Ceres Partners reaps profits from farmland
By Seth Lubove,
Perry Vieth baled hay on a neighbor’s farm in Wisconsin for two summers during high school. The grueling labor left him with no doubt about getting a college degree so that he’d never have to work as hard again for a paycheck. Thirty-eight years later, and after a career as a securities lawyer and fixed-income trader, Vieth is back on the farm.
Except, now, he owns it. As co-founder of Ceres Partners, a Granger, Ind.-based investment firm, Vieth oversees 61 farms valued at $63.3 million in Illinois, Indiana, Michigan and Tennessee. He’s so enthusiastic about the investments that he quit a job in 2008 overseeing $7 billion in fixed-income assets at PanAgora Asset Management, a Boston-based quantitative money-management firm, to focus full time on farming.
On a spring afternoon, Vieth, 54, barrels along backcountry roads in a Jeep Cherokee in Indiana and Michigan to scout a fruit orchard and corn and soybean farms to buy.
“When I told people I was leaving to start an investment fund in farmland, they said, ‘You’re doing what?’ ” Vieth says. “It will always be difficult for Wall Street firms to understand. It’s not like buying stocks on a computer.”
It’s much better: Returns from farmland have trounced those of equities. Ceres Partners produced an average annual gain of 16.4 percent, after fees, from January 2008, just after the firm started, through June of this year, Vieth says. The Standard & Poor’s 500-stick index dropped almost 1 percent in that time.
The Soros model
The bulk of the returns are in rent payments from tenant farmers who grow the crops and from land appreciation.
Investors are pouring into farmland in the United States and parts of Europe, Latin America and Africa as global food prices soar. A fund controlled by George Soros, the billionaire hedge-fund manager, owns 23.4 percent of South American farmland venture Adecoagro.
Hedge funds Ospraie Management and Passport Capital as well as Harvard University’s endowment are also betting on farming. TIAA-CREF, the $466 billion financial services giant, has $2 billion invested in some 600,000 acres of farmland the world over.
“You’ve got to buy in a place where it rains, and you have to have a farmer who knows what he’s doing,” says Jim Rogers, 68, chairman of Singapore-based Rogers Holdings. “If you can do that, you will make a double whammy because the crops are becoming more valuable.”
The growth in demand for food — spurred by the rising middle classes in China, India and other emerging markets — shows no signs of abating.
So many investors have rushed to capitalize on food prices in the past three years that they may be creating a farmland bubble. The Federal Reserve Bank of Kansas City said in May that farmland prices had surged 20 percent in the first quarter compared with a year earlier. “Yes, farmland will be a bubble again; all agricultural products will be in a bubble again,” says Rogers, an investor in Agrifirma Brazil.
Hedge-fund manager Stephen Diggle calls farming the ultimate safe haven. Diggle began buying farms with his own money in 2008 after Lehman Brothers filed for bankruptcy in September of that year and the S&P 500 plunged 43 percent in the next six months. He bought 8,000 acres in Uruguay, three smaller plots in southern Illinois and an 80-acre New Zealand kiwi-and-avocado orchard.
“We really thought all the investment banks would go under,” says Diggle, who as a hedge-fund manager uses options and warrants to bet on price swings in the market. “Everyone said, ‘Buy gold.’ But at the end of the day, you can’t eat it. If everything else goes and I just have these farms, it makes me moderately wealthy.”
The hedge fund Diggle co-founded, Artradis Fund Management in Singapore, incurred about $700 million in losses. He closed it in March and opened another Singapore-based hedge fund, Vulpes Investment Management.
From his vantage point in Asia, where the British expatriate has worked for the past two decades, Diggle says he has witnessed aspiring locals eating their way up the food chain. “You can see what a more prosperous China will consume,” Diggle, 47, says. “It means more dairy, more meat — not just pork and chicken.”
Investors find in farmland a respite from the cyclical price swings of the commodities market. The average value of an acre of farmland tracked by the U.S. Department of Agriculture has been on a mostly steady climb from $737 in 1980 to $2,350 in 2011.
In Britain, where farm prices are also rising, one money manager traded his career at BlackRock for one in farming. Graham Birch, 51, left in 2009 as the London-based head of the natural resources team at BlackRock, the world’s biggest asset manager, to run his two dairy, wheat and barley farms. Birch, who says farming has suffered from a lack of investment and management talent, has spent $1 million on improvements.
By about 2006, Vieth’s concerns about the economy were mounting: Inflation was at a low, and the dollar had peaked as U.S. debt and deficits soared. So he searched for an asset class that would benefit from a currency decline and rising prices. He hit upon farms because a falling dollar boosts U.S. crop exports.
Vieth then connected with Paul Blum, who spent some of his youth on a farm in Upstate New York and today acts as Ceres’s point person with tenant farmers.
As the dollar fell 24 percent against the euro from January 2006 through May 2008, the pair started buying land as personal investments until the business grew too big for Vieth to manage on evenings and weekends. So in late 2007, he founded Ceres, just as tightening credit markets began to push the global economy into a recession.
“I was more convinced hard assets were where you wanted to be,” Vieth says, “and farmland was the best investment I could identify.” By last May, he had collected 17,238 acres, mostly in the Midwest.
When Vieth wants land, he goes shopping. Armed with aerial and soil maps, he looks for farms with predictable rainfall, mineral-rich land and good drainage. They avoid land that slopes too much, which could lead to soil erosion.
At a 337-acre farm for sale by a bank, Vieth frowns at the slant of the land and trees on the perimeter. “Those trees will shade the corn and stunt growth,” he says.
The next visit is to a farmer he hired, Ed Kerlikowske Jr., who grows watermelon, peas and corn on a 782-acre spread near Berrien Springs, Mich. For farmers such as Kerlikowske, the entry of outside investors frees up money for new equipment.
“To really grow the business in today’s economy, you need partners,” the farmer says as he passes out watermelon slices.
The Federal Deposit Insurance Corp., which regulates banks that lend to farmers, has examined whether investors may be pumping up prices and creating the conditions for a crash like the one that devastated the market in the 1980s, resulting in the failure of 300 farm banks.
Greyson Colvin, who started farming fund Colvin & Co. in Anoka, Minn., in 2009, dismisses the idea of an overheated market. “After the housing bubble, people are a little too quick to assign the word bubble these days,” says Colvin, who oversees 2,300 acres of farmland in Iowa, Minnesota and South Dakota valued at more than $10 million.
Colvin, a former analyst at UBS and Credit Suisse, says U.S. farmers aren’t carrying as much debt as they did during the 1980s crisis, which contributed to the downfall of banks as agriculture loans defaulted. The farm debt-to-asset ratio, which peaked in 1985 at 23 percent, is expected to fall to 10.7 percent in 2011.
At a dining-room table in the farmhouse in Granger, Vieth sits at his computer one evening and totals the day’s haul: an additional $900,000 from investors looking for comfort — and profit — in one of the oldest industries on the planet.
The full article appears in the September edition of Bloomberg Markets magazine.