Fortune Magazine June 2009

Retirement Guide / Q
Shonda Warner and I are in her red Toyota
pickup heading southwest on Highway 61 out of Clarksdale, Miss., on our
way to see one of her farms. While her black standard poodle, Walter, naps
in the back seat, she's explaining the pitfalls of being an institutional land
investor. q "It's really hard to buy property at the right price," says Warner
as we roll past the famous crossroads where Robert Johnson is said to have sold his
soul to the devil to get the secret of the blues. "Half of all farmland that trades in the
United States never sees a broker. We believe you've got to have a lot of local knowledge of the marketplace. Farmers are smart and they talk. And if one Town Car full
of Wall Street types rolls into town and makes a bid, suddenly all of the prices go
up." q A Nebraska farm girl who went on to a globetrotting career as a derivatives
trader for Goldman Sachs and then as a hedge fund executive in London, Warner, 45,
is back on the farm pursuing what she believes is a huge moneymaking opportunity.
N A SUNNY FRIDAY MORNING,
1
George
Soros
Chairman.
Soros Fund
Management
The billionaire
hedge fund
manager has a
personal stake
in an Argentine
agribusiness
company called
Adecoagro, which
owns 650,000 acres
of farmland in
Argentina, Brazil,
and Uruguay.
In hisfund the
second-largest
stockholding is
fertilizer maker
Potash (POT).
444
102
Two years ago Warner launched an investment firm,
called Chess Ag Full Harvest Partners, with a fairly
simple underlying strategy: Buy undervalued farmland in the U.S. and profit from the coming global
agricultureboom.
Last June she closed her first fund with $30 million
from wealthy individuals and institutional investors such as the pension funds of Dow Chemical and
Lockheed Martin. She says her ultimate goal is to
take the company public as the first farmland-only
real estate investment trust in the U.S. "The returns
in agriculturehaven't looked sexy for a long time, but
I think that's about to change," she says.
Warner is just one of many financiers around the
world making that same bet. Over the past few years
hedge fund gurus like George Soros, investment powerhouses like BlackRock, and retirement plan giants
like TIAA-CREFhave begun to plow money into farmland-everywhere from the Midwest to Ukraine to
Brazil. Canadian private equity firm AgCapita, which
raised $18 million in 2008 to invest in Saskatchewan
cropland, estimates that as of the first quarter of 2009,
more than $2 billion of private equity money had been
raised for farmland investments globally, and another
$500 million was planned.
The growing flow of money into farms has persisted
despite a major drop in the commodities markets last
fall, prompted in part by the global financial crisis. In
the spring of zoo8 spiking grain prices caused food
shortages and rioting in dozens of countries before
falling some 50% by December. In fact, that crash has
obscured a broader trend. Even after the correction,
grain prices remain above their 20-year average, and
food stocks around the world are still near 40-year
lows. For many investors, last year's shortages are a
preview of what could lie ahead.
FORTUNE June 22, zoog
,
The fundamentals remain in place for a longterm boom in the prices of everything ag-related.
The simplest metric to consider is the amount of
farmland per person worldwide: In 1960 there were
1.1 acres of arable farmland per capita globally, according to data from the United Nations. By zooo
that had fallen to 0.6 acre (see chart, "Precious
Acresn).And over the next 40 years the population
of the world is projected to grow from 6 billion to
g billion.
"Land is scarce and will become scarcer as the
world has to double food output to satisfy increased
demand by 2050," says Joachim van Braun, director
general at the International Food Policy Research
Institute. "With limited land and water resources,
this will automatically lead to increased valuations
of productive land. And it goes hand in hand with
water. Water scarcity will probably increase even
more than land."
Improving diets in the developing world will also
help drive up prices. As per capita incomes rise in
China, India, and other parts of Asia, hundreds of
millions of people will be adding meat to their daily
fare. In the coming decades that will have a multiplier
effect on demand because of the massive amounts
of grain used to feed livestock. The USDA estimates
that it takes seven pounds of grain to produce one
pound of beef. Even with better crop yields from new
seed technology, a supply crunch is looming. And the
effects of climate change-rising sea levels, more
droughts-could only amplify the problem.
