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There are traditional ways to hedge against inflation – things like gold and TIPS (Treasury inflation-protected securities). There are newer approaches; Crypto advocates say Bitcoin falls into this camp. But perhaps an unexpected way to hedge against inflation and volatility is by investing in farmland.
Jose Minaya is the CEO of Nuveen, a division of TIAA, and hopes to generate profits from investing in agricultural assets. Here he is in conversation with Leslie Picker.
(The content below has been edited for length and clarity)
Leslie Picker: We have seen some pretty scary inflation data lately. How does farmland play in this?
José Minaya: You know, this is one of the main reasons we invested in the asset class. I think when we started looking into natural resources the idea was how we could better diversify our own portfolio to get better exposure to volatility or to protect ourselves from volatility and then inflation was an important one Part of the assumption that at some point in the future we will see higher inflation. How is our portfolio protected against this? And farmland is an asset class that we believe holds true on both the volatility and inflation sides, because what attracted us to farmland and what drives the correlation characteristics is that it is both the demand side in terms of people’s food needs the supply side is inelastic is inelastic in that it no longer creates a country in the whole world. And if anything, then given what is happening from an ecological point of view, we have a reduction in land area. And it’s a commodity that produces at the end of the day, which is highly correlated to inflation.
Picker: Looking at returns on a risk / reward basis, over the past 50 years farmland has outperformed many other asset classes, most other asset classes, including indices like S&P and gold and treasuries. If that is the case, why is there not more money and more wealth behind it? As I understand it, only about 80% of the arable land is institutionalized at this point. In your opinion, what are the most important hurdles?
Minaya: Well, when you think of farmland around the world, I would say that well over 90% of it is still in the hands of individuals and families. It is therefore an asset class that is still very much emerging in terms of its access to the capital markets. I always compare it to real estate – we’re also a big real estate investor – you go back 100 years, that was largely in the hands of private investors, right? And you’ve built a building or built a property because you have to put people in it. Nowadays it has a lot more access to the capital markets, you can deal with real estate publicly. This is one way where I believe the way for farmland leads. This institutional ownership has increased significantly in my opinion over the past decade, but it is still fairly privately owned. From the point of view of the capital markets, this is a much more inefficient market, but there is also a lot of alpha for us here. Because of this, we like asset classes that are not as efficient and we can achieve excess returns given the risks we take.
Picker: You briefly mentioned that the footprint of farmland itself is shrinking due to climate change. I mean, we hear on the news every day fires, destruction of vineyards, floods, destruction of farms, hot temperatures, strong storms, droughts. I mean, don’t you worry about all of this given that you are investing so much money in this asset class? I mean, this asset class changes dramatically from year to year.
Minaya: I think it’s the # 1 risk factor that we look at in farmland. One of the things for us, when we decided we were going to invest in farmland, where do we invest it? The first was [from a food] Security perspective. We wanted to invest in the most important grain export regions worldwide – the USA, Brazil, Australia, parts of Central Eastern Europe. Again, we don’t want to deal with food security issues; we want to deal with the regions that produce to feed the entire planet. The other piece that really has to do with farmland is water and there are different risk profiles. You can go to places that have a well-established profile for water. These returns will be significantly lower. You may have other locations that are sometimes more exposed to floods, droughts, and fires. These will potentially be a higher return with less risk. For us, we play in the area where we know that the infrastructure is there, we have excess water, we pay for it, which is why our returns are probably more in the high single-digit, mid-single-digit range, but very stable with lower risks on climate change.
Picker: Are there certain areas within the farmland that you currently see more opportunities than other certain crops or regions, or things that you believe offer the best risk / return profile?
Minaya: I think by expanding our portfolio we found different arable land – and it’s interesting – there are different levels of risk and return, right? Your most traditional is buying Midwestern land in Champaign, Illinois. And there is the lowest risk profile … some of the best lands in the world are located here. The great thing about this asset class is that there are no vacancies. We don’t have to worry: “Can this be rented?” We are paid at the beginning of the season so there are no rental losses. So it’s a very, very low risk asset. Now when we looked at other areas of agriculture, like vineyards, and went to places like California and said, “Okay, no more acreage can be built here. It’s not allowed.” The demand for wine consumption is increasing and what we see in demographics. Our ability to then look at things like vineyards then moved us from mid-single-digit returns to low double-digit returns. A little more risk, because now you have to invest a little more, but things like vineyards have become very attractive. Almonds was another where we said, “OK, here is an end fruit that is becoming more and more popular because the demand comes from Asia.” So we can be in a place like California, where I think we are the third largest almond grower in the world, the demand comes from Asia, so we can build on that exposure to growing demand and growing markets in emerging markets in places like China, in India but we do it through a very safe investment in the US. Those are the things that we found really attractive.
Picker: As an institutional investor in arable land, you can in principle receive a coupon or lease income from the farmers who lease from you. And then you can also generate returns through capital appreciation. How about [the] average investor? Is there an opportunity for anyone watching this to get involved in this asset class, especially as a diversifier and inflation hedge that you talked about earlier?
Minaya: Yes, I think the first way investors get involved, and it’s a very boring way when you think of our balance sheet which offers guaranteed income through annuities, much of it is embedded in the diversification of this asset class. We saw what happened now with the Secure Act and the idea that in 401 (k) s you will see more guaranteed income or secured income – very boring – but this is the diversification that gives you access to these types of asset classes. That being said, Leslie, yes, that is still very much institutionalized. Just last year we launched our first open fund that offers more liquidity. It is available in more retail channels now, and particularly in the US and US retail channels, US high net worth channels. So again, when you get back to real estate, it started, private hands, more institutional hands, you started to see it more in the wealth channels. Ultimately, you’ve seen REITs, public REITs. You are starting to see this in agriculture. That too is part of what we love – the fact that it is widely available and more inefficient brings us more ROI. That liquidity comes in and the various vehicles get behind it.
– Ritika Shah contributed to this article