Hancock Agricultural Investment Group Farmland Investor Volume 18, Number 2 Fall 2010 A Cash Flow Comparison of Farmland, Stocks and Bonds and Other Real Assets A s institutional investors seek to diversify their traditional equity and fixed income portfolios by including real assets such as farmland, timberland and commerical real estate, they are finding farmland to be an attractive long-term investment that offers a current income return component, strong total performance, capital preservation, low to moderate risk and favorable diversification characteristics. Over the long term, farmland cash yield has exceeded that of traditional equity and fixed income, timberland and commercial real estate. Farmland s strong income return potential is a benefit investors may particularly appreciate in today s environment of heightened market volatility. Farmland income returns compare favorably with traditional U.S. equity and fixed income investments, as well as with income returns from commerical real estate and timberland. A historical comparison of the Continued on page 2 Contents A Cash Flow Comparison of Farmland, Stocks and Bonds and Other Real Assets......1 Growth Brings Promotions, New Hires................4 2010 Harvest Outlook by Major Crop Type...........5
A Cash Flow Comparison of Farmland, Stocks and Bonds and Other Real Assets Continued from page 1 income component of the National Council of Real Estate Investment Fiduciaries (NCREIF) Farmland Index to the NCREIF Property Index, the NCREIF Timberland Index, the Barclay s U.S. Aggregate Bond Index and the S&P 500 Index is shown in Figure 1 on page 3. The Farmland Edge: Figure 1 shows that income returns from farmland exceeded those of the equity and fixed income indices over all periods shown. Farmland income returns significantly exceeded those of timberland 1, over all time periods, and also exceeded those of commercial real estate, Over the long term, farmland cash yield has exceeded that of traditional equity and fixed income, timberland and commercial real estate. represented by the NCREIF Property Index (NPI), over the three-, five- and 10-year periods ended December 31, 2009. Income does not always equal cash flow Real asset income returns often do not equal cash flow and thus income measures may not accurately describe the amount of free cash flow available for distribution (cash yield) that an investment generates. Unlike traditional intangible investments such as stocks and bonds, real assets such as farmland, timberland and commercial real estate require annual capital expenditures to maintain the assets condition. These expenditures are usually funded out of investment earnings. For example, capital expenditures in farmland investments may include improving irrigation or replanting permanent crops (trees or vines). Road building and tree planting are typical timberland capital expenditures. Commercial real estate capital expenditures may include building renovation and other physical improvements as well as mortgage-related adjustments 2
Figure 1: Annualized Income Returns as of December 31, 2009. Figure 3: Annualized Cash Yields as of December 31, 2009. Figure 2: Annualized Capital Expenditure Rates (Basis Points) as of December 31, 2009. For institutional investors seeking diversification and reliable cash flow in today s volatile markets, farmland is a real asset class that merits consideration. and leasing commissions. This concept is illustrated in Figure 2, where capital expenditures for these asset classes are annualized and expressed as a basis point charge against the corresponding return. This capital expenditure charge represents the difference between income and cash yield. In general, commercial real estate capital expenditures tend to be more costly to returns than those associated with farmland or timberland. Farmland cash yields have historically exceeded those of stocks, bonds, and other real assets Capital expenditures are not a factor in stock dividends and bond coupon payments. Therefore, in order to accurately compare real investments to stocks and bonds, one should compare the cash yields (cash income minus capital expenditures, or free cash flow expressed as an annualized rate) for each investment. By subtracting capital expenditures from the income return calculation for the NCREIF Farmland Index, NCREIF Timberland Index and NCREIF Property Index, these real asset cash flow yields may be compared to those of stocks and bonds as shown above in Figure 3. 2 Even after subtracting capital expenditures, farm- SOURCES land cash yields exceeded cash yields from stocks and bonds over all periods. Farmland outperformed timberland and commercial real estate in all periods except the one-year period where the cash yields for farmland and commercial real estate were the same 3. For institutional investors seeking diversification and reliable cash flow in today s volatile markets, farmland is a real asset class that merits consideration. Sources for all charts are: Morningstar National Council of Real Estate Investment Fiduciaries ( NCREIF ) Past performance does not guarantee future results. 