"I'm convinced that farmland is going to be one of
the best investments of our time," says commodities
guru Jim Rogers, who serves as an adviser to AgCapita. "Eventually, of course, food prices will get high
enough that the market probably will be floodedwith
lof thisstory gotofortune.com.
I
supply through development of new land or technology or both, and the bull market will end. But that's a
long ways away yet."
The biggest investors in farmland over the next
decade will probably be sovereign wealth funds and
governments of crop-starved countries eager to secure
food supplies for their rapidly growing populations. In
2008, China announced a $5 billion plan to develop
agricultural assets in Africa. That's just a start. Given
that it has 20% of the world's population but only 7%
of its arable land and 7% of its freshwater resources,
China has no choice but to look beyond its borders. And
the global recession has hardly slowed its appetite for
crops. In the first four months of 2009, China imported
a record 13.9 million tons of soybeans.
The Gulf States of Qatar, Abu Dhabi, and Saudi
Arabia have already begun making deals to acquire
or lease large tracts of farmland in Africa and Asia at
bargain prices. That in turn has led to spate of headlines recently about a "land grab" by rich countries.
When South Korea's Daewoo Logistics announced a
$6 billion deal last November to lease roughly half
the arable land in Madagascar-a plot about twice
the size of Delaware-it caused so much anger that
it helped spur a coup d'6tat. In May a UN-sponsored
study concluded that too many farmland deals were
giveaways by leaders of poor countries, with only
vague promises of jobs and investment in return.
The farmland phenomenon is almost certainly still
in the early stages and is playing itself out in many
ways around the globe. To get some insight into those
strateges, Fortune focused on three investors with
vastly different approaches-a British lord who's putting his money on Brazil, an American who is playing
on political tensions in war-torn Sudan, and Warner,
who is bargain hunting in the U.S. "Farming might
not look sophisticated," says Warner. "It might wear
overalls and talk funny. But it's older than Wall Street,
it's a fine-tuned machine, and it's avery difficult business." Still, she says, if you execute right, "there is a
big opportunity here."
WARNER COMES FROM a long line of farmers. The origi-
nal deed on her family's land in Dakota County, Neb.,
in the northeastern comer of the state, was signed by
Abraham Lincoln in 1861. By the time she was 14, she
had earned her grain grader's license and was managing the grain elevator her father had built in Dakota
Portion ofthe
world's population
living in China,
which has only 7%
ofthe world's
arable land.
BRAZILIAN BOUNTY
THE SOYBEANS
FROMTHISFARM I N
RONDON6POLISWILL
BESHIPPEDTOCHINA.
WHERE INCREASING
CONSUMPTIONOFMEAT
REQUIRES MORE AND
MOREANIMALFEED.
Retirement Guide / 0
City. Even when she was living abroad, she says, she
loved to get home and ride a tractor. But it was the
blues that originally brought Warner to the delta.
A lifelong "music nut," she started visiting Clarksdale to hit the local blues clubs after getting divorced
in 2000. In 2004, after selling her share of a hedgefund-of-funds business in London, on a whim she
bought a two-story, 19th-century brick building
on Delta Avenue downtown that housed a general
store, renamed the shop Miss Del's (as in "Mississippi
delta"), and added antique knickknacks and British
chocolate to the inventory.
When she decided to move from London to the
U.S. full-timein zoo6 to pursue farmland investing,
Warner converted the second floor of the building to a loft-like apartment. For now, it doubles as
the headquarters of her fund. When Warner's not
traveling, she and a couple of employees work at a
dining room table with a PC. Books like Food, Inc.
and Trade Negotiations in Agriculture sit on shelves
above, next to a copy of Graham and Dodd.
