Episode #480: Craig Wichner, Farmland LP – Cultivating Wealth with Sustainable Farmland Investing
Visitor: Craig Wichner is the Founder and Managing Associate of Farmland LP, a number one funding fund that generates returns by changing typical industrial farmland to regenerative sustainable farmland.
Date Recorded: 4/19/2023 | Run-Time: 1:00:38
Abstract: In at present’s episode, Craig begins with an replace on his firm after which shares how greater inflation and the shifting macro atmosphere has affected farmland as an asset class, particularly after 2022 when actual property have been one of many few property that didn’t have unfavorable returns.
Then we dive into the financials of an acquisition they manufactured from a 4,000 acre, 150 12 months previous farm in Northern California again in 2013 for slightly below $30 million. Craig walks by means of the funding and timeline to transform the farm to natural, the advantage of the conversion, and the way it helped the farm be re-appraised for simply over $75 million final 12 months.
Craig shares some nice slides in the course of the episode, so if you wish to watch on YouTube, click on under.
Take heed to Craig’s first look in December 2020 right here.
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Hyperlinks from the Episode:
0:39 – Sponsor: YCharts
1:48 – Intro
2:56 – Welcome Craig to the present
4:00 – Episode #276: Craig Wichner, Farmland LP
4:09 – The expansion of Farmland LP since 2020
7:00 – Leverage ratios between multi-family actual property, workplace buildings, and farmland
8:00 – The farmland sector’s constructive correlation with inflation
14:10 – Why there’s a scarcity of natural farms
23:25 – Strolling by means of an actual case research
26:52 – How Farmland LP calculates how a lot debt to make use of on a farm
28:10 – The valuation of dry land and water
36:00 – The supply of Farmland LP’s funding capital
37:00 – The mechanics of the upcoming launch of Fund III
44:30 – The function that automation performs in farming
48:40 – How Farmland LP obtained the very best ever ESG rating from the biggest agency
53:12 – Authorities-subsidized natural crop insurance coverage
55:15 – What the longer term seems like for Farmland LP
56:40 – Farmland LP’s upcoming investor occasions; be taught extra at farmlandlp.com; electronic mail [email protected]
Transcript:
Welcome Message:
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Disclaimer:
Med Faber’s the co-founder and chief funding officer at Cambria Funding Administration. On account of trade rules he is not going to focus on any of Camber’s funds on this podcast. All opinions expressed by podcast members are solely their very own opinions and don’t mirror the opinion of Cambria Funding Administration or its associates. For extra data, go to cambriainvestments.com.
Meb:
At the moment’s episode is sponsored by my mates at YCharts. When you’re a monetary advisor, pay attention up. By now YCharts enables you to see return information, worth charts and different data, however now they’re taking it to a complete nother stage by serving to you create customized experiences and displays to reinforce conversations with purchasers and prospects. With its simple drag and drop design, the report builder permits you to customise over 30 visuals, making it nice for assembly with prospects and purchasers throughout quarter or year-end evaluations. You possibly can even add your individual visuals and your agency branding colours and emblem. Their new replace permits for customized storytelling, providing you with the flexibility to tug in save tables and charts, or add customized textual content packing containers that advisors love so as to add disclosures for our mates in compliance. Make your life simpler. Give YCharts a try to streamline your course of of constructing displays. YCharts is providing new subscribers who’re listeners of the present a 20% low cost. Click on on the hyperlink within the present notes or go to go.ycharts.com/meb2023. That’s go.ycharts.com/meb2023, or simply click on on the hyperlink within the present notes.
Meb:
Howdy everyone. We’re heading again right down to the farm at present with returning company. Craig Wichner, founder and managing accomplice of Farmland LP, the biggest farmland supervisor targeted on natural farmland now managing over 1 / 4 billion {dollars} in property and 15,000 acres of farmland. At the moment’s episode Craig begins with an replace on his firm, after which shares how greater inflation and the shifting macro atmosphere has affected farmland as an asset class, particularly after 2022 when actual property have been one of many few ones that didn’t have unfavorable returns. Then we dive right into a case research of an acquisition they manufactured from a 4,000 acre, 150-year-old farm in Northern California again in 2013 for slightly below $30 million. Craig walks by means of the funding and timeline to transform the farm to natural, the advantages of the conversion and the way it helped the farm be reappraised for simply over $75 million final 12 months.
Craig shares some nice slides in the course of the episode, so if you wish to watch it on YouTube, click on on the hyperlink within the present notes. And in the event you aren’t subscribed to our YouTube channel, what are you ready for? Virtually 15,000 traders are subscribed, so hop on over. Please take pleasure in this episode with farmland LPs. Craig Wichner. Craig, welcome again to the present.
Craig:
Meb, nice to see you.
Meb:
You have been final right here in late 2020. I’m excited to get a catch-up. What’s happening in your life, your world? The place do we discover you at present? This stunning, for these not watching on YouTube, this stunning [inaudible 00:03:13] within the background. The place are you?
Craig:
Simply north of San Francisco close to Larkspur.
Meb:
Let’s get slightly replace briefly in your firm and agency, then we’ll speak about all issues farmland, macro after which again particularly to y’all’s farms. However give us the replace since 2020. Did I see you guys are actually on the fund three?
Craig:
We’re nearly to launch fund three. We truly simply yesterday closed a 1100 acre property. That’ll be the primary property in fund three.
Meb:
Congrats. The place was the closing?
Craig:
Oregon within the Willamette Valley. Good natural blueberries, wine grapes, hazelnuts, stunning floor, stunning groundwater rights or water rights normally. Nice rising local weather.
Meb:
Yum. All proper, nicely catch us up on the corporate. We’ll publish the present be aware hyperlink listeners if you’d like the sort of intro episode. However stroll us ahead since 2020, what have you ever guys been as much as?
