Agriculture investments offer up a ‘sustainable’ inflation hedge

As farmers begin the harvest season with depressingly low price prospects in the grain market, investors have been finding new ways to play the ag trade, according to PGIM. Grain commodities prices have been depressed for years due to the long-running productivity in farming that has helped meet the demand for food with a growing population, according to Harsh Parikh, principal and head of real assets research program, institutional advisory and solutions at PGIM. An investor, however, that put cash into farmland previously would have harvested some or all of the productivity gains. “Investing in permanent crop farmland would be another innovative way to play the Ag trade in institutional portfolios,” Parikh said. “Of course, investing in agribusiness equities such as Ag-tech companies may also provide potential rewards from productivity gains.” While the tech-plays are in California’s Central Valley rather than Silicon Valley, that does not mean they are any less valuable to institutional investors. Essentially the growth in long-term food productivity needs on the planet is on the rise, whether or not investor appetite increases in tandem for the asset class. Parikh said that while ag productivity gains have been 1.4% annually over the long run, the actual need is 1.75% per year growth in order to double output by 2050 to meet expected population demand. “What is needed to increase the productivity growth is active farmland management -- adopting sustainable farming practices such as precision and regenerative agriculture and other innovative technology,” he added. Examples of such technology abound. Sensor technologies monitor the moisture in the soil or are used for frost protection by monitoring the temperature to turn on the overhead sprinklers and wind machines, according to Parikh. Image processing and data science too are being used for selecting and monitoring crops. “In real estate, we’ve also seen a focus on food security by investing in temperature-controlled warehouses and cold storage facilities; this trend we think may only accelerate with supply disruptions in a post-COVID world,” he said. Jamie Shen, managing director and chief investment officer – agricultural finance and investments at PGIM, said that the mid-term and long-term outlook for agriculture remains positive as the food supply chain was forced to pivot from food service to the retail market in recent months. Today the industry is better positioned, she said. “The coronavirus has highlighted the positive impacts of healthier diets and the need for more whole foods as part of a regular diet,” Shen observed. “This trend was in place before the coronavirus and we believe it will be accelerated.” Also ramping up is the use of technology in the sector to promote sustainable practices. One of the UN’s Sustainable Development Goals is to promote sustainable ag, Shen pointed out, while adding that as investors continue to experience the benefits of ag investing the interest in the asset class will likely continue to increase. The other key piece to agricultural investment puzzle however is inflation, which has essentially dried up even as interest rates have remained persistently low. “Our sensitivity (RASA) analysis shows that row crop farmland provides exposure to inflation and therefore can help mitigate inflation risk,” he said. “This is because cash rent prices over the long run fluctuate with broader commodity cycles.” Inflation protection only works though when money is put to work before its onset. So, while grain prices are fundamentally depressed, it just may be the optimal time to begin investing, according to the PGIM execs. PGIM’s most recent public pension plan survey that will be released later this year confirms that exposure to farmland investments remains small for large institutional investors when compared with traditional real estate or infrastructure. Parikh said that some preliminary data from the research on a handful of large US public pension plans shows that they currently have close to a 1% allocation to agriculture and, in contrast, about a 10%-plus allocation to real estate. These plans did not have any agricultural allocations five years ago. Still, Parikh, pointed to rising investment interest over the last decade being driven by agriculture's usefulness as a diversification tool that can provide varied return streams by crop type and geography within a crop type even to mitigate specific risks such as weather. Notably, there have been improved outcomes by allocating to farmland as investors clamor for stagnation and inflation protection in addition to promoting sustainability within the food supply chain to benefit everyone around the globe.

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