What is in this article?:
- Rethink Soil Value | Why Not Reflect the True Cost of Soil Erosion in the Economic Value of Land?
- Could Land Mimic Timber Asset Model?
- Losing ground
- Food for thought
Could Land Mimic Timber Asset Model?
By Clay Mitchell
Institutional investors view farmland today as timber was 20 years ago when it was developing as an asset class. Investor ownership in timber grew from less than $1 billion to over $50 billion due to third-party certification of Best Management Practices (BMP) by forest managers.
The timber market, only about one-tenth the size of the farmland market, was made investable by squeezing inefficiencies out of the system. Today, institutional land investors seek the same level of soil-quality measurements to help in their valuations that timberland buyers developed decades ago.
To grasp the long-term viability of an asset, timber investors needed evidence of foresters using BMPs that were appropriate for the local climate, soil, topography and timber type. Third-party certifications from four organizations (American Tree Farm System, Forest Stewardship Council, Program for the Endorsement of Forest Certification and Sustainable Forestry Initiative) became critical for forest managers.
Among forest operators, poor stewardship became viewed as a violation of professional ethics. Throughout the value chain, certifications became an opportunity to show skill and professionalism, not a set of burdensome rules.
Despite the much longer production horizons in timber compared to farmland, the timber industry brought transparency to sustainability issues that might not have cash impacts for generations.
Even though investor ownership in timber is still far below 50%, the improvements and new technologies produced better appraisals and productivity measurements that re-priced an entire asset class.
I expect similar benchmarking in the land market, as institutional investors seek better data on their potential asset. Technologies today can give us critical soil-quality benchmarks far beyond what we have now. Investor demand for transparency and improved productivity measurement, along with technologies that allow accurate inventorying of soil and high land prices will have profound effects on the economics of farming and eliminate both inefficiencies.