Craig:
Nice. Nicely, we’re as much as round $250 million in property, about 15,000 acres, 16,000 acres of farmland. Now, for the individuals who don’t know, we purchase typical farmland, Farmland LP buys typical farmland and converts it to natural regeneratively managed farmland as an funding fund. And we actually simply concentrate on including worth to farmland. Enterprise has grown a bit as nicely. We’ve about eight individuals in fund administration and 45 individuals in farmland administration, and we lease out two thirds of our acres and we farm a few third of the acres ourselves and our farmland is situated in Northern California, Oregon and Washington.
Meb:
Nicely, one of many huge issues that has actually modified or accelerated, we may do lots of totally different adjectives, since we final spoke is a, I imply multi-decade outlined regime that appears to have shifted, which is of one in every of declining rates of interest and bottoming to at least one the place abruptly rates of interest have shot up and inflation. Which is one thing that we haven’t seen in the US or has been a priority for 40 years, actually. Inform me slightly bit about that. We speak about farmland market normally. You can provide us an replace overview of the macro and the way it’s impacted curiosity and all the things you guys are doing in your world.
Craig:
It looks like this extremely therefore time. One of many issues that I really like about farmland is that there’s $3.8 trillion value of farmland within the U.S. Similar financial worth as all the workplace buildings within the U.S. or all the condo buildings within the U.S. However once more, 40% of farmland is leased. Farmland actually is industrial actual property like these different asset lessons. However there’s little or no debt on the farmland sector. And possibly I’ll simply put up a fast slide for you guys for-
Meb:
Yeah, I’d like to see, you have got an important deck. If we are able to’t share broadly with the listeners, possibly you’ll allow us to share a number of the slides in these present notes. However there was actually two large takeaways from our final episode that basically have been a shock to me, for somebody even who’s been a very long time Farmland participant investor. The primary was the statistic you simply dropped, which is absolutely the magnitude of the dimensions of Farmland. And you may see on the slide relative to, wow, it is a nice slide. Relative to numerous varieties of industrial actual property workplace and we truly simply did an episode on timber, so the timber trade too. All proper, we’ll hand it again to you.
Craig:
Nicely, that’s nice. The following half about it’s the leverage ratios. So multi-family is round 51%. LTV workplace buildings are round 78% LTV in the complete sector, $3.2 trillion value of workplace buildings, 78% of that’s debt. And that’s why you see actually large modifications occur when you have got rates of interest go up or have any credit score points. Farmland, there’s solely 13% LTV on the complete sector, so actually tremendously little debt and about half of that debt is simply working traces. It’s not even the land being leveraged, however I embrace that within the quantity simply as a worst case comparability. And solely 2% of farmland is institutionally owned. It actually is that this, it’s not correlated with the debt markets. It’s been arduous historically to get into as an institutional investor and even as a person investor.
I do know you’re personally an proprietor in Farmland, which is nice, and it does truly positively correlate with inflation. Truly, I’ll go to the following slide right here only for background. And the quick story on that is that over the many years since 1970 farmland returns have overwhelmed inflation by 6.2% per 12 months. And the mechanism of that’s truly simply, it’s actually easy and simple when you perceive it, which is that rents on farmland, 40% of farmland is rented, as I mentioned. And the lease charges are mainly pushed by the worth of the crops that develop on that land. And in order you improve the worth of the crops, it will increase returns to the farmers and the landowners. And that leads to improve in asset worth as nicely over time. And so very merely, as meals costs will increase, which is the definition of core inflation, meals costs go up, the farmers’ income per acre goes up, they’re rising the identical quantity of meals and slightly bit extra every year with productiveness will increase and that will increase the returns per acre on the farmland and will increase the asset worth as nicely.
That basically has pushed these nice returns plus productiveness will increase over time. And that’s actually the core of our technique, which is to extend the worth of the crops grown on that land, not depending on inflation, however truly we’ve demonstrated that we purchase farmland that generates rents of $300 an acre, take it by means of a three-year natural conversion course of and get rents of $750 an acre on that land.
Meb:
The analogy to industrial actual property is so relatable I really feel like for many individuals as a result of most individuals have grown up clearly with actual property, even when it’s only a private expertise, however it’s slightly extra tangible I really feel like for many. For these of us who’ve grown up both on a farm or subsequent to a farm, it’s a really comparable psychological idea, the industrial actual property rents versus farmland. What’s the easy takeaway, by the way in which, why we’re on this chart, of why actual property has such the next LT V is it’s just because it’s institutionalized and securitized that debt is such a serious a part of the transaction versus farmland which has simply traditionally been owned outright. What’s the explanation?
Craig:
The banking system may be very aware of industrial actual property as an asset class. Multi-family workplace buildings, the banking system is de facto designed round that. In farming, in agriculture, you had some debt will increase in mainly the ’70s and then you definately had a farm disaster of debt disaster in late ’70s, early ’80s. And banks have been mainly foreclosing on farmland that was not well-liked with farmers and you’d mainly have farmers boycotting the auctions that they might have. And so lenders didn’t need to lend into the area, farmers didn’t need something to do with the banks as nicely. And a part of that was brought on, truly … What drove it’s in 1971 the U.S. modified its agricultural coverage to inform everybody to mainly plant fence publish to fence publish and get huge or get out. Previous to that, previous to 1971, the coverage had been way more round conservation.
About 10% of the farmland was all the time not farmed and in conservation reserve applications. 1971 rolls round and due to some political points with Russia, the us on the time, the coverage turned, let’s overproduce corn and drive down the value. You had lots of people taking up debt to plant extra corn after which the value declines brought on issues with solvency for them with all of the debt.
Meb:
And I believe with anybody who’s been burned by debt too, you get some PTSD or actually any form of market atmosphere that burns you as soon as. You might have a really vivid reminiscence of that. I think about a part of that’s a part of the story too for farmers, the place the mother and father and grandparents down the generations have been like, “No matter you do, don’t take out a bunch of debt on these farms.”
