Somebody else noticed dairy exports...

The last few years.  It seems investors are looking at the Chinese milk market and seeing the next Big Thing.

Reuters reported last December that KKR planned to invest $100 million in the Chinese dairy, taking a stake in a fragmented and troubled industry.

Other investors may pour $150 million more into the company alongside KKR, said the source at the time. Monday's announcement did not include financial terms.

The investment is among the few China deals for New York-based KKR, one of the world's biggest and oldest private equity firms that arrived in Asia only a few years ago.

KKR is investing in an industry that, while tainted by last year's milk scandal, reaches into the world's largest consumer market.

KKR is known for participating in some of the biggest leveraged buyouts across the United States, Europe and Asia. So, while this relatively small deal in a Chinese dairy farm is unique to KKR, other Western firms have put money into the industry. [More]

It doesn't take an MBA to figure out where the global dairy trade is headed. (Very helpful stats here).  Still, this type of investment is singular for KKR and could presage a new challenge for our domestic industry as it becomes advantageous to raise production in the biggest markets rather than load up ships and export to them.

While I have anticipated outside investment in all kinds of agriculture, the easy flow of capital around the globe, has reduced the advantage US producers have enjoyed simply because we were close to the money.

The subject I will be investigating is whether these investors have maintained their positions over the last year as other sectors declined sharply. Certainly there was considerable interest.

The New York Times describes how some big-money players are skipping the commodities market and going directly to being hard asset players by buying farmland and grain elevators. This is hardly new (I know of one global macro fund that was making ag related investments two years ago) but the Times piece gives the impression that quite a lot of money is suddenly chasing this theme.

While in theory having more capital deployed in food production would be a Good Thing, the equation isn't necessarily that straightforward. Yes, 70% of the world's farms are not at the highest level of productivity that modern techniques can produce, so more gains are possible. But this isn't a linear equation where farmland + more dough = more output at a higher profit. Modern agricultural techniques are both energy intensive and fertilizer intensive, and both are increasingly costly. A land grab may produce an input squeeze that erodes much of the hoped-for return. [More]

Anecdotal evidence suggest interest in farmland has perked up lately, undoubtedly sparked by a strong commodity run over the last two months.

After spending months on the sidelines, investors are starting to return to the nation's agriculture land as a home for their investment dollars. Investors have long played a role in the land-buying market, but toward the end of 2008 those once active investors retreated, according to Lee Vermeer, AFM, vice president of real estate operations at Farmers National Company.

"Investors stepped aside around November, but they have gotten back in the game," said Vermeer. "Everyone was trying to figure out the stock market and whether the economy had bottomed out. Some believe it has. Now that the uncertainty has subsided, buyers are looking for investments they can feel good about."

During the past six months, owner/operators around the country took advantage of the decline in investor attention and purchased available land to expand their operations. It was that activity that kept land values steady despite the turbulent economy.

"A good indication of the strength of the land market was that even with all the uncertainty and the stress on the market the past six months – land values held," said Vermeer. "I think that speaks to the quality of the land, but also shows the confidence today's buyers have in the land market as an investment opportunity."

Vermeer said the land market did slow somewhat last fall and there were some weak spots around the country the first part of 2009. He attributed the slow down to the drop in commodity prices. In the past 30-45 days, however, Vermeer said the market is gaining ground. [More]

My axiom is the farmland market is a better judge of ag sector health than commodity prices, and even with a hiccup over the last few months, it appears to be a place money wants to be, regardless of the location.