Farmland Investing: Risks and Opportunities

John R. Farris Founder & President LandFund Partners

70th CFA Institute Annual Conference May 22, 2017

Presenter Bio

John Farris – Founder & President, LandFund Partners Mr. Farris received a full-tuition fellowship to study economics and finance at the Woodrow Wilson School at Princeton University, where he was awarded a Master’s Degree. Before attending Princeton, Mr. Farris studied economics and philosophy at Centre College from which he graduated Phi Beta Kappa. He has served as an economist at the Center for Economics Research at the Research Triangle Institute, as well as a senior economics consultant with both the World Bank and the International Finance Corporation. From 2006 to 2007, Mr. Farris served as Secretary of the Finance and Administration Cabinet for the Commonwealth of Kentucky.

Mr. Farris is Chairman of the Board of Directors for Kentucky Retirement Systems (KRS), and serves on the Board of Directors of Kentucky Employers’ Mutual Insurance (KEMI), GreenBrick Partners (NASDAQ: GRBK), and Kentucky Technology Inc. Mr. Farris also acts as Senior Investment Advisor to the Centre College Endowment.

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Table of Contents

I.  Farmland Investing Overview

II.  Historical Returns & Correlations

III.  Macro & Micro Opportunities

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SECTION I: Farmland Investing Overview

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Basic Overview

5 Soybean Harvest on LandFund Property (Arkansas 2016)

Land Owner

• Owns farmland asset • Pays annual fee to

Farm Manager

Farm Management Company

• Manages farmer relationship and farmland

Farmer

• Pays rent to Landlord for the right to farm the property

Farmland Investment Vehicles

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Structure Advantages Disadvantages Examples

Direct Ownership •  Most direct method •  Complex and time

consuming •  Family Farm

Ownership

Managed Accounts •  Higher level of investor control •  High minimum

investment ($5MM +) •  US Trust •  LandFund Partners

Private Equity/ Closed-End

Funds •  Economies of scale •  Lower investor control •  LandFund Partners

Public REITs •  Smallest capital outlay •  Liquidity

•  Dilution felt primarily by retail investors

•  Farmland Partners (FPI)

•  Gladstone Land (LAND)

Regional Differences

7 Image Source: https://www.ncreif.org/data-products/farmland/

•  Regional variation in price per acre and yield

•  Dependence on weather patterns •  Flood and drought risk •  Access to and cost of water •  Cost and use of farm inputs

(fertilizer, etc.)

•  Regional diversity of crops and livestock (revenue drivers) •  Transportation costs to global export hubs •  Creditworthiness of farm operators •  Development of local agricultural markets

Farmland Subclasses

•  Row Crop Farmland –  Annual planting seasons for crops such as

corn, soybeans, cotton, wheat, and rice

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•  Permanent Crop Farmland –  Establishments such as vineyards and

almond farms, which require a 3 to 12 year capital outlay period

•  Pasture / Range Land –  Land leased to local operators for dairy,

beef cattle, and other operations

Lease Structures

•  Three primary strategies: –  Cash Lease

•  A cash lease is the most simple form of rental agreement •  Typically 1 to 3 years in length

–  Crop Share •  Crop shares are used more frequently on farms with excellent, or sub-

par soils •  Entitle owner to 20%-30% of crop yield per acre

–  Blended Lease •  Includes a base cash rent, plus a “kicker” component driven by

commodity prices, realized crop yields, or some combination thereof

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Farmland Facts

•  Less than 1% of U.S. farmland is owned by institutions & funds •  Average age of a U.S. farmer = 59 years old •  Only 3% of U.S. farm income is comprised of government subsidies 1 •  Asset class is now recognized as a viable alternative investment

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Harvesting cotton in Phillips County, Arkansas – November 2013

1. Source: USDA ERS, Farm Income and Wealth Statistics, U.S. and State Farm Income and Wealth Statistics

SECTION II: Historical Returns & Correlations

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Historical U.S. Farmland Returns

