Rising Interest Rates Galvanize Change in Alaska Board’s Farmland Portfolio

Management Board switches focus from row crops to permanent crops to target outsized performance.

The Alaska Retirement Management Board (ARMB) is considering significant changes to its $852 million farmland portfolio following interest rate changes and their potential effects on row crops.

Farmland is typically categorized into two main crops, row and permanent. Row crops are cultivated seasonally, with the potential to change the type of crop planted, whereas permanent crops are planted once and maintained over a long period of time, with no potential to quickly change the crop type.

While the benefit for row crops is the ability to switch crops, there are limited options for switching since row crops are dominated by five commodity crops: hay, soy, corn, cotton, and wheat.

Yield expectations for row crops are typically projected around 3-5% compared with 7-9% for permanent crops, of which the $32.5 billion ARMB’s farmland portfolio is divided between permanent crops ($136 million), and row crops ($716 million).

While “row crop returns have been excellent,” according to a report from the ARMB, “row crops are unlikely to have outsized performance going forward.” Row crop price appreciation has closely tracked interest rates, but with interest rates rising or staying flat, row crop price appreciation will be challenged, the report continued.

Additionally, permanent crops have consistently beaten or kept pace with row crops since the ARMB started investing in the asset class in 2004.

Both row and permanent crops have low betas with the S&P 500 Equity Index and the Bloomberg Barclays Aggregate Bond Index.

As a result of the study, the board received a recommendation from Nicholas Orr, investment officer for real assets, to reconfigure the target allocation from 80% row crops / 20% permanent crops to 60% row crops / 40% permanent crops.

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