Although Warner's rationale for betting on farmland is very much rooted in the global demand picture, her strategyis strictly focused on the U.S. "Yeah,
land might be cheap and plentiful in Russia, but if
the price of wheat goes up, is your deed going to be
honored?" she says by way of explanation. Rather
than buy farms in what she calls
the "Prada handbag" states of
Illinois and Iowa, where land
comes at premium prices, she
concentrateson less-well-known
PRECIOUS ACRES
farming areas. In addition to her
Growing population and widespread
home
base in Clarksdale, she has
development are shrinking the
an
office
in South Dakota, and so
amount of farmland per person.
far the fund has bought land in
Arable Ian? per capita WORLDWIDE
Arkansas, Kansas, Missouri, and
I
Texas as well as Mississippi.
To figure out how much to
1.b
acre
pay for land, Warner looks at a
range of factors, from local cash
rents to the area's lo-year cropyield trend. She hires contractors to farm the land and splits
the harvest, using her trading
experience to hedge out price
risk and lock in gains. In exchange for a seven-year lockup,
a 2% management fee, and 20%
of profits, she figures she can
deliver the investors in her first
fund an annual return of 13% to
2030
196C
16%-about 4% to 6% from crop
I
104 FOKTUNE June 22, zoo9
yields, around 8% from land appreciation, and the rest
from hedging.
Based on historical returns for farmland, that's an
attainable goal. According to research by Terry Kastens and Kevin Dhuyvetter, professors of agricultural
economics at Kansas State University whom Warner
recruited to be advisory partners in her fund, the
average annual return on U.S. farmland since 1950,
including crop yield and land appreciation, is 11.5%,
vs. a 12% annualized total return for the stock market. And the farm returns actually came with about
half the volatility of stocks.
Despite the big price moves in grains, farmland
values have stayed relatively stable. Land prices in
the U.S. rose modestly last year (the final data from
the USDA won't be out until August), but the picture
this year is unclear. In May the Federal Reserve Bank
of Chicago estimated that farm prices in parts of the
Midwest fell by 6% in the first quarter, the biggest
such drop since 1985. However, Warner says that the
markets she targets are still on the rise. "I hope we see
some softening," she says. "I think it would be a great
buying opportunity."
IF ANY INVESTOR has a long view on world markets,
it's Lord Jacob Rothschild. The 73-year-oldscion of
the world-famous European banking dynasty need
only look to his own family history, which dates
back some zoo years to the rise of patriarch Mayer
Amschel Rothschild in Frankfurt. Even after losses
in his investment trust last year, Rothschild has a
personal fortune estimated at $600 million. He also
has a strong opinion on the prospects for farmland.
"We think right now is an excellent point of entry
for taking a long-term position in agriculture," he
tells Fortune.
Rothschild did just that last year when he invested
$36 million for a24% stake in aventurecalledAgrifirma
Brazil. The company is the brainchild of Jim Slater, a
longtime City of London investor and investingwriter
known in the 1970s as one of Britain's most feared corporate raiders, and Ian Watson, a Canadian investment
banker. It is not the trio's first investment in commodities together. In 2003, Rothschildinvestedwith Watson
and Slater in a company called Galahad Gold, which
snapped up gold and uranium assetsjust as metals prices
began to move up, and then sold shares publicly through
the London Stock Exchange's AIM market. With commodities booming in late 2007, they liquidated the
company's assets, locking in a 66% annualized return
over five years. Profits in hand, the trio decided that the
next big opportunitywas in agriculture.
When asked about the case for buying farmland,
/
RetirementGuide / @
Rothschild rattles off statistics on population growth
before bringing up another issue of increasing importance: inflation. "If you look at the macro picture
today," says Rothschild, "we have an extraordinary
situation. If you take governments' printing money
as fast as they are, borrowing as fast as they are, and
bailing out white-elephant corporations,we're surely
going to have an inflationary situation fairly soon." In
that kind of environment, owning a hard asset like
land is a good hedge.
