Steve Bruere is the president of Peoples Company
The era of socially responsible land investing has dawned and is advancing in tandem with an institutional hunger for hard assets. It’s also being driven by the necessity of feeding a worldwide population expected to reach 9 billion people by 2050.
Farmland is often viewed as a simple, low-risk investment that can act as a hedge against inflation. It can also be categorized as an asset class that has consistently beaten the U.S. stock market since the late 1990s.
U.S. farmers acquired approximately 80 percent of the land transactions in 2013 and 2014. Institutional investors or absentee landowners make up the other 20 percent. In 2013, non-farmer owners held about 60 percent of Iowa’s farmland, compared with 45 percent in 1982. Similar trends have been reported in neighboring states.
This influx of institutional types considering farmland as an investment has traditional media outlets buzzing with the opinions of some urban critics who attribute soil loss and water quality issues primarily to commercial farming operations. It’s no secret that poor soil conditions can lead to runoff, carrying costly nutrients such as nitrogen and phosphorus into Iowa’s rivers, and all the way down to the Gulf of Mexico.
Bill Stowe, the Des Moines Water Works Park CEO who in January began leading the municipality’s charge to sue three Iowa counties over the issue of nitrate levels in Iowa's rivers, told The Wall Street Journal that it’s a matter of “agricultural accountability.”
On the other side of the coin, it’s widely known that issues surrounding water and soil erosion are global ones that are by no means limited to rural areas.
Developers and homeowners downstream in Iowa’s cities acknowledged their own challenges last year amid the roll out of a 4-inch topsoil rule that’s intended to deal with poor stormwater absorption rates and reduce flooding. It’s also supposed to help mitigate the flow of chemical fertilizers and herbicides from poor quality lawns and into Iowa’s waterways.
With big questions on both sides of the farm field, owners and managers should be asking which systems will be required to satisfy the advancing expectations of socially responsible land investors – investors in search an annual income along with confidence in the long-term sustainability of their investment.
Simply put, socially responsible farmland investing means using multiple criteria to analyze and decide on a particular investment in farmland. The obvious challenge for a land manager is that maximizing present income – and maximizing asset value – can be viewed as opposing goals.
But this is short sighted. After helping owners and farm producers realize the competitive advantages of increasing a farm’s relative value – securing the goals of premium rent and maximum appreciation – the strategies and tactics should be tied back to the best practices in land conservation.
Traditional and accepted conservation practices such as terraces and waterways are frequently recommended and implemented to protect from soil and nutrient loss while maintaining productivity on tillable production acres. Conservation practices for cropped acres include native prairie restoration and the protection of riparian areas.
The voluntary Iowa Nutrient Reduction Strategy program is aimed specifically at reducing the quantity of nutrients being delivered to Iowa waterways and the Gulf. The initiative was launched in 2013 and focuses in part on the design of targeted ag practices to reduce loads of nitrogen and phosphorus from non-point sources such as farm fields.
A winter cover crop is among examples of measures that could be recommended to improve the durability of a farm's soil. The enhancement of wildlife habitats or timber stand improvements on recreational land, as examples, could also come with a long-term financial benefit. Another approach is to restore as much native landscape as economically feasible. The idea is to practice due-diligence that goes beyond basic compliance.
Today’s land manager or farm operator has access to mapping tools, soil calculators, and aerial imaging technologies to assist owners in preserving organic matter and potentially boosting the profitability of the farm. Use of such incredible precision tools are already at work with a goal of improving soil health, fertility and yield. It also goes hand in hand with optimizing inputs while monitoring and measuring the impact of land management decisions.
Erosion and runoff are striking examples of what can be measured when weighing the cost-benefit of incorporating a soil-loss reduction strategy.
Take for example that a loss of three tons of topsoil per acre, per year is considered a moderate loss on a moderately sloping farm with typical crop management practices in place. At that rate, the loss from five acres would fill a typical 15-ton dump truck. Now imagine a dump truck full of topsoil that’s spread over five acres – a very thin layer of soil. On a 160-acre farm with 150 acres of tillable ground, a three-ton loss rate would equal out to 30 dump trucks of topsoil being lost annually. Along with the soils go the nitrogen, phosphorus and other nutrients that were paid for.
By implementing and documenting the cost-benefit of a given soil-loss reduction strategy, landowners are presented with an opportunity to improve long-term farm profitability, along with the real estate’s “curb appeal.” For some, that could mean taking some environmentally sensitive acres out of production, and then analyzing the results.
Initiatives such as the Iowa Nutrient Reduction Strategy are based on a science-and-technology fueled approach centered on education, collaboration and building broader awareness of the issues. Historically, farmland has been managed primarily for a landowner’s expectations for cash rents. Today, owners are looking for not only a record rents paid, but yield histories, soil tests, fertilization records, soil-loss controls and more.
Great attention has been paid to ag real estate as an investment in recent years following an explosion in commodity prices and run-up to $8-a-bushel corn. The recent cooling in commodity prices and subsequent downturns cash rents or land vales are only intensifying the expectations of contemporary landowners.
The smart money for farmer-owners and institutional investors today is to consider how socially responsible land investing and diligent operational excellence could lead to a total return.
At the same time, limiting the runoff of nutrients and chemicals is becoming more essential in Midwest states such as Iowa, which will dig deep to produce enough corn, soybeans and animal proteins to feed 9 billion within the next 35 years.