•  Farmland returns are driven by: 1) annual rent and 2) change in farmland asset value

12 Data Sources: NCREIF, NYU Stern Note: S&P 500 returns include dividends Past performance does not guarantee future results

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 10-Yr Avg.Office Farm S&P 500 Apartment Apartment Farm S&P 500 S&P 500 Retail Industrial Farm20.5% 15.8% 25.9% 18.2% 15.5% 18.6% 32.1% 13.5% 15.3% 12.3% 13.2%Timber Timber Farm S&P 500 Farm S&P 500 Farm Industrial Industrial S&P 500 Retail18.4% 9.5% 6.3% 14.8% 15.2% 15.9% 20.9% 13.4% 14.9% 11.7% 8.7%Hotel Retail Timber Retail Industrial Retail Retail Retail Hotel Retail S&P 50018.1% -4.1% -4.8% 12.8% 14.6% 11.6% 12.9% 13.1% 13.2% 9.0% 8.6%Farm Industrial Retail Office Retail Apartment Industrial Farm Office Apartment Industrial

15.9% -5.8% -10.9% 11.7% 13.8% 11.2% 12.3% 12.6% 12.5% 7.3% 7.9%Industrial Apartment Apartment Industrial Office Industrial Apartment Office Apartment Farm Apartment

14.9% -7.3% -17.5% 9.4% 13.8% 10.7% 10.4% 11.5% 12.0% 7.1% 7.1%Retail Office Industrial Hotel Hotel Office Office Hotel Farm Office Office13.5% -7.3% -17.9% 9.0% 11.8% 9.5% 9.9% 11.1% 10.3% 6.2% 6.9%

Apartment Hotel Office Farm S&P 500 Hotel Timber Timber Timber Hotel Timber11.4% -9.4% -19.1% 8.8% 2.1% 8.3% 9.7% 10.5% 5.0% 4.7% 6.0%

S&P 500 S&P 500 Hotel Timber Timber Timber Hotel Apartment S&P 500 Timber Hotel5.5% -36.6% -20.4% -0.2% 1.6% 7.8% 7.7% 10.3% 1.4% 2.6% 5.4%

Farmland Timberland Hotel Apartment Office Industrial Retail S&P 500 Nasdaq 100 10 Yr Trsy.

Farmland 1.000

Timberland 0.644 1.000

Hotel 0.332 0.705 1.000

Apartment 0.318 0.388 0.818 1.000

Office 0.329 0.584 0.917 0.918 1.000

Industrial 0.324 0.512 0.877 0.941 0.960 1.000

Retail 0.430 0.421 0.701 0.861 0.765 0.824 1.000

S&P 500 0.035 0.207 0.321 0.156 0.236 0.178 0.175 1.000

Nasdaq 100 -0.104 0.128 0.145 0.006 0.106 0.018 0.045 0.812 1.000

10 Yr Trsy. -0.084 0.049 0.183 0.208 0.236 0.195 0.083 -0.593 -0.567 1.000

20 Year Correlations (1997-2016) of Annual Returns for Selected Asset Classes

Low Correlation with Traditional Real Estate

•  Farmland returns exhibit low correlations to traditional real estate, and almost no correlation to equities and treasurys

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Data Sources: NCREIF, Morningstar, NYU Stern Note: S&P 500 and Nasdaq 100 returns include dividends Past performance does not guarantee future results

Risk Adjusted Returns

•  U.S farmland displays strong risk adjusted returns and may be utilized to increase portfolio efficiency

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S&P 500

10 Yr US Treasury

Emerging Markets

BRK-A

Apartment Retail

Timberland

US Farmland

NASDAQ

0%

2%

4%

6%

8%

10%

12%

14%

16%

0% 5% 10% 15% 20% 25% 30% 35% 40%

AV

G. E

XC

ES

S R

ET

UR

N

STANDARD DEVIATION

Annualized Risk & Return 1997-2016

Data Sources: NCREIF, Morningstar, NYU Stern, Berkshire Hathaway Note: S&P 500 and Nasdaq 100 returns include dividends Past performance does not guarantee future results

