Institutional investment in natural capital has often been predicated on the assumption that volume drives value, with acquirers often acting as near-passive land-banks. But with record land prices causing capitalisation rates to fall and P/E ratios to rise, that logic is starting to strain. Appreciation can no longer be relied upon to carry the return, and increasingly, a significant portion has to come from the management of the land and its accompanying assets.
This article examines how agricultural asset management practices can determine productivity, how scale amplifies operating systems rather than creating value on its own, why the institutional environment surrounding an asset often matters more than the asset’s physical characteristics, and why due diligence must shift from merely verifying the asset to auditing the operations and processes.
Management sets the productive baseline
For institutional capital, acreage has frequently served as the working unit of value. It is the first number in investment packs and comparison sets, it is the denominator in almost every performance ratio, and it is the one variable that can be quickly verified. But a wide dispersion in yield and margin between the strongest and weakest operators of comparable assets suggests that returns are not intrinsic to the asset, and are in fact generated at the management layer.
While it seems intuitive that the quality of agricultural asset management matters, the degree to which it drives returns is routinely underestimated by institutional allocators. For instance, a study of agricultural enterprises in Ukraine found that commodity output per 100 hectares exhibited a far greater correlation with production costs than with the quantity or quality of the underlying asset. In other words, what was spent on, and done to, the land explained almost all of the difference in performance between high-margin producers and underperforming peers. At the same time, Teagasc’s (Ireland’s farm & food research agency) national farm survey (which categorises dairy enterprises into top, middle, and bottom thirds by gross margin per hectare), came to the opposite conclusion: that misdirected input expenditure was the leading cause of subpar net margins among the worst performing dairy farmers.
The two findings may be less contradictory than they first appear. Expenditure is a reasonable proxy for effective agricultural asset management where it is well directed and a direct measure of value destruction where it is not. When carefully deployed, every marginal dollar drives compounding yields, but when mismanaged, capital simply erodes operating margins. The financial impact can be substantial. In the Teagasc survey, net margins were up to 45% higher for best-performing farms, which is a significant spread when you consider that these farms are working from the same land base, the same climate, and crucially, the same price for their produce.
It is also worth noting that these efficiency gains are not simply a function of size. Scale and efficiency are routinely treated as the same variable, where bigger is assumed to mean better run. But the case for scale is much narrower than it is usually presented. In essence, scaling a strong system compounds an advantage but scaling a weak one compounds its deficits, and worse still, often adds additional financial obligations to it. It is also true that while scale efficiencies exist, the greatest inefficiencies concentrate among the smallest, sub-commercial operations, they decline as farms get bigger and are close to exhausted by the time an operation reaches institutional scale.
Ultimately, what makes an operation work is largely scale-invariant. What separates a strong operation from a weak one comes down to agricultural asset management fundamentals: agronomic timing, variable input discipline, and operational expertise.
That said, management does not determine outcomes on its own. Weather, commodity prices, input costs, currency movements, and the policy environment can all be hugely impactful and yet frequently go unconsidered. From this list, the policy environment arguably deserves the closest attention as it sets the terms on which any operating system is permitted to run. Water allocation rules, tenure security, subsidy design, planning consent, and export controls determine which crops remain viable, which inputs stay affordable, and which revenue lines survive a change of administration. Increasingly, these macro factors determine what agricultural assets are worth.
However, policy risk is rarely priced with the same rigour as commodity or currency risk, in part because it does not move continuously. It arrives discretely and often with limited notice. But a withdrawn subsidy, a tightening of water allocations or a restriction on a particular crop can easily strand capital that was deployed on the assumption of continuity.
This is a pattern we regularly encounter in our own advisory work, particularly in the North African produce sector and other export-oriented growing regions. Morocco offers a clear illustration of this. Having spent a decade subsidising high-value, export-oriented horticulture, the government reversed course as drought deepened. From July 2022, avocado, new citrus, and red watermelon plantings were excluded from eligibility for localised irrigation grants. Restrictions on cultivation followed, with authorities in Zagora capping watermelon at a single hectare per grower in late 2023, and banning it outright near drinking-water abstraction points.
The same mechanism operates in reverse. Establishment grants, irrigation and mechanisation support, secure tenure and lease frameworks, as well as payments for carbon or wider ecosystem services can each improve the economics of an operation without altering its physical productive capacity. Consequently, acquirers need to be acutely aware of whether their target operation is actually positioned to access what is available, and how much of the underwritten return depends on payments that a future government could withdraw.
How due diligence should assess agricultural asset management
Conventional farmland due diligence verifies the physical and legal asset: title, encumbrances, soil classification, hectares, water rights on paper. That work remains necessary, but it establishes only what is being bought, not what it will earn. Assessing returns requires a forensic analysis of operations and the macro environment layer as well.
Too often agricultural asset management and the policy environment are treated as a residual, or as a line item to be resolved after acquisition. But the evidence points the other way, with these factors frequently determining how acreage gets converted into cash flow.
Four areas deserve particular attention. The first is agronomic protocol: whether rotation, nutrient, crop protection, and irrigation scheduling decisions are documented, consistently applied, and recorded at field level, or whether they reside informally with one individual. The second is cost structure, broken down per hectare and per tonne and benchmarked against regional best practice, so that spending and input intensity can be measured and evaluated. The third is asset lifecycle management: machinery age, utilisation hours, and replacement schedules. The condition of irrigation infrastructure and on-farm storage warrants particular scrutiny, as improper or deferred maintenance can easily result in substantial unrecognised liabilities. The fourth is counterparty strength, covering offtake agreements, tenant covenants, lease duration, and the credit quality behind them.
Naturally, this is not to say that assets which score poorly against the above criteria are not worth acquiring, only that they should be priced accordingly. In fact, where records show a wide and persistent gap between actual and best-practice performance, that gap is likely to indicate the return on offer, provided the buyer has the operational capability to close it. This is why distressed or poorly administered assets can represent better entry points than well-run operations already trading at full value.
From land holdings to durable assets
Farmland continues to be a sound long-term asset, but the source of its return has moved. The margin that separates a high performing agricultural portfolio from a poor one is a function of how the asset is managed. Acreage multiplies that performance but is not a substitute for it.
At Farrelly Mitchell, our agribusiness consultants provide strategic, technical, and commercial expertise to help agribusiness owners and managers make informed decisions and achieve sustainable growth. Our teams conduct comprehensive commercial and operational due diligence, and design the asset management systems that convert land holdings into durable assets. With a proven track record across the agricultural value chain, we combine local market insights with global best practices to optimise your operations, address complex challenges, and capitalise on emerging opportunities. Contact our experts today to discuss how we can support your business’ continued growth and profitability.
