Our decisions on how to deploy capital are based on extensive research of global economic and environmental trends. We combine this with local knowledge and relationships to develop strategies that deliver financial returns and positive environmental impacts.
Rural land is set to be a valuable asset in the 21st century. A growing world population, rising incomes in the fast-growing Asian economies, and expanding bioenergy markets will underpin a steady increase in demand for food and fibre.
On the supply side, land and water resources are under pressure in many parts of the world. There are reserves of land in Africa and South America but it will be difficult and expensive to develop them. The best, most accessible land is already being used – each additional hectare comes at a cost.
Rising demand and constrained supply have led to a sharp rise in the price of food and other agricultural commodities since 2007. There have been many ups and downs since – and more volatility can be expected – but prices appear to have undergone a structural shift compared to the 1980s and 1990s. The era of cheap food and fibre is over.
Higher prices send a clear signal – that more investment is needed in food production and biological systems. Investors are responding by increasing their allocations to real assets such as farmland and forestry.
These real assets have particular features that make them attractive to long-term investors. They provide a natural hedge against inflation, they are uncorrelated with other asset classes, and they can provide current income as well as steady capital appreciation. Moreover, research from the USA and Australia indicates that over the past 30 years farmland investment has out-performed other asset classes, with lower volatility.
Conventional systems challenged
Nonetheless, farmers, land owners and investors often do not see the benefits of this positive market context. There are 3 major challenges that threaten the profitability and sustainability of many conventional land management systems.
Rising input costs. Over the past decade, inputs costs have risen quicker than the price of outputs, squeezing margins. Much of this is linked to the rising price of energy, as fertilisers, agro-chemicals, diesel and machinery are all dependent on fossil fuels. Intensive livestock producers who rely on purchased animal feed often face the most pressure, squeezed between grain prices and meat prices that they can’t control.
Volatile weather. Droughts, heatwaves, floods and storms threaten biological production systems. Extreme weather can send shockwaves all the way from an individual farm to global markets. As the climate warms, the science indicates that the frequency and intensity of these events will increase.
Environmental degradation. Conventional agriculture can erode soils and degrade natural soil fertility, increasing the need for costly inputs and magnifying vulnerability to extreme weather. In some regions, water resources are being extracted at an unsustainable rate. Agriculture is also responsible for polluting air and water, destroying biodiversity and producing greenhouse gases. Farming can be a dirty business, pushing environmental costs onto the rest of the society. We believe that over time these ‘externalities’ will be taxed, regulated and priced.
Regenerative, ecological land management
There are alternative farming systems that minimise the use of expensive inputs, enhance resilience to volatile weather and create positive environmental impacts – while being just as productive and, in many cases, more profitable than conventional operations.
These agro-ecological systems seek to make the most of natural cycles, minimising the use of off-farm inputs. They emphasise soil health, in particular the powerful effects of soil organic matter. They are knowledge-intensive, exploiting the symbioses that come from diverse mixes of plants and animals. They not only reduce greenhouse gas emissions and increase resilience to extreme weather; they can help mitigate climate change by storing carbon in the soil.
There are many examples of these systems in use. Rotational grazing with large herds can restore degraded grasslands; using minimum tillage, cover crops and varied crop rotations can enhance the fertility of arable land; agro-forestry has been used to reverse soil erosion on fragile hillsides; integrating crops, animals and trees can produce a whole that is worth more than the sum of the parts. There is a burgeoning literature showing how land can be transformed to a more productive and resilient state.
The opportunity for investment
Most of these regenerative, ecological systems have been applied at a small scale, often by innovative farmers looking for an alternative to mainstream agriculture. The challenge is scaling them up and achieving landscape-level impacts. Financial capital can play a role by backing the best land managers and helping them expand.
Regenerative, ecological systems have particular advantages for long-term financial investors. By minimising purchased inputs, they can deliver a low cost of production, which builds a buffer against fluctuating commodity prices. These systems are more resilient to climatic extremes, which can smooth volatility and reduce risk. And they enhance the productivity and value of an investor’s primary asset, the soil.
There is a particular opportunity for investors to take degraded land – of which there are millions of hectares around the world – and to restore it. Transforming an under-performing asset into a productive one has obvious benefits for investors. Increasing production on degraded land also takes the pressure off the rest of the planet. We call it an ‘ecological turnaround strategy’.
SLM Partners seeks to acquire rural land and to implement regenerative, ecological management systems that are commercially viable and environmentally beneficial. We target financial returns that are commensurate with market expectations for real assets. These returns come from a combination of operational income and capital appreciation.
Because we look to change how land is managed, we do not pursue passive ‘buy and lease’ strategies. We build the local teams needed to manage land and to gain the benefits from improved operational performance.
Our clients are sophisticated investors such as pension funds, insurance companies and family offices. We believe in long-term investing (10+ years) and creating structures and management agreements where interests are aligned.