Current Yields from Farmland

•  Current yields from farmland have been attractive to many investors in recent years when compared with yields from other assets

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0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

10 Yr JGB 10 Yr Bund 10 Yr Gilt S&P 500 Div. Yield

10 Yr Munis (AAA)

10 Yr T-Note 30 Yr T-Bond 20 Yr Corporate

(AAA)

US Row Crop Farmland

Yie

ld

Current Yields from Selected Assets

Data Sources: NCREIF, Bloomberg (as of April 2017) Past performance does not guarantee future results

Inflation & Farmland Returns

•  Farmland returns act as a hedge against inflation –  For the period 1970-2014,

farmland’s positive correlation with inflation (0.65) was higher than treasurys, gold or stocks 1

–  For the period 1914-2011, farmland returns show a 0.63 positive correlation with CPI 2

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1. Private real assets: Improving portfolio diversification with uncorrelated market exposure,” TIAA Global Asset Management, Winter 2016 2. Purdue University’s Center for Commercial Agriculture

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

An

nu

al C

han

ge (%

)

CPI & Farmland Returns: 1992-2016

CPI

NCREIF Farmland Returns

Data Source: NCREIF, InflationData.com; compiled by LandFund Partners

SECTION III: Macro & Micro Opportunities

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Macroeconomic Fundamentals

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•  Supply of row crops is constrained due to: –  Availability of arable farmland –  Access to water –  Ability to export

•  Demand for row crops such as soybeans is increasing due to: –  Population growth –  Demand for protein

•  3 - 5 oz. grain = 1 oz. meat 0

10

20

30

40

50

60

70

80

90

1964 1974 1984 1994 2004

Mil

lion

Ton

s

Chinese Soybean Imports

Chinese Consumption

Chinese Production

Total Imports

0

5

10

15

20

25

30

35

40

45

50

1964 1974 1984 1994 2004

Th

ousa

nd

Ton

s

US Soybean Exports

Source: USDA ERS Database; compiled by LandFund Partners

Population Growth & Protein Consumption

•  Current population is 7.3 billion people à 8.5 billion people in 2030 à 9.5 billion people in 2050

•  Multiplier effect as more wealthy global population consumes meat

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Source: OECD, IMF, FAOSTAT, World Resources Institute Source: OECD, IMF, FAOSTAT, World Resources Institute

Source: IMF, United Nations Food and Agriculture Organization, World Resources Institute

Land Supply is Limited

•  There is a finite supply of farmland with fertile soil and an adequate supply of fresh water

•  Globally arable land per capita decreased by more than 50% between 1950 and 2000

•  Worldwide more than 75 million acres of farmland are lost each year to industrialization, urbanization and desertification

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-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1961

19

64

1967

19

70

1973

19

76

1979

19

82

1985

19

88

1991

19

94

1997

20

00

2003

20

06

2009

20

12

Tot

al H

ecta

res

(1,0

00s)

Arable Land on Earth (Hectares)

Source: United Nations Food and Agriculture Organization; compiled by LandFund Partners

1 hectare = 2.47 acres

Global Food Stocks

•  Chart displays how many days the world could continue at normal rates of consumption, assuming that grain production ceased entirely at year end

•  Production, consumption, yield improvement baked in •  Trendline shows global production unable to keep pace with consumption

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0

20

40

60

80

100

120

140

1985 1990 1995 2000 2005 2010 2015

Day

s

Global Crop Surplus by Days of Consumption

Source: USDA ERS Database; compiled by LandFund Partners

Global Opportunities

•  Considerations: Rule of Law, Infrastructure, Geopolitical Risk

22 World map of change in cropland area, 1960-2000 – Alston, Babcock, and Pardey [eds.] (2010)

U.S. Farm Sector Financial Health

•  Key farm sector debt ratios have trended upward in past 5 years, but remain at historically normal levels