Craig:
The children who develop up in that atmosphere are those who’re operating, the banks now operating these organizations. Meb, in the event you do an funding and then you definately determine you don’t like a sector, you simply don’t put money into that sector anymore. When you’re a farmer, you’re a farmer, you’re not going to choose up and go work in a manufacturing facility. Yeah, so the people who find themselves on the land, that’s why you solely have 13% debt on the complete sector. And it’s actually the ethos of the sector at this level. The federal government truly has two GSEs, authorities sponsored enterprises targeted on lending to farmers. You get actually advantageous charges. There’s Farmer Mac, which is like Fannie Mae and Freddie Mac, which lends to establishments.
After which there’s the farm credit score system. We simply truly within the property that we acquired, we simply took over a mortgage from the farm credit score system and that’s all arrange as cooperative. They really provide you with a rebate in your loans. Our internet curiosity on that mortgage is 3.99% on there after that rebate. So there’s good lending alternatives, however we do like having low leverage on the farmland, typically none. Truly often we like to purchase it a 100% fairness after which do enhancements with leverage if it’s not too long ago priced.
Meb:
Acquired it. Okay. It is smart, I believe for most individuals once they give it some thought, that farmland intuitively, in the event you have been to consider inflation or greater inflation intervals, why farmland would do nicely, I really feel like that’s considerably of an apparent takeaway. The 2 issues that I mentioned have been actually huge surprises to me from the final podcast. One was what we simply talked about. Second was that the function of, you talked about organics and also you dropped on the final podcast that just one% of U.S. farmland is natural. Is that’s nonetheless the case? That appeared like a surprisingly low quantity to me.
Craig:
Nicely, nice information, is as much as 1.2%.
Meb:
Oh child, it’s up 20%. That’s a greater technique to say it, 20% improve. That’s loopy.
Craig:
It’s a surprisingly low quantity. Over 6% of the U.S. meals price range is spent on natural meals. The extra margins are nice, so 50 to 200% worth premiums are there. And there’s large client demand. The CEO of Costco, 10% of all natural meals within the U.S. is offered by means of Costco, so it’s an incredible channel, however their CEO says that they will’t get sufficient organics to remain in enterprise day after day. So it’s actually a provide restricted market. If there was extra natural meals, you’d have a bigger market, however you want that licensed natural land with a view to develop natural meals with a view to serve that market. And it’s that three 12 months transition to natural that basically holds individuals again, holds farmers again from changing.
Meb:
My brother’s doing it proper now in Western Kansas, in the event you’re watching this on YouTube, this may even be me do the farm he’s doing. And he says it’s not simple and it takes some time.
Craig:
Three years to get licensed. And one of many huge challenges is definitely you’ll be able to’t simply mono crop, like essentially the most operationally environment friendly method of managing farmland is to farm one crop 12 months after 12 months after 12 months, proper? And solely rotate when you need to. When you’re maximizing soil well being and doing regenerative agriculture, then you definately want mainly 4 crops grown every year and you’ll want to rotate these fields over time.
Meb:
Is that a part of a requirement for the natural label or is that extra on the regenerative aspect or how’s that work?
Craig:
That’s extra on the regenerative aspect, however as a result of we do this, it makes it very simple for us to get licensed natural. Normally in crops you’ll want to rotate your crops. When you attempt to develop corn three, 4, 5 years in a row, you’re going to have every kind of soil pests, every kind of above floor pests. You’re going to have an incredible quantity of weeds and you actually need to interrupt that cycle. And so what most farmers within the Midwest do, is that they maximize the time they will do the corn by doing genetically engineered crops and making use of numerous pesticides and herbicides on the land after which rotating. The rotation that they do is simply often one 12 months to soybeans, which have a complete totally different set of pests after which rotate again, provides slightly little bit of soil nitrogen as nicely, after which rotate again into corn.
That’s the first rotation, however it’s very depending on genetically modified crops and many pesticides and herbicides. If you wish to go away from that, use extra pure programs, then you definately want these a minimum of three, however typically 4 crops every year after which rotating over time. That’s very difficult for a farmer. And if you concentrate on the typical commodity farmer within the U.S. has about $8.5 million value of land and gear and so they make simply $250,000 a 12 months. But when they take three years and convert that by means of to natural, that’s $750,000 that they’re not going to need to ship their youngsters to varsity or fund their retirement or varied issues like that. So that basically is a giant barrier.
Meb:
Taking a look at this chart, I really like when issues are quite simple for me on the investing aspect, and to me, 6% natural meals market share, 6.3, 1.2% natural crop land, there’s a ramification there to be earned and it’s getting wider, by the way in which. And if there’s worth premiums, 50 200% worth premiums natural, why are extra individuals not benefiting from this? What’s the hindrance?
Craig:
A part of the difficulty is that farmers themselves, 98% of farmland is owned by the farmers and a pair of% is institutional. The large barrier to the present farmers is that three 12 months conversion interval. It’s how do they fund in essence that transition to natural. There’s lots of experience points, such as you truly must know the way to do that. It’s a lot tougher to develop 4 totally different crops every year and discover totally different markets to promote them to and have the gear to try this as nicely. Scale turns into very, crucial to deal with that. On the institutional aspect, we’re at 250 million. We’re one of many 14 largest farmland managers within the U.S. which is a surprising quantity in the event you’re used to different types of industrial actual property. However we’re the biggest targeted on natural and regenerative agriculture. I’d truly love for there to be extra competitors on this area.