1. In the NCREIF Timberland Index and as presented here, timberland income returns are classified as earnings before interest, taxes, depreciation, depletion and amortization (EBITDDA). 2. Income returns minus capital expenditure rates may not exactly equal cash yield, since each component is calculated separately using NCREIF property-level methodology prior to investment management fees. 3. While the cash yield happens to be the same for the NFI and the NPI in 2009, NFI income was 5.50% for the year while NPI income was 6.17% for the same period. 3
Growth Brings Promotions, New Hires A s part of an expansion of product offerings and to maintain and enhance its commitment to client service, the Hancock Agricultural Investment Group (HAIG) has announced several organizational additions and changes. Chad Drake has joined HAIG as Senior Tax Accountant in the Financial Accounting and Client Reporting Group. Mr. Drake is responsible for the taxation work papers, reporting, filings and corporate compliance for all HAIG clients. Prior to joining HAIG, he worked for Deloitte and Touche where he was a senior tax associate focusing on REIT and private equity clients. Mr. Drake holds a Bachelor of Science in Accounting and Finance and a Master of Science in Taxation from Bentley College. Melanie R. Murphy has joined HAIG as Senior Investment Analyst, assuming Mr. Kenney s former role in portfolio analysis and client service. Ms. Murphy s prior experience has been in real estate consulting and investment management. She holds a BS in Resource Economics and a Master of Science in Agricultural Economics from the University of Connecticut. Daniel Eccles has joined HAIG as Controller in the Financial Accounting and Client Reporting Group. Prior to joining HAIG, Mr. Eccles held financial accounting positions with the Boston Bruins and in various investment and public accounting firms, including Bain Capital, LLC and PricewaterhouseCoopers. He holds a Bachelor of Science in accounting from Suffolk University. Stephen A. Kenney, who previously served as Senior Investment Analyst in the portfolio management and client service area, has assumed the newly created position of Vice President of Business Development. In his new role, Mr. Kenney will focus on raising capital for farmland investment. Prior to joining HAIG in 2005, Mr. Kenney was an analyst at various financial and investment management firms, including Morgan Stanley and Wells Fargo. He is a member of the Boston Security Analysts Society and holds a Bachelor of Science in Finance from Iowa State University and a Master of Science in Finance from Brandeis University. Beatrice A. Porter, CPA has joined HAIG as a Senior Investment Analyst in the Asset Management Group. Ms. Porter assists with risk management activities as well as valuation and investment analysis. Prior to joining HAIG, she was a senior portfolio analyst researching food and agribusiness companies for John Hancock s Bond and Corporate Finance Group, and an audit manager for John Hancock s Audit Group. Prior to joining John Hancock, Ms. Porter was employed by PricewaterhouseCoopers. She holds a Bachelor of Science in Accounting from Virginia Polytechnic Institute and State University (Virginia Tech). The Hancock Agricultural Investment Group is one of the largest institutional managers of agricultural real estate in the U.S. and the leading provider of farmland investment management services to institutional investors.as of December 31, 2009, HAIG farmland assets under management in the United States, Canada, and Australia totaled US $1.3 billion. For more complete information on HAIG employees, please visit the Key Personnel section of the HAIG website: www.haig.com. 4
2010 Harvest Outlook by Major Crop Type Almonds: Despite a cool, wet spring that appears to have reduced almond yields, an increase in productive acreage has pushed California s 2010 almond production forecast to 1.65 billion pounds, a 17% increase over last year. If realized, a crop of this size would exceed 2008 s record harvest of 1.63 billion pounds. Fortunately, increasing almond utilization has continued to support prices as crop size has increased in recent years. For the fourth consecutive year, the almond industry in 2010 saw record shipments both domestically and abroad, and almond exports topped 1.0 billion pounds.top destinations for U.S. almonds are Spain, China and Germany. Growth in shipments to Asia and Europe outpaced other regions, increasing 17% and 15% respectively. A recovering global economy and a relatively weak U.S. dollar have helped to drive exports. Apples: The 2010 Washington apple harvest, which accounts for 60% of the overall U.S. apple crop, began in mid-august with harvest of the Gala variety. While the total U.S. apple production forecast is down 4% from last year,washington state production is estimated to reach 5.65 billion pounds an increase of 5% over 2009 s crop. Unfavorable spring weather significantly hampered Michigan and New York production. Despite a decline in the USDA Fresh Fruit index of 4% since August 2009, apple prices rose 6.1%. Corn: Harvest is progressing on schedule, but early reports indicate mixed yields. 