14th Congress Proceedings
Farm Investments: Alternative Ownership Structures That Address The Liquidity Versus Profitability Conundrum
Investing in farmland is fraught with conflicting signals. Oltmans (2001) concludes that while investing in land may generally be profitable it is seldom, if ever, feasible on a cash flow basis. He argues that the non-depreciable nature of land and long-term capital gains are incompatible with the capital recovery terms sought by investors and lenders. He also notes that literature on this subject tends to focus on either the returns (profitability) or the cash flow (feasibility) but not on both simultaneously. To assist in the debate it is helpful to split the farm into two businesses that are often, but not necessarily, linked – the property business, where success is measured by changes in asset values over time and is driven by smart purchase and sale decisions, and the farming business, where success reflects effective and efficient sustainable operation of the resource base. By determining the profitability, liquidity and wealth creation for three ownership structures (land leasing, sharefarming, equity partnerships) from the perspective of both the farming entity and the passive investor (property owner or non-managing equity partner) it is possible to identify for each player the measures most relevant to their expectations from the investment and the factors which most influence them. If the assets of the property business and the farming business are owned by different parties there is no need for an aggregate measure of business performance. The challenge is to determine ‘fair’ returns to each player; is profit, cash flow or wealth creation criteria the basis for such a comparison? For the property business investors the opportunity cost of capital comes from the farming ‘rent’ and what they believe the property business will deliver over time (many expect at the very least an inflation proof investment). The opportunity cost of capital for the farming business investors must allow for depreciating assets. Historically the property business has out performed the farming business although its returns have been three times as volatile as farming returns (Nartea and Basanta(1998), Brown (1999)).