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By Loch Adamson
Alpha Magazine 09/12/06
"Live green, go yellow,” trumpets General Motors’ new advertising campaign, touting the benefits of using corn-based, cleaner-burning ethanol in combination with gasoline. With oil prices stuck at about $70 a barrel, demand for ethanol surged to record levels this summer. Nor is it likely to drop anytime soon: The passage of the Energy Policy Act of 2005 calls for the U.S. to increase ethanol usage from 4 billion gallons annually to 7.5 billion by 2012.
Wall Street has taken notice — and so have a number of hedge funds. This spring Shonda Warner, founder of London-based fund of hedge funds Chess Capital Partners, began looking at the possible ramifications of the ethanol boom. Rather than putting money into construction projects, like Microsoft founder Bill Gates, whose Cascade Investments made two private placements worth a combined $84 million in Pacific Ethanol to help the Fresno, California–based company build five new plants, Warner is betting that the value of farmland itself may appreciate.
“Everyone is talking about ethanol, but how do you make it?” says Warner. “You have to have corn, which means that you have to have land.”
The Nebraska native knows whereof she speaks: She was raised on a farm near the Missouri River, where her father cultivated corn and soybeans, and started her career in finance on the grain-trading desk at agribusiness giant Cargill. “Unfortunately, ethanol production could have inflationary knock-on effects if grain gets more expensive, but the potential for baseline change in U.S. agriculture is huge,” she says. “I don’t think we’ve seen anything like it in 30 years.”
Last fall Warner’s friend Hunt Taylor, director of investments for Stern Investment Holdings, came to her for advice because he had been approached by a pension fund looking to put $100 million into farmland. She invited Taylor and John Fletcher, an expert trader in soft commodities like corn, down to Clarksdale, Mississippi, to brainstorm. (Warner owns Miss Del’s General Store there.) All three were keen to work on the project, but their collaboration was cut short when Taylor, who was about to leave Stern, the private investment arm of the Stern family’s Hartz Group, was killed in a motorcycle accident in February.
The idea lay fallow until Warner and Fletcher took it up again this spring. They have designed an unusual hybrid investment vehicle, Full Harvest Agricultural Opportunities Fund, under Chess Capital’s purview. The fund will offer investors a cost-efficient means of gaining exposure to farmland — and the crops grown on it — without having to pay any carry (the storage and interest fees implied by owning commodities futures). Rather than lease the property to farmers and collect cash, they plan to charge rent in crops and market the crops directly.
“Owning the land is a much better way to invest in soft commodities,” says Fletcher, who runs Central Missouri Agriservice, a grain business in Marshall, Missouri. “Because of the cost of carry, which is quite high, investors [who buy futures contracts] have to see a return of 30 percent over the course of a year just to break even.”
The fund, which Warner and Fletcher expect to launch in December and to have the capacity to manage $200 million, will have a second share class that combines land ownership with private-equity-style investments in biofuel partnerships. “They do tend to hedge each other, so it’s a nice combination,” Warner says. “If energy prices drop, inflation will likely stay low and credit loose — and those factors tend to support the price of land. If, on the other hand, energy prices go up, grain prices will be supported by the need for ethanol, especially with all of this new legislation coming into effect.”
The 42-year-old Warner has come a long way from her father’s farm. After leaving the grain-trading desk at Cargill, she moved to Goldman, Sachs & Co., where as a proprietary trader she focused on investment warrants and convertible bonds. In 1998 she joined London-based multimanager hedge fund Montier Partners as CIO; she decamped in 2003 to launch her own fund of hedge funds. Although Warner still has a home in London, she is keen to get back to her agrarian roots — and find new ways to combine her knowledge of finance with her farming experience.
“All of these Wall Street guys are getting interested in the diversification potential of agriculture, but honestly, they don’t know much about it,” she says. “The farmers, who do, can’t stand New York. For the first time in a long time, I feel as though I can really add significant value by bridging these two worlds.”