Why Farmland With Centuries of Water Is the Ultimate Scarce Asset | John Farris of LandFund Partners on Super El Niño, Food Security, and the Sources of Alpha in Farmland

John Farris discusses the critical scarcity of arable land and the rising global demand for food, particularly protein, as the world population has surged from 6 billion in the late 1990s to 8 billion today. He highlights that global grain reserves are at their lowest in a decade, with food stocks averaging around 70 days, down from 110 days a decade ago. Farris warns that these tight food stocks, combined with the anticipated impacts of Super El Niño, could lead to significant supply chain disruptions.

Farris emphasizes the importance of irrigated farmland with reliable water sources for global food security. He cites California's decline in rice production, which has fallen from approximately 500,000 acres to between 200,000 and 300,000 acres due to water issues. He predicts that climate conditions could further impact food stocks, particularly rice production in India, in the fall and early next year.

The value of farmland is increasingly linked to water availability, with high-quality farmland prices in the Midwest currently 80 to 100% higher per acre than in the Mid-South, where 93% of the land is irrigated. Arkansas has become the largest rice-growing state in the U.S. due to its water resources. While the Midwest has fertile soils, it is vulnerable to drought, making the irrigated land in the Mid-South more resilient.

Farris represents Land Fund Partners, which focuses on acquiring non-irrigated farms and investing in irrigation infrastructure to enhance land value. He notes that water rights in the western U.S. have outperformed the S&P 500 over the past 30 years and anticipates increased demand for water rights in the eastern U.S. due to the needs of data centers. The Mississippi Alluvial Aquifer is highlighted as a crucial water source for farming, with the average farm having about 300 years' worth of water at current draw rates.

Farris asserts that farmland with centuries of water is a scarce asset that can significantly enhance food security. He mentions that Land Fund Partners has approximately $450 million worth of land and expands by about $50 million annually. He discusses the importance of regenerative farming practices, which can lead to substantial income increases after initial costs, and the role of government subsidies in supporting farmers and ensuring food security.

Farris notes that rice prices are currently at all-time highs due to low planting and anticipated supply reductions, which could be exacerbated by adverse weather conditions from Super El Niño. He highlights that LandFund Partners has a robust portfolio of over 40,000 acres of high-quality, 93% irrigated farmland, with zero vacancy and strong demand for its assets. The fund maintains a leverage ratio of 30 to 35% and has never experienced a late rent payment, indicating a stable investment environment.

The discussion also addresses the increasing demand for agricultural products, particularly protein, as the global population is projected to reach 10 billion. Farris predicts that supply and demand dynamics for key crops like corn, soybeans, cotton, and rice will remain strong over the next 20 to 25 years, despite challenges posed by climate change and fluctuating weather patterns.

Farris points out that the U.S. has a strong agricultural infrastructure that supports significant exports. He notes the growing interest in solar land development, with companies willing to pay more for land with transmission lines. Additionally, LandFund Partners is the first fund to receive carbon credits for its soil management practices, further enhancing the value of its farmland assets.

Overall, Farris underscores the unique characteristics of farmland as an asset class that is negatively correlated with stock and bond markets, providing true diversification for investors. He cautions that while farmland has historically performed well during financial crises, future performance is not guaranteed.