I believe that there’s an incredible alternative on this, however after I go searching on the different institutional traders, two issues maintain them again. One continues to be a common bias in opposition to natural, like the overall bias in opposition to natural agriculture. Which to some extent goes away on the floor. However the farm managers beneath that also actually, actually imagine that. They actually inform me that natural doesn’t work, although it’s a $60 billion a 12 months enterprise, in order that’s not true. After which the second factor is that they’re speaking to their traders about shopping for an asset that generates regular money circulation from day one. They discuss in regards to the money circulation that they generate from day one, and you may’t take it by means of a worth add course of in the event you offered the on getting money circulation from day one. We inform our traders they’re not going to get money circulation for 3 years.
We’re going to take it by means of the natural conversion course of after which we’re going to get the stepped up rents from $300 an acre to $750 an acre, or it could be 4 or 5 years if we’re changing a part of the land over to natural blueberries or wine grapes or different crops like that. Extra what are known as everlasting crops. And when the traders are available with that good long run time prize and that 5 years or extra time horizon, and so they know upfront they’re not going to get money circulation proper at first. Then it makes lots of sense, however it additionally shrinks the pool of traders.
Meb:
As we’re speaking about this natural transformation, is it a giant value? I’m pondering of limitations and it simply appears so apparent to me. Is it one thing that, is there a giant price to pay for this to get licensed? Is there lots of documentation? I imply, you and I have been joking earlier than this started and I used to be lamenting how problematic coping with simply authorities allowing was for simply renovating our workplace. It’s been happening for six months, it ought to have taken one week, possibly. We didn’t even do something, so we cleaned up the area. However I imply, my God, simply coping with the federal government. Is that this a giant barrier or is it truly, when you discover ways to do it pretty templated and easy and as costly, what’s the method for somebody who’s by no means been by means of it?
Craig:
It may be so simple as simply basically not farming the land for 3 years after which farming natural crops. It’s extra sophisticated in that while you’re switching from doubtlessly monocropping corn to 4 numerous crops, you have got 4 instances the complexity that you just had earlier than. Our farm administration crew will get the land licensed natural. We map out a 10-year crop rotation plan on the land, and by shopping for a minimum of $50 million value of farmland in a single tight geographic space, now we have sufficient that we are able to say, “Okay, nice. Nicely, now we have 600 acres of land accessible for tomatoes yearly for the following 10 years. It’s simply going to rotate across the farm.” A part of the land can go in pasture, for instance, half to natural greens, half to grains, after which again into pasture. However yearly the identical ratios of land are there. And so we’ll exit and we’ll discover the very best sheep and cattle tenants for the pasture, the very best natural tomato farmers or natural candy corn farmers for the vegetable rotations, inexperienced beans and the very best grain farmers as nicely. After which lease that out as basically multi-tenant industrial actual property.
Meb:
Sounds altogether too smart. Let’s discuss slightly bit about you guys final couple years. You possibly can both do it by means of case research, you possibly can simply speak about broad phrases, what you guys have been in search of, what you’ve been shopping for, any market developments you need to speak about, have costs. I imply I’ve seen your returns and I understand how the funds work, however any overview you need you’ll be able to kick it off and we are able to undergo any which method you need.
Craig:
Most likely one of the best ways to reply your query is an instance of a farm that we’ve taken during the conversion course of and actually created much more range on that. And there’s a brand new slide up right here if individuals need to take a look at that on YouTube. However one of many properties that we purchased was a 4,000 acre farm about 55 miles east of San Francisco. And we purchased it for round $30 million. I used to be not too long ago appraised for slightly over $77 million, and the conversion course of was fairly attention-grabbing. After we purchased it, it was nice farmland, a number of the oldest water rights in California, truly pre-1914 water rights. Our water rights are senior to the state of California. We are able to discuss in regards to the worth of water, Meb as a result of I believe that’s among the finest causes to purchase farmland, is definitely to get what I believe is essentially the most miss priced asset class round which is water.
However simply farmland for this case research is, we purchased this property, had two tenant farmers on the land every farming about 2,000 acres, and so they had been farming it for round 50 years. And each of them have been utilizing the very same crop rotation on the land, about two-thirds alfalfa, 25% corn and the remainder of it, about 5% tomatoes on that land, simply rotating round by means of a five-year crop rotation. And the income was below $350 an acre for that. After we purchased it, we took it by means of an natural conversion course of. One of many farmers wished nothing to do with changing to natural. He was a 91-year-old man who had made a ton of cash in promoting land for property growth and simply loved farming 10,000 acres. And he mentioned, “You guys need this 2,000 acres again, we’re completed. Simply tell us while you need it.”
And the opposite group we truly labored with to assist truly do the work on the land as we have been changing it to natural. And fast-forward to at present, the place up to now there have been no natural acres, we now have over 2,900 acres licensed natural and in everlasting crops. Went from three typical crops to 12 crops at present. And went from two farmer tenants to seven farmer tenants on that land. And elevated the income per acre for us from slightly below $350 an acre to over $800 per acre. Actually important improve within the efficiency of the land, and it really works. And really these numbers mirror solely one of many issues that we’ve completed is we recognized a number of the floor that was simply very best for natural blueberries on that floor, so about 600 acres.
We went out, we established a partnership with Driscolls, now we have experience in blueberries, so we truly planted them ourselves, and we’re simply partway by means of the maturation means of these blueberries. Our internet final 12 months, internet revenue was over $1,100 per acre on these blueberries that’ll develop to round $10,000 per acre maturity. The numbers that I’m quoting over $800 per acre will truly improve fairly considerably as that matures.
Meb:
You guys use slightly little bit of debt, I do know, we talked about it at first. How do you see that? Are there any form of fence posts or broad factors of reference you utilize for the way a lot debt you’ll make use of on a farm or an operation or a purchase order? How do you concentrate on it?