Agrifirmahas alreadyacquired some ioo,ooo acres
in the Brazilian state of Bahia and holds an option on
another 60,000. This summer it will produce its first
crops of soybeans, cotton, and corn. Rothschild and
Watson say they chose Brazil in part because there was
a large quantityof scrubland, or cerrado, that could be
irrigated and converted to farmland, enhancing the
value greatly. They also liked the fact that its economy has been growing robustly. And perhaps most
important, Brazil has 14%of the world's freshwater
resources, the most of any country. "The world is fully
in a water crisis, and we haven't realized it yet," says
Watson. "When you're exportingagriculture,you're de
facto exporting water."
7 H E Y CAN'T CHANGE the laws on me, because I've got
OWNING HEARTLAND
Want to buy afarrn? Here's how you can get into the game.
One of the few asset
classes that didn't blow
up in the meltdown was
farmland. It rose 8%in
2008, hitting a record
high of $2,170 per acre,
according to estimates
by the U.S. Department
of@culture. How
canyou invest?Some
ETFs offer exposure
to the agricultural
t
sector. ~ a r k eVectors
Agribusiness (MOO)
tracks the DAXglobaI
agribusinessindex,
which includes Deere,
Monsanto, and others
that derive at least
half their salesfrom
the sector. Qualified
investorsmight
consider a hedge
fund like BlackRock
Agriculture.
To buy land on your
own, it helps to use a
broker like Tom Schenk
of Investors Farmland
Services, in Valleyford,
Wash., who will scout
out land deals. For
a list of agentsgo to
landbrokermls.com.
Onceyou buy the
land, you can retain
the current operator
or use a management
firm to find a new one.
You then enter into
a cropshare or lease
agreement with the
farmer. Rangeland
is the least risky but
tends to produce
annual returns of only
2% to 3%; irrigated
acreage requires costly
equipment but can
show yields of8%.
Schenk encourages
diversifiing by
geography and crop.
Farmland is a longterm investment.
Not every year will
see land values rise.
Patient investors,
however, can make
a tidy profit without
ever getting their
hands dirty.
-BETH KOWITT
the guns," says Phil Heilberg, pausing to take a bite of
his turkey bacon. On a Monday morning in May the
chairman and CEO of Jarch Capital is explaining his
investment strategy over breakfast at the Regency
Hotel near his office on Park Avenue in New York City.
"As long as Gen. Matip is alive, my contract is good."
While Warner and Rothschild have focused on carving out a relatively risk-freeway to profit from the farmland boom, Heilberg, 44, has taken the opposite tack
The American is putting his money into Sudan, Africa's largest country and one of its least stable. And he's
hardly shy about the many ways his investmentcould go
wrong. "I like to point out that it's a failed state, it's been
sanctioned by the U.S., and it has a peace agreementthat
could unravel at any time and lead to armed conflict,"
he says. "The good thing is that you know what most of
the risks are, and you can get paid for them."
With hundreds of thousands of acres of lush, undeveloped land in the Blue Nile and White Nile valleys, Sudan has the raw potential to develop into an
agricultural powerhouse. Investors from Abu Dhabi,
Qatar, Saudi Arabia, and Kuwait have already reportedly made deals to lease land in the predominantly
Muslim northern part of the country. But in January,
Heilberg raised a lot of eyebrows by announcing that
he had agreed to lease roughly 1million acres of undeveloped land-an area the size of Rhode Island-in
Mayom County in southern Sudan.
The deal has drawn all kinds of criticism-everything from cries of land grabbing to accusationsthat
Heilberg is intentionally fomentingdiscord on behalf
of the U.S. governmentto outrage that he is consorting
with "warlords." Heilberg has cultivated connections
to Washington. His vice chairman is former ambassador Joe Wilson, the husband of onetime CIA agent
Valerie Plame and the man who blew the whistle on
the Bush administration's obfuscations about Iraq and
FEEDBACK bokeefe@fOrtunernail.com
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Rdrement Guide i B I
n
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the abundance of naturalresowces in the southern part
of the country. "There's a lot of wealth to be made when
have changes in sovereignty," he says.
