Milltrust Agricultural Investments (MIA) is one of the few firms around the world that provides exposure to agricultural land as an asset class, with a regional or global focus.
MIA co-founder Simon Hopkins sheds light on where the opportunities lie across the global agricultural landscape and why agriculture has evolved into its own “dynamic” asset class in recent times.
Agricultural land traditionally hasn’t been a very attractive place to invest, aside from the occasional spike here and there, but that is starting to change, according to Milltrust Agricultural Investments co-founder Simon Hopkins.
“We saw that the whole dynamic of agricultural production was about to change in a big way – an uninspiring asset class has recently really taken off,” Hopkins says.
“Several years ago, China, as an emerging power on the scene, was starting to drive all sorts of markets, not only financial but also commodity markets. Urbanisation is shifting the lifestyles of these new [urban] residents, driving commodity prices, energy, and the demand for agri products in particular.”
That aspect of the equation did come to bare, Hopkins reiterates.
“Five years ago, China didn’t import any beef, but now its doing tonnes and tonnes.”
Its trends like these which have caught the attention of strategic investors, pension funds, private equity houses, entrepreneurs – and MIA is no exception.
However, what makes MIA different is that is one of the few firms in the world that provides exposure to agricultural land as an asset class.
Hopkins says land is important, although there are plenty of people that believe the best opportunity is to invest in infrastructure which is in short supply, needs updating or modernising, or others who think the real opportunity is to invest into private equity models, where you take operational risk.
“The kinds of investors we were canvassing didn’t want that risk. They are not demanding the same returns which are associated with private equity – these are difficult to achieve in agri investing with historical PE precedents seeking 20-to-25 per cent returns,” he says.
“Instead, we buy land where land title is assured – like in Australia and New Zealand – and where there are legal frameworks protecting investors, we buy and then lease the land back to the farmer.”
MIA established its Buy to Lease Fund in 2015. It is one of MIA’s key agricultural land programs which gives the investor ownership of the land with all the exposure to land appreciation and a fixed return without the operational risk of running the farm.
“Where this is interesting – and removes the controversyaround land banking – is that many farmers want to develop a business, but the challenge they face is that most of their capital is tied up by owning the land,” Hopkins says.
“By selling the land to the investor and recycling the capital into the operating business the farmer can become a bigger player, leveraging their operational expertise.
“Let them operate and farm the land he or she has an attachment to, but put their money into expanding the operation by buying the block next door and taking the development risk themselves as the operator.”
Hopkins says this model appeals to farmers because they want to expand and they know their land best. As such, the deal with the farmer is a “partnership”.
So, how is a yield secured?
“We seek to deliver a target net rental income to our investors of 5.5 per cent derived from the portfolio in aggregate, some pay higher, some lower, but I think that looking across the balance sheets of the operators we work with, these farmers are getting a pretty attractive deal,” he says.
“If the farm land goes up a great deal, the yield will come down and the rental returns wont be as high. But in the aftermath of the Global Financial Crisis, we’re still finding attractive opportunities in the agricultural space. The real worry is that more and more people come into this space as returns will then be compressed.”
Another unique aspect to MIA’s approach is there are no forced time horizons for investment entry or exit. MIA’s investments are held within evergreen structures with no defined timeline.
“Investors can invest at anytime, based on the net asset value of the portfolio,” Hopkins says.
“We don’t attract a spread or charge fees for redemption. Our proposition is that we will continue to be championing this asset class, so the investor(s) can move in and out, so long as its not detrimental to other investors.”
In terms of its strategy, beyond the Buy to Lease Fund, MIA aims to offer diversification across crops, and geography, be it in horticulture, broadacre cropping, organic dairy, or simply growing fodder, and is looking at similar opportunities in other parts of the world.
“Fodder is the lifeblood in the agribusiness world – so that, indirectly, is a play on the protein story. You have to put a lot of feedstock into the feed cycle,” Hopkins says.
“We also really like horticulture. The trees go in the ground and they’re there for 30 years. From an investor standpoint the asset has value over the long-term. We are not averse to investing in livestock but its more challenging place to be – from an operating income – although some of the big international agri transactions of late have been in that area.”
“Low interest rates are driving capital into real assets and in agri, the income component is attracting the kind of capital that is needed to modernise and to continue the process of economic consolidation,” he says.
“Interest rates have a job of attracting the kind of capital that is needed to modernise and to continue the process of consolidation in the agricultural world,” he says.
“The real challenge to the strategy however that we cannot escape is a dramatic shift in weather patterns. You need diversification to manage weather risks. The whole investment hypothesis could be substantially knocked off-course if you had prolonged drought or big weather changes in the places where you’ve invested.”
For these reasons, a long-term view is essential when it comes to achieving meaningful investment outcomes in agriculture, Hopkins believes.
While there has been recent ‘hype’ in the agricultural investment space, MIA focuses on finding the right investment opportunities in the right territories, with the right partners whose investment interests and timelines are aligned.
“I believe that people fronting trades for the Chinese are not in the best interests of anyone in the farming industry. Institutional capital – benign capital – is far more attractive,” Hopkins says.
“The nature of the money we’re putting to work is long term capital seeking a fair deal with farmers and that is really playing a long term yield and capital appreciation game. And, there are very good reasons to assume that agricultural land will go up.”
MIA is also a firm believer in the agri tech opportunity, having recently invested in Roslin Technologies, an Agritech start-up jointly owned by the University of Edinburgh, JB Equity and The British Innovation Fund, (a Milltrust International fund, with a cornerstone commitment from The Royal County of Berkshire Pension Fund).
Hopkins says Roslin is a “fascinating business”, extending beyond agri tech and also into biomedical research, innovation in healthcare, and improvement in the food chain.
“These innovations are central to our livelihoods. The work that is being done in immunology and in the area of pork genetics at Roslin could have as much as an implication for human biomedical breakthroughs as it will have for agricultural advancement. These things are all very tied up closely,” he says.
“If we can successfully marry capital with the scientific work being undertaken at a great institution like Edinburgh, it could be revolutionary. Roslin Technologies will play a part in this innovation and to be involved in that context is exciting for me and my team.”