Craig:
It’s fairly delicate to debt costs. Up till a couple of years in the past we have been very comfy with debt. Usually, we wish to see 30% plus or minus 10% on debt is an inexpensive LTV quantity as the costs elevated. And due to a number of the debt that was accessible within the area with the federal government sponsored enterprises, you have been in a position to get it at a reduction to already low-cost free cash charges. Now the debt markets are simply not purposeful. Because the charges have been going up, we shifted over to a 100% fairness for purchasing the properties after which utilizing debt to do the enhancements. However now we’re just about only a 100% fairness for the entire thing. Within the case we have been in a position to assume this debt at 3.99%. In order that’s unacceptable, and it’s solely just a bit over 20% of the asset.
Meb:
We’ve had you on the podcast earlier than, we’ve had a variety of farmers on the podcast, and I believe in the event you have been to do the phrase cloud or take a look at the phrases that get used most, water’s up there. Perhaps dig slightly extra, inform us slightly deeper about why that is so vital? How do you shield your self in opposition to errors right here or getting in hassle with a property that both might not have the fitting water rights or that sooner or later relating to world warming or altering geopolitics and borders, the way you shield your self?
Craig:
And now we have a giant display screen mainly on which areas are going to be neutrally or positively impacted by local weather change, which of them are going to be negatively impacted? And thru this, the chance to purchase water has been simply actually eye-opening for us. We truly worth the grime and the water individually, and while you do this, we frequently really feel like we’re shopping for the grime and getting the water at no cost.
Meb:
I used to be going to say, what’s the standard breakdown in the event you have been to really … Is it 90% land worth, 10% water mentally? I do know there’s in all probability not an actual breakdown, however is there a assemble you concentrate on it?
Craig:
That’s truly fairly good, and it’s truly simply wacky, actually the water costs are actually simply damaged. However I’ll provide you with some examples to anchor this. In Oregon, for instance, 10, 12, about 15 years in the past or so, the dry land costs have been as little as $2,500 an acre, and the water rights have been one other $2,500 an acre. So the irrigated land may promote for $5,000. Okay, however you fast-forward to at present. The dry land costs are round 10,000 an acre and irrigated land is round $12,500 an acre. The land costs have elevated, however the worth of the water rights hasn’t elevated throughout that point.
That’s a spot that we are able to take a look at very, excellent information, the worth of that water proper, both on a money circulation foundation or on an asset worth foundation. As a result of actually water is a property, identical to proudly owning a chunk of actual property, simply related to farmland, blended and blurred along with farmland. Water is one thing that basically has large worth. Australia has arrange a water market, the US has not. If that occurs it will likely be an enormous change.
Meb:
You guys at the moment are California, Oregon, Washington, is that proper?
Craig:
That’s appropriate.
Meb:
Going again to how traders take into consideration this, the place it slots in. We’ve lengthy talked about actual property and actual property will not be homogenous. You might have actual property, which is clearly very totally different, industrial actual property. Even inside industrial actual property you have got information facilities, you have got single household housing, you have got workplace area, college, medical, on and on and on. You might have farmland and issues like that. However even once more, inside farmland you have got corn and wheat within the Midwest versus blueberries within the northwest versus hashish in California versus wine grapes. It’s additionally a really numerous asset class. Which were mentioned, we are inclined to lump actual property collectively for comparable traits. However 2022 is an effective instance. The place many varieties of actual property did very poorly farmland was in all probability to my information, one of many solely few lengthy solely property that had nice efficiency. Is {that a} honest remark? I’m making an attempt to think about even what else might have endured final 12 months. Shares and bonds clearly did horrible, however farmland put up a strong 12 months. Is that correct?
Craig:
That’s correct truly. On common, farmland is up about 10% and only one 12 months over 12 months, so ’21 to ’22 and a few areas just like the Midwest are up. I’m Iowa for instance, at up 19.7% after which some areas on the West Coast round eight, 9, 10% as nicely. Farmland actually is attention-grabbing in that 53% of U.S. farmland grows two commodity crops, corn and soy. And most of that farmland is within the Midwest. And so when you concentrate on farmland costs, the dominant worth is that Midwestern farmland, however there’s 300 totally different crops rising on the West Coast and it offers 50% or extra of fruits, nuts and greens for instance within the U.S. so very, very, very massive markets which are diversified. One of many attention-grabbing issues in regards to the Midwest farmland is that it’s very liquid. So the public sale markets that they’ve within the Midwest and all of the farmland is offered primarily based on CSR factors, corn suitability score factors, so how a lot corn are you able to develop per acre is what it’s priced on.
And so it successfully turns into virtually this commodity priced asset with a liquid market by means of the public sale system that may change very quickly. And there was lots of capital going into that area. However it leads to imbalances, as a result of the farmland, for instance on the West Coast doesn’t have that very same liquid markets. When you’re an out of doors investor, a non-professional investor, it’s tougher to seek out property and tougher to seek out an operator for these property. And in order that’s why these markets have gone up lower than the Midwest. and it leads to imbalances as a result of in the event you truly do some math and also you say, “Hey, how a lot corn can I develop per acre in Iowa versus our farm in Washington?” And one factor that folks don’t know is that farmland the place we’re in Washington truly produces essentially the most quantity of corn per acre in any county within the U.S. Partially because-
Meb:
That’s stunning to me.
Craig:
It’s an important rising local weather, however partially as a result of it’s irrigated so we are able to present simply the correct amount of water that’s wanted, whereas the Iowa farmland is extra rain fed and slightly bit topic to the variability, so we are able to make it rain precisely the place we wish it to. It’s very excessive productive farmland, however the worth of that farmland, Iowa farmland has been promoting for $20,000 an acre was once a excessive worth. Now they’ve had farmland gross sales at $30,000 an acre. The farmland the place we’re in Washington, for instance, is nearer to $15,000 an acre. Produces the identical quantity of corn per acre. in the event you wished to supply corn, Doesn’t it make extra sense to purchase, for instance in Washington than in Iowa? Sure, however it’s a very regionalized market. And it’s affected by the liquidity of those markets as nicely. Then it’s a extremely attention-grabbing sector and it’s very not correlated. It’s correlated with cash printing and never correlated with the debt markets. And that’s I believe common place to be macroeconomically.