'5 In addition to farmland, southern Sudan has oil,
zinc, and uranium, and Heilberg has long been
lo&ng for a way to profit from developing those
resd&ces. But he is constrained by, among other
things,;the fact that U.S. sanctions prevent him from
exporting oil out of Sudan-not that the government
in the northern capital of Khartoum would allow
it anyway. (His ideal investment scenario involves
southern Sudan's making a relatively bloodless split
from the Muslim north and being recognized by the
U.S. as an independent nation.)
So for now Heilberg is focusing on the farming
opportunity, and he says that by the end of the year
he will have more thaia doubled the amount of land
that he's leasing. He is interviewing foreign farming
contractors to develop theland, and hopes to begin
growing tomatoes, corn, onihms, and other vegetables
by next summer. He anticipates taking on investment
from a "major venture partner" within the year.
Heilberg has promised not only to create jobs but
also to put 10% or more of his profits back into the
Mayom County community. (Jarch'sslogan: "Because
it is your land, your natural resources!") And Wilson
characterizes their approach as aversion of doing well
by doing good. "This is a deal that's certainly fraught
with political risk," he says. "But we think that it has
enormous potential to open an avenue of economic
development for the southern Sudanese and make
them shareholders in a positive outcome. That's my
theory as I look at this." In theory, it sounds good. As
an investmentstrategy, it's not for the faint of heart.
I
I
'sou
w,
AFRICAN GAMBLE
AMERICAN PHIL
HEILBERG(LEFT) IN
JUBA.SUDAN-W'THAN
ADVISER. GEN. PETER
GATDETOFTHE
SUDAN PEOPLE'S
LIBERATIONARMY
~ ~ & ~ ~ ~ ~ , "
HASLEASEDAMlLLlON
ACRESOFLAND IN
SOUTHERNSUDAN.
yellowcake uranium. Another executive is a former
CIA operative.
But Heilberg dismisses any suggestion that he's
working with the U.S. government. And he makes no
apologies for his associates on the ground, including
Gen. Paulino Matip Nhial, 67, a
~the
& aforementioned
C A L
hardened veteran of the long civil war between north
and south Sudan who is now the deputy commander
of the army in the south. Both Matip and one of his allies, Gen. Peter Gatdet, are on Jarch's advisory board.
An Amnesty International report in 2000 recorded
accusationsthat troops under Matip's command committed war atrocities. "One man's warlord is another
man's freedom fighter," says Heilberg. "If you want to
be in power over there you have to control territory,
and listen, that involves tribal battles. You just have to
recognizewho is a good man and who isn't--who's doing it for power and who's trying to better his people.
Matip is a good man."
The son of a c o k trader, HeiIberg spent nine years
working for the AIG Trading
Group, doing metals and currency deals in the former Soviet
republics and openingoffices for
the company inHong Kong, Singapore, Moscow, and Tashkent
before strikingout on his own in
1999.He startedJarch(the name
is formed from his children's
initials) in 2002, and became
captivated by the combination
of political tension in Sudan and
ABU DHABI
QATAR, AN^
SAUDI ARABIA
HAVE ALREADY
MADE DEALS
TO LEASE FARMLAND IN WARTORN SUDAN.
BACK ON HIGHWAY BI,Warner is reflecting on the fact
that the wider world is mimicking her own journey
back to the farm. "I think it's fun to get Wall Street
types and farmers talking," she says. "They might
have a lot to offer each other. A couple of years ago
when I started telling my buddies in New York my
little story about row-crop agriculture, it seemed
really exotic. But I think people have sort of been
slapped around and gotten a wake-upcall, and they're
thinking, 'Oh, this kind of makes sense.' "
There's another thing she finds comfortingabout
what she's doing. "I've always personally liked the
idea," she says, "that even if the bottom dropped out
of this whole credit bubble and the world blew up, that
the farmland, while it might not make a return fortwo
or three or four years, was going to be there down the
road. Because in the end, people have to eat."
aePoaTaR ASSOCIATE Beth Kowitt
'
I