23 Source: USDA ERS Database; compiled by LandFund Partners

0

5

10

15

20

25

30

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45

50

1960

1962

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1972

1974

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1982

1984

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1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

F

Per

cen

t

U.S. Farm Sector Solvency Ratios: 1960-2017F

Debt/asset ratio

Debt/equity ratio

Debt service ratio

International Trade

•  Roughly 20% of total U.S. agricultural production is exported •  Policies that reduce competitiveness of U.S. exports pose a risk

•  Trade and tax policies are likely to impact value of U.S. Dollar, which has a direct impact on farmer revenues and cost structure (oil, fertilizer, etc.)

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Trading Partner U.S Agricultural Net Exports Percent of Total China $22.3 billion 16.4%

Canada $21.3 billion 15.7% Mexico $18.3 billion 13.5%

Source: USDA ERS Database

Government Programs

•  2017 government payments are projected at $12.5 billion while U.S. farm revenues are forecasted at $412.4 billion –  This amounts to only 3% of U.S. farm revenues

•  2014 Farm Bill removed the direct payment subsidies to landowners and replaced it with a crop insurance subsidy program –  Only actual farm operators now eligible for support –  Opt into Agricultural Risk Coverage (ARC) or Price Loss

Coverage (PLC) products à set a revenue floor for U.S. farmers

•  New Farm Bill expected to be passed by Republican congress in 2018

25 Source: USDA ERS Database; compiled by LandFund Partners

Niche Strategies

•  Supply of organic crops has not kept pace with consumer demand. 2016 U.S. organic soybean production only 20% of consumption.1

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0%

50%

100%

150%

200%

250%

300%

350%

Jan-

11

Apr

-11

Jul-

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Oct

-11

Jan-

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Apr

-12

Jul-

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-13

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Organic Price Premium (as % of Conventional Price)

Corn Organic Premium

Soybean Organic Premium

ESG / Impact Investing with Farmland

•  Opportunities exist for impact & ESG investors to meet goals through sustainable, non-GMO, and organic farming practices

•  Many environmental benefits from sustainable farming practices: –  Carbon Footprint & Greenhouse Gas Reduction

•  Organic farming produces 35% less carbon dioxide per year than a conventional farm, saving roughly 247 tons of CO2 per 1,000 acres.2

•  Conventional fertilizers also cause the production of nitrous oxide, which is a greenhouse gas 300 times more harmful than CO2.3

–  Ecosystem/Biodiversity –  Soil Health –  Water Protection

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1. Source: Morgan Stanley Institute for Sustainable Investing 2. Source: Rodale Institute, “Regenerative Organic Agriculture and Climate Change” 3. Source: Science News, “Fertilizer produces far more greenhouse gas than expected”

1. Source: Morgan Stanley Institute for Sustainable Investing 2. Source: Rodale Institute, “Regenerative Organic Agriculture and Climate Change” 3. Source: Science News, “Fertilizer produces far more greenhouse gas than expected”

1. Source: Morgan Stanley Institute for Sustainable Investing 2. Source: Rodale Institute, “Regenerative Organic Agriculture and Climate Change” 3. Source: Science News, “Fertilizer produces far more greenhouse gas than expected”

1. Source: Morgan Stanley Institute for Sustainable Investing 2. Source: Rodale Institute, “Regenerative Organic Agriculture and Climate Change” 3. Source: Science News, “Fertilizer produces far more greenhouse gas than expected”

1. Source: Rodale Institute, “Regenerative Organic Agriculture and Climate Change” 2. Source: Science News, “Fertilizer produces far more greenhouse gas than expected”

Contact Information

John R. Farris

Founder & President LandFund Partners

615-678-8331 jfarris@landfundpartners.com

@LandFundLP LandFundPartners.com

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