Meb:
And because the world goes haywire and you may watch shares and bonds go up 10% in a day, you’ll be able to say, “right here’s my farm, I can’t do something with it,” which I believe is a characteristic, not a bug. Discuss to us slightly bit about the way you guys put collectively these funds. So for traders, is it nonetheless accredited solely, what’s the minimums?
Craig:
It’s accredited solely, it’s 506(c) which permits us to speak publicly about what we do, and that’s a brand new jobs act construction. It’s limitless quantity of capital that we are able to increase normally, however it does imply that each investor who is available in needs to be verified, third-party accredited on that. 50K minimal, We would like individuals to have the ability to take part.
Meb:
Oh man, that’s accessible, that’s nice.
Craig:
We attempt to make it as accessible as attainable. And we do have institutional traders, massive wealth administration corporations have their purchasers make investments with us and excessive net-worth people and household places of work as nicely.
Meb:
Once I get round is promoting a few of my farmland, I’ll make investments some proceeds with you guys. I like what you’re doing. Each time which may be, sooner or later. Discuss to us slightly bit about, all proper, so fund three for instance versus the prior funds. What’s the objective on the composition of that? Is it going to be 5 totally different geographies? Is it going to be one particular geography, varieties of crops? How do individuals get the cash out? What are the mechanics of the fund for somebody who might make investments at present? Can they withdraw on 20? I’m making an attempt to do the mathematics. What are we, 2020, 2033. I can’t even say it someday sooner or later.
Craig:
2023 is true now. We’ll truly launch that fund this quarter on there. We simply acquired this anchor 1,100 acre property, in any other case we might have launched fund three already, however that’s a pleasant anchor property for us. Our technique is predicated on shopping for a minimum of $50 million value of farmland and one tight geographic space. So we are able to have an onsite farm supervisor and actually handle that as you’d handle a 400-unit condo constructing. And that makes it very easy for us to purchase the 100-unit condo constructing subsequent door or the 1,000-unit condo constructing subsequent door with out actually increasing our headcount on that. We’ve three main hubs, Northern California, Oregon and the Willamette Valley and Washington. These are nice rising areas. The brand new fund will increase someplace between 250 and $500 million and by farmland typically in these geographies. Plus we’ll add yet another geography.
At this level it’s in all probability going to emphasise Oregon and Washington simply we just like the pricing dynamics the place they’re proper now. We expect there’s lots of alternative in these areas. And the funding typically, it’s formally a 10-year fund with one 12 months optionally available extensions. We inform the traders to not count on money circulation in the course of the first three years after which because it’s accessible, we’ll distribute that money circulation, then they’ll have a chance to exit on the finish or they will keep in so long as they need. So, I view these as sort of 30 plus 12 months property, farmlands simply this nice asset class. And so we’ve designed it in order that sure, our job is to extend the money circulation and supply liquidity to traders as shortly as attainable. But additionally not pressure them out, not pressure them to have a taxable loss after which simply attempt to search for one other property.
Meb:
I think about some persons are excited about this generationally the place if given their alternative, they might in all probability simply roll or proceed with the properties. Not indefinitely, however actually for the foreseeable future.
Craig:
That’s how I give it some thought. For me, I do need to give the traders liquidity as shortly as attainable, however I additionally need to be stored on my toes and never give them a purpose to need to exit. These are nice property and we do give it some thought multi-generation.
Meb:
What occasions over the previous few years has brought on essentially the most curiosity? When you may correlate it? I ponder if Silicon Valley Financial institution, in my thoughts there’s sure issues that’ll simply drive cash elsewhere. Silicon Valley Financial institution is the kind of factor. It’s like, all proper, nicely A, I acquired to determine if I’ve an excessive amount of cash in a single financial institution. B, is it a financial institution which will disappear below the ether? B, ought to I be getting a greater return on my cash than 0%, or one thing like COVID, or one thing like inflation actually ramping up? Previous couple of years, I imply clearly 60/40 getting smashed final 12 months whereas farmland outperformed it by what, 20 share factors, some simply astonishing quantity. Is there something particularly the place your cellphone begins ringing off the hook otherwise you beginning to get emails, aside from the Med Faber Present? Anything that’s like, oh, persons are truly waking as much as this idea?
Craig:
Nicely, you do have very good traders that aren’t pondering contained in the field, and also you’ve simply completed an exceptional job on actually articulating a number of the complicated developments which are taking place in nice methods for shifting ahead. However actually in the course of the COVID interval, I acquired the sense that folks have been actually wanting, they have been involved in regards to the world economic system. The federal government had simply printed an incredible sum of money, elevated cash provide 30% or extra, and so they wished to place their cash someplace secure. And in order that was a common theme for individuals. And that did have impact on individuals coming to Farmland LP.
Meb:
Yeah, I’m all the time excited about the place traders come from, their motivations. And in your space it’s attention-grabbing as a result of there’s those that in all probability come to you from A, “I don’t have farmland publicity side.” There’s individuals which are it from a pure diversification or return perspective. There’s different individuals which are in all probability it from actually a regenerative natural stewardship. They’re like, “Hey, I need to make investments, however I need to make investments someplace the place it’s considerate versus faceless or do no evil, mentioned in a different way.” After which I think about it’s additionally a mixture of people, household workplace, all kinds. Do you suppose it’s just a bit little bit of all the things? What’s your expertise been over the previous variety of years? You going to get all, I think about it’s slightly tougher for the typical monetary advisor. I imply, until they’re inserting say, “Hey purchasers, bunch of you guys make investments.” Since you don’t have a public car, which for that channel makes it slightly tougher for somebody at UBS or Morgan Stanley or one thing. There’s slightly little bit of all the things and motivation’s diversified as nicely.
