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1 Comparison between Farmland & Timberland Investment
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Page 1: Farmland and Timberland

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Comparison between Farmland & Timberland

Investment

Page 2: Farmland and Timberland

Introduction

Farmland Investment 1

• Farmland investments consist of direct investments in rural land along with crop and livestock assets that produce food, fiber and energy.

• Focus on the productive capacity of the land base.• The returns are based on the biological growth of crops and livestock as well as

appreciation of land and related assets.• Investments are grouped into three general categories:

Timberland Investment 2

• An investment instrument used primarily by large institutional investors (such as public and private pension funds).

• The two main assets that underlie timberland investments are tree farms and managed natural forests.

• The returns on these forestland investments come from biological growth, upward product class movement, timber price appreciation and land price appreciation.

Source: 1GMO white paper, FAO 2011, Global AgInvesting Research & Insight Estimates 2012, Macquarie Agricultural Funds Management 2012, 2Investopedia. 2

Row Crop Permanent Crop Livestock

Page 3: Farmland and Timberland

Value of investment opportunity

Source: FAO 2011, GMO 2011, HNRG 2012, Global AgInvesting Research & Insight Estimates 2012, Timberland Investment Resources 2012, Macquarie Agricultural Funds Management 2012.* Investable universe estimate - The total land value is reduced to the investable universe due to a range of factors that significantly restrict or prevent institutional investment including a lack of basic infrastructure, adverse governmental policies or unacceptable social and environmental risks.

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Total land value

$8,300bn

Investable universe

estimate*$1,000bn

Institutionally owned $35bn

Institutionally owned $60bn

Total land value $425bn

Investable universe estimate* $300bn

Agriculture

Timber

Page 4: Farmland and Timberland

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Farmland v/s Timberland

Source: http://www.pbig.ml.com/pwa/pages/back-to-the-land.aspx

Farmland potentially provides investors with an annual income stream, usually through

lease payments from tenant farmers on the other hand because trees take years to

reach maturity, timberland doesn't provide the regular income potential.

Timber is inextricably tied to the housing market. For that reason, and unlike farmland,

both lumber prices and timberland values remain below historical norms. That, to some

observers, is a bullish signal. "It could be a buying opportunity," says Moon

- Dennis Moon, Head of the Specialty Asset Management team at U.S. Trust

Page 5: Farmland and Timberland

Risk Return Profiles for U.S Farmland & Timberland

Source: Morningstar, NCREIF 5

January 1994 – December 2013

Page 6: Farmland and Timberland

1. Farmland provides a high level of capital security and a low level of risk2. An effective inflation hedge3. A stable income producing asset4. Farmland investment delivers lower income volatility5. It delivers high total returns6. Has superior risk adjusted returns7. An attractive portfolio diversification tool8. Performs well in times of market turmoil9. Direct investment in farmland is simple and transparent10. Farmland has a number of benefits over other real estate investments

– Fundamental Limits to Supply– Resilient and Rising Demand– Price / Earnings and Yield– Farm Sector Debt

11. Farmland investment provides tax planning opportunities

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Investment Benefits of Farmland

Source: http://www.landcommodities.com/investment-benefits-of-farmland/

Page 7: Farmland and Timberland

1. An effective inflation hedge2. Timber returns beat stocks3. Has superior risk adjusted returns4. An attractive portfolio diversification tool - negatively correlated with other

investment instruments such as stocks and bonds5. Performs well in times of market turmoil6. Investment in land as an appreciating asset

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Investment Benefits of Timberland

Source: http://www.investopedia.com/articles/stocks/08/timber-investment.asp

Page 8: Farmland and Timberland

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Risks of Farmland Investment

Source: Report - DGC Asset Management - Farmland as an Alternative Investment Asset Class, 2012

Endogenous Risks Exogenous Risks

Those risks having an internal origin relating to specific crops, on-sitemanagement and site location.

Those risks having an external origin such as commodity prices, extreme climatic events and international trade policies

Risks involved in owning farmland properties can be separated into two broad categories:

1. General Investment Risk

2. Commodity Prices

3. General Agricultural Risk

4. Geographic Risk

5. Liquidity Risk

6. Regulatory Risk

7. Inflation / Deflation Risk

8. Currency Risk

9. Counterparty Risk

10. Asset Specific Risk

Page 9: Farmland and Timberland

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Risks specific to Timberland Investment

Source: Timberland Report – James W. Sewall Company

Physical Financial

Risks include factors affecting the volume and quality of timber, such as fire, insects,

and disease.

Risks include those affecting the price of inputs, including fertilizers and seedlings, and outputs, such as pulpwood, sawlogs,

and the timberlands themselves.

Operational Regulatory

Risks include factors affecting the day-to-day operability on the timberlands, from

weather impacts and access issues.

Risks may arise from land use regulations, green certification, and social pressures, all

of which have policy implications.

Page 10: Farmland and Timberland

• Investors can participate through direct investments or through the use of a specialist farmland investment manager, that may offer funds, co-investments, or separately managed accounts.

• Close-ended funds have a fixed term with some potential for extension.• Open-ended funds and publicly-traded REITs provide more liquidity, but valuation

at entry and exit can be a problem and performance of REITs can be influenced by capital market trends apart from the underlying farmland investment.

• Co-investments and managed accounts often require a larger minimum investment, but offer investors a greater measure of control.

Investment Strategies2

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Investment Vehicles - Farmland

Source: GMO white paper- A Farmland Investment Primer, July 20142 Report - DGC Asset Management - Farmland as an Alternative Investment Asset Class, 2012

Let Land Greenfield Developments

Page 11: Farmland and Timberland

• Billions of institutional investment dollars are being allocated to farmland assets by a number of large Institutional Investors and Sovereign Wealth Funds which continue to acquire large farm properties all over the world including

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Major Investors - Farmland

Source: Report - DGC Asset Management - Farmland as an Alternative Investment Asset Class, 2012

Page 12: Farmland and Timberland

• Timber Investment Management Organisation ( TIMO) is an investment management group that manages forestry and timber investments on behalf of large institutional investors such as pension funds, hedge funds, university endowments and family offices.

• Due to the large capital investment required by TIMOs, non-institutional investors interested in adding forestry assets to their portfolio are better off considering direct investments or forestry funds that facilitate smaller investments, either in single property acquisitions or across a managed portfolio of timber assets.

• Apart from TIMOs which invest privately, there are also publicly traded timber investment companies structured as Real Estate Investment Trusts (REITs)

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Investment Managers - Timberland

Source: http://www.dgcassetmanagement.com/investing/agriculture/forestry-timber-investment/timos

Some of the largest and longest established Timber Investment Management Organisations

Forest Investment Associates

Page 13: Farmland and Timberland

• Agricultural land assets sit at an estimated $8.3 trillion in total value with an estimated $1 trillion of that being investable. This represents a compelling opportunity for institutional investors.

• Demand for timber is expected to increase as economies in the U.S and abroad continue to grow. Environmental pressures will also continue to shrink global timber supplies.1

• While growth in investor interest has been strong, there has been a moderated translation into investment flows.

• Gradually, the industry is developing a track record and investors and their advisors are developing a deeper understanding of the opportunity.

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Conclusion

Source: FAO 2011, GMO 2011, HNRG 2012, Global AgInvesting Research & Insight Estimates 2012, Macquarie Agricultural Funds Management 20121 Hancock Timber Resource Group

Until recently, agriculture and farmland did not have a natural home in the investment portfolios of the mainstream institutions. This is now changing and has the potential to

make significant changes to capital ownership structures in the industry and the quantum of investment in the sector over time.