2010 production estimates have been revised downward but remain above 2009 record levels. Domestic corn use is expected to fall in 2010/11 but is projected to be offset by increased exports of an additional 50 million bushels over 2009 levels, driving stocks as percentage of total use to their lowest level since 1995/ 96.The combined effect of short stocks and increases in worldwide demand from a recovering global economy has pushed prices upward in recent months, and this trend is expected to continue into 2011. Cranberries: An early spring and warm summer temperatures contributed to high fruit quality and early fruit maturity for Wisconsin cranberries.as of mid- August, industry-wide cranberry production is forecasted to rise 6% over 2009 despite lower average yields per acre. The increase in production is due to an increase in cranberry acreage. Consecutive years of large harvests have contributed to record carry-in inventories in 2010 and driven the price of cranberry juice concentrate close to historical lows. California Wine Grapes: California wine grape production is expected to fall 6% from 2009 s record crop. Due to cool and wet spring conditions, the crop was generally two weeks behind schedule as of mid-august. U.S. wine consumption by volume increased 1.9% in 2009 while total wine sales by value declined 3.3%, reflecting steep discounting and a shift to less expensive value wines by consumers and wine retailers. Continued on page 6 5
2010 Harvest Outlook by Major Crop Type Continued from page 5 Walnuts: Above average rainfall and cool weather created favorable conditions for walnut production in 2010. Production is projected to reach a record high of 510,000 tons, up 17% over last year, due largely to strong yields. Less than typical carry-in inventories and strong export demand are expected to mitigate downward price pressure resulting from the bumper crop. Pistachios: California 2010 pistachio production is still expected to match or exceed that of 2009, despite inclement weather during bloom period and the fact that it is an off year for this alternate-bearing nut crop. Rapidly increasing industry production in recent years has been absorbed by surging global demand from key importing countries in Europe and Asia. Political and economic sanctions against Iran, the U.S. s main pistachio producing and exporting competitor, are expected to continue to provide the U.S. with an advantage in the global marketplace. Prices are currently near record highs. Soybeans: Planted soybean acres rose 2% over last season. More acres in production, coupled with high yields per acre have driven the mid-september U.S. soybean production forecast to a record 3.48 billion bushels for the 2009/10 crop year. Strong early season sales and a projected increase in global demand, especially from Asian markets, indicate the increase in supply will be absorbed at strong prices, and ending stocks are forecast to decrease from prior year levels.... Hancock Natural Resource Group 99 High Street 26th Floor Boston, MA 02110-2320 First Class Mail U.S. Postage PAID Boston, MA Permit No. 11 Farmland Investor is published by Hancock Agricultural Investment Group, a division of Hancock Natural Resource Group, Inc. headquartered in Boston, MA. Hancock Natural Resource Group, Inc. is a registered investment adviser and wholly-owned, indirect subsidiary of Manulife Financial Corporation of Toronto, Canada. The information provided herein is not an offer to sell, or a solicitation of an offer to buy any security, investment product or service. This material was prepared solely for informational purposes and it is distributed with the understanding that Hancock Agricultural Investment Group is not rendering legal, accounting or other professional services. There is no guarantee that forecasts discussed will be realized. A variety of factors, many of which are beyond Hancock Agricultural Investment Group's control, may affect performance and results, and could cause the actual performance and results of investments to be materially different from any future performance or results that may be expressed or implied by any forward-looking statements. For further information on any of the topics covered in Farmland Investor, contact Stephen A. Kenney, HAIG Vice President Business Development at (617) 747-1620 or visit our web site at www.haig.com.