Craig:
I believe so. However Invoice Gates popping out as one of many largest farmland house owners, I believe additionally had an affect on individuals. And in the event you do the mathematics round that, he put round 5% of his property in farmland. And that’s anchor quantity for individuals. It’s best to have diversified industrial actual property publicity, actual property publicity, and round 5% in farmland is only a ok for Invoice Gates. And I do suppose that there’s simply elevated concern about how leveraged in a common sense, not with a capital L, not with a capital debt standpoint, however how leveraged the monetary markets are and the way leveraged individuals’s portfolios are simply to shares and bonds.
Meb:
One of many questions I wished to ask was, what’s … I toured one of many largest greenhouses on this planet a few week in the past. It’s primarily tomatoes and hashish, however it’s some of the technologically superior buildings I’ve been in, I believe ever. And also you begin to see the function of robotics actually speed up on the farm. I imply, I joke on right here on a regular basis that some of the superior items of equipment for my childhood was driving round on a tractor, which a few years in the past had GPS and a TV and all the things, air con. However at present it’s like subsequent stage and it appears to be accelerating. What are your ideas there? I imply, I think about one of many ways in which you guys may even farm eight several types of crops is the flexibility to effectively work these several types of, it’s totally different to chop some wheat than it’s to reap some strawberries on and on. What’s the function that automation’s enjoying and the way shortly is that like adoption curve taking place right here in 2023?
Craig:
There’s an incredible quantity of expertise that’s being superior on the farm. And it’s tractors, slicing heads, automated harvesting gear for everlasting crops as nicely, not simply wheat and corn that you just may usually take into consideration. However for instance, in the event you take a look at blueberry harvesting. One blueberry harvester with 4 individuals on it could harvest as a lot as 125 hand harvesters. And actually most blueberry fields on the market are arrange for hand harvesting. You need to mainly do all the things totally different along with your crops and your plantings and your rows and your varietal choice, et cetera to have the ability to do the machine harvest. However you get recent market high quality blueberries with 4 individuals as a substitute of 125 individuals. So you actually get dramatic value financial savings, high quality will increase as nicely.
Speaking in regards to the vertical farming, we may do vertical farming on our land. We’ve lots of nice land. We’ve water, sunshine, labor, et cetera. However after I do the mathematics, and AppHarvest might be instance, to do a 60 acre greenhouse would value them round $2.5 million per acre for that greenhouse. And for that very same sum of money that it prices them to construct a 60 acre greenhouse, I may purchase 10,000 acres of irrigated farmland. Greenhouses are depreciating property. Their working prices are excessive, usually round twice the fee per pound of meals than farmland grown stuff. However actually in 10 years the query is, “Nicely, would you moderately personal a 10-year previous 60 acre greenhouse or 10,000 acres of irrigated farmland?”
Simply from an funding standpoint, I’m a giant fan. I nonetheless suppose there’s large worth on the farmland aspect. If I assumed that there was lots of alternative within the managed atmosphere sector, we’d be investing there as nicely. However it’s actually slim number of crops. Issues which have a fast turnover and excessive greenback worth per sq. foot are the issues that make sense. So suppose tomatoes, strawberries, hashish, et cetera.
Meb:
Yeah. What’s the hip score and why are you guys primary?
Craig:
Oh, as a result of we’re superior. One of many issues, I’ll pop that up on the display screen if individuals need to take a look at that. And possibly I’ll provide you with only a fast little bit of the backstory. We’re very science oriented in what we do, as a result of we purchase farmland and converter to natural regeneratively managed farmland, the USDA was truly … And do it at scale. The USDA was truly very excited about what the ecological worth was of what we did. They really gave us a $250,000 grant and we introduced in two consulting corporations to have a look at what we did and quantify it for us. And so these two corporations checked out each tractor move, each crop that went on the bottom, each enter that went in, and on $50 million value of farmland these guys confirmed not solely did we ship a 70% internet financial achieve to the investor, however we additionally delivered 46% internet achieve to the ecosystem within the type of soil, carbon sequestered, cleaned water, clear air, et cetera, biodiversity.
And in the event you dig into the numbers slightly bit, what it confirmed is that if that land had been managed conventionally, it might have brought on $8.5 million value of ecosystem service hurt. And the way in which that we managed it created $12.5 million value of ecosystem service profit. So, an actual double backside line return each to the traders and to the ecosystem. Partially due to that scientific report that we did we introduced within the largest ESG rankings agency to provide us a rating on our system. We do a bunch of various rankings, however we introduced these guys in and this group does the rankings for MSCI. When you see an ESG rankings on MSCI, these are the backend guys behind it.
They went in, we went by means of a three-month course of with them. They rating you on a number of totally different measures and provide you with an final rating out of a 100 factors. When you get 50 or under, you’re doing unhealthy for the world. When you get 50 or above, you’re doing good for the world. The typical agricultural agency of their system has a rating of 17, so not doing nicely for the world. And we obtained the very best rating that they’ve ever given to any one in every of their 10,000 firms. We acquired a rating of 82 on that. And we beat insurance coverage corporations and tech corporations and biotech corporations and every kind of corporations on that. And there’s a 12-page report that’s accessible on this. However for us it’s crucial not solely to get licensed natural, which is a federal regulated customary. But additionally have these third get together scores which are delivered. You possibly can’t get a 100 on stuff. Some pretend trade scoring is rather like, “Oh, you’re all sustainable.” “Nicely, oh nice, I assume we are able to go residence. We’re all completed.”
However it’s truly actually vital, identical to you by no means say, “Oh, we’re completed when it comes to delivering income on the sustainability aspect,” there’s all the time one other step you’ll be able to take. There’s all the time issues you’ll be able to enhance on and that’s why we like issues like this hip rating.
