The new fund in the market for sustainable farmsOctober 2010
While the stability of agricultural products comes evermore into question, Agro-Ecological is already treating sustainable farming as an asset class. Mike Scott speaks to the fund’s co-founder
Recent events in Russia, where a grain export ban has been imposed following a drought, have brought agriculture back to the forefront of investors’ minds. The ban recalls 2008, when a surging oil price fed through to food prices and was one of the catalysts for the financial crisis.
It is also a reminder of the dependence of the agricultural sector on fossil fuels, the weather and secure water supplies. With oil prices on a long-term upward trend and climate change likely to disrupt water supply and land productivity, a new fund is offering the chance to invest in more sustainable farming.
Agro-Ecological is a London-based investment vehicle in the early stages of capital-raising – it hopes to raise about £50million (€58m, $79m) initially – that is promoting the idea of sustainable farming as an asset class. ‘It is about buying or renting farms and converting them to organic methods,’ says Geoff Burke, a New Zealander who is co-founder and managing director of the fund. ‘I thought farmland was an asset that was being overlooked.’
Initially aimed at family offices and high net worth individuals, the fund, he says, ‘ties in with the trend for these investors to want to move beyond philanthropy and ensure that their money works harder in a good cause’. Furthermore, Burke claims, ‘it is genuine impact investing, where the better environmental and social performance leads to better financial performance.’
The fund, which hopes to be acquiring assets within six months, will focus on buying land in New Zealand, one of the most politically stable countries in the world as well as one of the most established food exporters, ‘which will appeal to investors looking for a degree of security’. But in time it hopes to branch out to Africa and Latin America, which will allow it to offer a portfolio of products with different levels of risk and return.
Burke sees plenty of potential, with demand for organic products far higher than supply. In milk, for example, the main New Zealand producer Fonterra has about 20,000 cows producing organic milk but it needs 60,000. ‘The major supermarkets are struggling to get the quality and quantity of organic supplies they need for products, from vegetables to baby food.’
Organic farming is often seen as a middle class indulgence, but the drivers for the sector are more fundamental, Burke argues. Climate change is going to lead to more droughts and more flooding, both of which can be seen at the moment – in Russia and Pakistan respectively. Organically farmed land ‘holds on better in droughts and it rebounds more quickly from floods’.
In addition, it is not exposed to fossil fuel costs in the same way as conventional farming, which relies heavily on nitrate fertilisers that are derived from fossil fuels. ‘If fossil fuel costs go up – as many people think they will – the cost gap with organic produce will narrow. As all these pressures develop, organic produce has an advantage that conventional farming does not.
‘If the land is not managed well, its performance will decline. It is critical that investors understand this issue,’ says Burke.
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