mainly back
trades in the agricultural futures markets.
These markets have quite distinct returns
time frames and performance drivers from
the farmland itself.
What are the special characteristics of
investing in farmland globally?
Griff Williams: The key point is that
agriculture, in many countries, remains a
politically defined investment universe.
Certain governments restrict direct farm
ownership to residents, while others link
subsidy payments to the farm’s output. A
set of agricultural economies, however, has
liberalized its farming sector to reflect global
market prices, and these countries have
seen substantial efficiency gains. New
Zealand is the classic example here, ditching
“Maximizing sustainable
yield and minimizing
environmental risks means
that it is critical to
partner with real farm
operators.”
Griff Williams
Griff Williams
The New Zealand national comes from
a farming family on the North Island,
where he continues to have dairy farming
interests. At Milltrust he is responsible
for designing and co-managing the
globally diversified agricultural strategy
with special focus on Australia and
New Zealand. Prior to Milltrust, he was
Head of Europe and Interim CEO of Itaú
Asset Management.
farm subsidies virtually overnight in the
mid-1980s. The New Zealand dairy sector is
now the most efficient in the world, and few
farmers would seek a return to government
involvement in the price-setting process.
Australia has also largely cut out farm
support. Other countries, such as the USA,
have more recently and gently modified
farming subsidies. The 2014 US Farm Bill
took the positive, though modest, step of
lowering direct payments and replacing them
with crop insurance provisions. Globally,
rich-country transfer payments to the agriculture
sector have been a major obstacle
to free trade agreements. It’s important
to stress that agriculture can survive and
thrive in a high-income country, without
state price support. Finding those liberalized
land opportunities, and conducting the vital
due diligence on legal systems, security of
title, environmental and marketing systems,
does require a broad range of skills.
Have you identified some best-practice
markets, or does it vary from farm to farm?
Griff Williams: The set of undistorted
farm product opportunities is quite small, in
country terms. The best operating environments
are seen across Australasia and in
selected Latin American countries such as
Uruguay, Paraguay and Brazil. Once a
number of farmers in a given country adopt
the best technologies and practices,
the pressure on the other farmers builds up
rapidly. This is as true of yield-enhancement
techniques as it is of sustainable
farming practices. Still, there are enough
underper forming farms in countries with sufficiently
good investment conditions to provide
opportunities for a portfolio approach.