January 7th, 2019

Investing May Save the Agricultural “Commons”

Whether in a college class or as a passing anecdotal reference, at some point in time you have probably heard the story of “The Commons.” In 1968, UC-Santa Barbara professor Garrett Hardin put a title to a well-known problem. Given a communally accessible resource—a common grazing land, for example—it is in the short-term best interest of an individual to exploit that resource for his or her own profit. By slipping a few extra cattle onto the land, one rancher receives substantial benefit. Of course if all the ranchers do that, the carrying capacity of the land is exceeded, the quality of the forage, and in turn the cattle, deteriorates, and all returns diminish. The paradox of the commons, Hardin writes, is that “Each man is locked into a system that compels him to increase his herd without limit—in a world that is limited.”

Investing May Save the Agricultural “Commons”

The compulsion to unswervingly pursue short-term returns is driven by the true assumption that the window for profit from the shared commons will be open for a short time. The field will eventually reach its carrying capacity: the point at which all the value has been squeezed out of it. The commons will then be abandoned for the swift pursuit of a new investment.

The major concern surrounding some large-scale agricultural investments is that they set the stage on which this familiar parable plays out. Dean Kuipers echoes the concerns of the Oakland Institute when he writes, “megascale [agricultural] investments can lead to the worst kind of absentee landlordism, resulting in badly managed farms, poor labor practices, disempowerment of farmers, and increased speculation in land prices.”

Fortunately, an alternative form of agricultural investment is gaining momentum around the world, one that seeks to relieve the pressure of short-term (and ultimately destructive) gains in favor of long-term growth and profit. The driving idea is that the longer a farmer’s tenure on her land, the more incentive she’ll have to invest in soil health, biodiversity, and the like. As agricultural journalist Sarah West explains, “The organic model of farmland investing is the inverse of the conventional model: rather than being abused and depleted by short-term users, the land instead becomes more valuable the longer it’s worked.” This ultimately leads to larger and more consistent returns, providing a reliable option for investors looking to diversify their portfolio in an uncertain market.

The Iroquois Valley Farmland REIT is one organization that has recognized the potential value of playing the long game. Co-founder David Miller, a former vice president for First Chicago Bank, started the group in 2007 with two goals: restore farmland soil and profit from the growth of the organic market.

Farmers approach Iroquois Valley with land they’d like to purchase. The firm purchases the land and then leases it back to the farmer. Starting or scaling farmers enjoy a low fixed rent as they transition and then have the opportunity to purchase the land directly as their work becomes more lucrative. The system works for farmers and investors, as investors have seen double-digit annual returns since IQVF’s inception in 2007.

“We believe that investing in organic farmers and supporting their businesses creates myriad environmental, social, and financial benefits,” shares Claire Mesesan, Iroquois Valley’s Communications Director. “Our farmers are stewarding the land, and by doing so, are supporting public health and ecosystems.”

Of course, stewardship takes time. Stakeholders must understand that building lasting value requires patient investment. “For this arrangement to work, West writes, “companies dealing in organic farmland must also take an active role in land management and require that their investors understand the long-term nature of the investment before signing on.” A crucial part of the process, Mesesan adds, is that “Investors also see that they are supporting individual farmers and farm families. They have a human connection to their investment.”

Thomas Connell, Farmfolio’s Business Development Manager, looks forward to opportunities to provide investors with a hands-on tour of Farmfolio’s projects. “I’ve yet to come across anyone who doesn’t crack under the beauty of the landscape and the reconnection with where our food comes from, how it’s produced, how the land and the people that care for that land are looked after, and ultimately how it ends up in our shopping baskets back home,” he says.

Connell finds these investor trips, which he leads 8-10 times each year, unique in the industry and crucial to the success of agricultural investment. “If you invest in Apple or Exxon Mobil stock, sure you might get to go to an AGM once a year, but is your broker inviting you down to hang out at HQ in California or checking out operations on one of the oil rigs?” Connell quips. “Farmfolio’s model encourages stakeholders to be active participants in the investments they make. The vision is to provide consistent, long term returns for investors and local communities while contributing to building environmental and socially responsible use of land.”

“Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons. Freedom in a commons brings ruin to all,” Hardin historically wrote. When agricultural investment means responsible engagement in well-managed farms, that equation turns upside down. And that, Farmland LP founder Craig Wichner explains, “is really the way to turn farmland back into a commons. Back into a common good.”

(Read more about Mexico’s Fundamentals, A Destination for Investment)

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