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Pension fund investments in ag — a growing business

Agricultural investments by the nation’s 1,000 private and public pension funds account for about 5 percent of the funds’ total investments.

Five percent seemed minuscule until an ag investment fund manager pointed out those pension funds have $7.4 trillion dollars invested in them. Not m, not even b, but t as in trillion.

Seemingly teeny agricultural investments in all pension funds represent a whopping $370 billion.

And, according to the experts speaking at the recent 78th annual meeting of the American Society of Farm Managers and Rural Appraisers (ASFMRA), investments in agriculture are providing a consistent, attractive return and a hedge against inflation with minimal risks.

Investing in U.S. agriculture 25 years ago was one of the riskiest investments available, according to Clay Jackson, western regional manager for US Bank. Today agriculture investments rank lowest in defaults.

Agriculture is good business for farm managers and rural appraisers and that is why major commercial suppliers like seed companies, chemical manufacturers, 1031 exchange specialists and others were eager to talk about their products and services to the more than 350 people on hand for the annual ASFMRA gathering that attracted certified appraisers and managers from across the U.S.

The ASFMRA not only listened to sales pitches, they also spent the week in San Diego honing their skills as appraisers and farm managers.

Several ag investment portfolio managers had high praise for ASFMRA professionals and their vital role in agricultural investments.

In this era of uncertainty in many financial and real estate markets, agriculture is performing well and has been for several years, according to those who manage ag portfolios.

From 2002 through 2005, American farmland appreciated by roughly 50 percent, according to U.S. Department of Agriculture data. The investment appeal of farmland includes steady income from rents, along with appreciation that tends to run ahead of inflation.

The Hancock Agricultural Investment Group (HAIG) is one of the largest institutional managers of agricultural real estate in the U.S. According to Oliver Williams, HAIG director of asset management, the subsidiary of John Hancock insurance manages agricultural assets valued at $900, million covering almost 150,000 acres in the U.S. and 7,400 acres in Australia.

The U.S. properties are in 17 states broken down into 41 percent row crops and 59 percent permanent crops, including the two biggest pieces of the HAIG asset pie, 18 percent in almonds and 18 percent pistachios.

HAIG manages portfolios of farm properties for large investors and reports returns of better than 20 percent for each of the last three years up until 2006. The minimum investment is $40 million.

This HAIG economic performance has been driven by the two nut crops produced primarily in California. Pistachios and almonds have benefited from a relatively weak dollar, which aids exports, and from research suggesting that they may contribute to cardiovascular health.

Also fueling this growth in ag investments and returns, according to Williams, are skyrocketing land values thanks to a cornucopia of commodities reaching record and near record prices and production levels in both row crops and permanent crops.

“Agricultural exports are projected to reach $95 billion dollars by 2016,” predicted Williams. That will not hurt American agriculture’s future.

Also Williams said ag is an attractive investment due to its low debt to equity and debt to asset ratios.

The government emphasis on developing energy in agriculture with biofuels and wind farms is just another economic plus for farming.

“Farmland is now a very compelling investment,” said Williams.

Agricultural investors are adding to the land and farm investments by investing in processors of agricultural products like almond hullers/shellers and pistachio and vegetable processors. They also are moving into biofuel plants and wind farms as the nation looks to agriculture as an energy producer.

The largest pension fund in the U.S. is the California Public Employees’ Retirement System (CalPERS), which owns $254.8 billion in stocks, bonds, funds, private equity, and real estate to generate income to provide pensions, health care and other retirement services for approximately 1.5 million California public employees.

According to Richard Brockmeyer, Napa, Calif. wine industry consultant, CalPERS earmarked $300 million for investing in agriculture a few years ago. CalPERS has a real estate portfolio, including agriculture that totals more than $13 billion.

Some $200 million of the agriculture investment package went into a partnership with Premier Pacific Vineyards (PPV) based in San Francisco, to develop vineyards in California, Oregon and Washington. Brockmeyer was a consultant on the vineyards purchase/development program that has invested in 27 vineyards from eastern Washington to Santa Barbara County, Calif. The vineyards total 5,400 acres.

This joint venture between CalPERS and PPV is the first of its kind.

Some $200 million is a “dramatic amount of capital” to move into the wine grape business, but in terms of CalPERS Brockmeyer said it is almost insignificant since the massive pension fund earns that much interest in just 1.8 days.

Wine grape investment may be on the more risky side because it is cyclic and people make planting decisions five years ahead of when vineyards begin producing.

Wine grapes are a cyclic business, Brockmeyer said, but charting overall wine sales and production over the past few decades shows a steady, consistent trend in wine consumption. Brockmeyer said considerable due diligence was used with the CalPERS vineyard development project.

However, many others make millions in businesses beside wine and come into the wine industry to make what Brockmeyer facetiously calls Chateau Le Ego wine. They fail to make good business decisions and often fail. They often unwisely invest in high priced land — up to $300,000 per acre in some areas of Napa Valley — to make the perfect wine.

Growing wine grapes and making wine is a business like any other business, said Brockmeyer. Many ignore that and immerse themselves into winemaking and eventually pay dearly for it.

“I tell people wanting to go into the wine business that farming wine grapes is farming a commodity,” he said. Many do not like hearing that and suggest wine is a “glamorous” endeavor. It is not, said Brockmeyer.

It is fickle and often influenced by outside forces. An example — the movie “Sideways,” which did wonders for Pinot Noir wine and grapes, as it was a prime element of the film. “Sideways” was a major factor in moving Pinot Noir grapes to the head of the class today for wine grapes with prices as high as $4,000 to $4,500 per ton for Santa Barbara County Pinot Noir.

The movie about Pinot Noir wine, Brockmeyer added, put Merlot “in the tank” for consumer demand. Merlot was a hot commodity before the movie came out.

The industry is coming out of a wine grape price downturn right now with improved prices and demand. Growers are making decisions to plant new vineyards now when it will be years before they start producing grapes.

“Unfortunately, the dilemma is we base planting decisions on last year’s prices when it will be five years before we get grapes off the vines we plant now,” she said.

A vineyard generally starts producing a small amount of grapes in the third leaf. It takes several years for vines to reach full production.

Brockmeyer said the trend for wine sales and grape prices has been on an upward climb since the 1970s, but he cautioned, “There are train wrecks and yes, we’ve got cycles in the wine business.”

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