Farmland is an inflation-proof, defensive asset that has performed well during periods of stagflation. The farming business is also, by definition, inextricably linked with sustainability, Craigmore’s Forbes Elworthy tells Mike Scott
Investors’ portfolios may differ in the details of their holdings, but the asset classes they hold tend to be the same wherever you look, says Forbes Elworthy, chief executive of investment fund Craigmore Sustainables.
But Craigmore offers investors another option, one that is looking increasingly attractive – farmland and forestry. The Elworthy family has farmed in New Zealand for 150 years and the fund has its roots in the family farm, which Elworthy took over when his father died in 2004.
“Farming is an industry that is ‘out there in the community’. The farmer is a key custodian of the countryside and, to prosper in that role, needs to take his custodial duties seriously,” he says.
Farming is also an industry where ESG issues are not just a nice to have, but vital to the health of the business. “The risk management of the climatic volatility of your farming systems, for example, is a key skill set that, if not properly understood, can see an otherwise promising farming strategy lead to huge disappointment,” Elworthy explains.
Investors in farmland need to take account of a whole range of factors, ranging from soil quality to fertiliser run-off, to access to water supplies to how future yields will be affected by climate change. This explains why he says: “It is no accident that our head of risk management is also the head of sustainability. Our sustainability principles are our business principles. We believe that they are return-enhancing.
“Most farmland managers should have a well-developed sustainability theme. If you want to manage farmland in an exploitative way, you will have problems.”
A number of factors led him to set up the fund, including the increasing focus in New Zealand on managing its carbon footprint, which culminated in the establishment of a national emissions trading scheme.
Elworthy, who had worked at Goldman Sachs and Merrill Lynch before setting up and then selling a financial software company, noticed that New Zealand farmers, who are a major part of the country’s economy, were far too reliant on debt finance. In 2007, mortgage financing in the sector made up a quarter of GDP, he says. “About 3% of the population owed, mostly to foreigners, a quarter of our GDP.
“It was obvious that the country would experience a massive deleveraging and there would be a massive need for capital.”
The country of four million people is an agricultural powerhouse, particularly in dairy, producing enough food to feed 100 million people.
With the increase in wealth in Asia leading to increased demand for dairy, the future for New Zealand farmland looks bright, but the country lacks domestic capital formation. “I thought, let’s set up a fund that brings in long-term investment capital.”
As the central bank put the brakes on the economy in 2006/07, there was a wave of mortgage sales in the farming sector, with the price of land dropping by some 40%.
In 2009, the Craigmore forestry fund was born and, two years later, it was followed by the farmland fund. Around £40m is currently invested across the two funds and the firm hopes to boost that to around £150m over the next year. Initial investors tended to be high net worth individuals and family offices, including $NZ20m from the Elworthy family, but the fund is wooing institutional investors and is finding a responsive audience.
“Farmland is an inflation-proof, defensive asset and it has a low correlation with other assets,” says Elworthy. “In addition, farmland assets have really performed well in periods of stagflation, such as just after the war and in the 1970s.”