Meb:
Is there any carbon credit score angle to this at any level, or I’m all the time pondering of other yield. Clearly, farmland is a fairly simple return stream, whether or not it’s by means of the crops in addition to appreciation of the land. Are there different various yield sources you guys ever take a look at for these properties? Is carbon one in every of them?
Craig:
We sequester about half a ton to a ton of carbon per 12 months on every of our 15,000 acres. It’s an important, basically byproduct of specializing in wholesome soil biology and good land practices. Cowl cropping for instance is without doubt one of the finest methods to extend, so soil carbon, and it’s solely completed on about 3% of farmland acres within the U.S. Farmland is the second-largest carbon sink accessible after the oceans. There’s actually an incredible alternative to sequester carbon there. The difficulty has been, it’s sophisticated to really combination the carbon. Each totally different soil kind, each totally different geography, each totally different crop rotation has a special protocol that must be developed with a view to quantify the quantity of carbon, a minimum of in accordance with the way in which that the carbon markets are structured at present.
And the profit, if carbon costs are $20 per ton, they could be greater than that now, however let’s use $20 a ton. If we’re sequestering half a ton to a ton of carbon per 12 months, that’s 10 to $20 extra earnings per 12 months on that, which is ok. When you’re producing $300 an acre typical lease and you will get an additional 10 or 20 bucks, nicely, okay, that’s good. But when I can convert it to natural and get $750 an acre lease, that 10 to $20 doesn’t change my conduct.
Meb:
Yeah, and specializing in the massive return, the massive muscle motion, the massive return driver, it makes much more sense than the rounding errors. As we simply had Ramit Sethi on the podcast mentioned, “Give attention to $50,000 issues as a substitute of $5 issues.” Now he’s speaking about lattes and different issues, however I believe it applies. I usually get seduced in an identical method in our enterprise of getting distracted by shiny concepts when the primary focus is true in entrance of my face, really easy to do. Craig, we talked about lots. What did we miss? Something that we haven’t touched on at present that you just suppose is vital or significant that we glossed over?
Craig:
The magical factor about farmland. And after I began, we didn’t have this, crop insurance coverage, so natural crop insurance coverage. Mainly the commodity sector has had this excellent profit for crop insurance coverage, authorities funded crop insurance coverage. The federal government subsidizes crop insurance coverage by 40 to 60%, and so they make it possible for the farmer, the federal government has the vested curiosity in ensuring that meals is produced yearly. And so, one of many key methods they do that’s to supply crop insurance coverage for individuals. And that makes positive that these farmers can keep in enterprise decade after decade, regardless of the climate cycles. When you don’t develop meals one 12 months, you’ve acquired an actual societal problem. That is the explanation why the federal government will mainly make it possible for all of the farmers succeed.
Nicely, it takes 10 years the way in which the crop insurance coverage is ready up. It takes 10 years’ value of rising a selected kind of crop in a selected county to ensure that it to be eligible for crop insurance coverage. Nicely, we’re now 25 years into natural certification. We’ve acquired a ton of crop range that’s now accessible for crop insurance coverage from the federal government. And so we’re in a position to get crop insurance coverage for greater revenue margin crops that basically take away the danger. You get 80% crop insurance coverage in your crops. We develop 40 totally different crops throughout our farms, so we get lots of inherent diversification and with that crop insurance coverage on it. It actually creates this beautiful magical asset class. You don’t have lease insurance coverage in your condo buildings or workplace constructing insurance coverage in your workplace buildings, however now we have authorities funded crop insurance coverage on this. It’s a fairly matched asset class, solely 2% institutionally owned, and that creates some actually fantastic dynamics for traders to nonetheless get into the area.
Meb:
Hear, hear. Nicely, what’s the longer term appear like for you guys? I imply, final time we talked, I imply, I believe the reply I think about is simply plant and develop, proper? Develop a bit and carry on doing what you’re doing. However is there anything in your mind that you just’re excited about as we glance out to 2024, 2025?
Craig:
We’ve spent the previous variety of years actually constructing out our farm administration firm. We’ve this 45-person farm administration firm that basically is simply superb. Every little thing is finished at value, it’s not a revenue middle for us. We do it at value. In order we scale up these prices mainly get amortized over extra acres. I believe we’re at a really good stage to broaden these areas that we’re in with out growing headcount on that and actually benefiting from the economies of scale. And we’ll simply proceed to be targeted and execute on shopping for top quality farmland with nice water rights into the longer term. Long term we’ll create these, we’ll do one thing enjoyable round as soon as the property are all absolutely money flowing in order that it’s simpler for everybody to take part in, however we are able to speak about that in a 12 months or two.
Meb:
Now that we’re out of COVID you do any extra real-world meetups? You maintain any occasions on the farm? The place can individuals discover out extra about you guys? What’s the very best locations?
Craig:
Yeah, so our web site @farmlandlp.com is a superb place to get involved with us. We’re truly having an investor occasion at our California farm that has the blueberries at first of June. After which within the fall now we have investor occasion up in Oregon the place we harvest wine grapes. We actually wish to get the traders out to the farms.
Meb:
Yeah, man, that needs to be a simple promote. It’s just like the Buffet, the Berkshire assembly ticket. So long as you’re an investor, you get entree, you bought to stomp some grapes, you bought to get your ft moist.
Craig:
Just about. It’s fairly superb to get again out on the farm and actually truly see sustainable regenerative agriculture occur at scale. And other people say our blueberries are the very best tasting blueberries that folks have ever had, and it’s lots of enjoyable.
Meb:
Cool. Nicely, Craig, it’s been lots of enjoyable as common, becoming a member of you, catching an replace. Thanks a lot for becoming a member of us at present.
Craig:
Nice speaking to you, Meb as all the time.
Meb:
Listeners, in the event you loved this episode, take a look at the hyperlink within the present notes for our first episode of Craig that was launched on the finish of 2020. Podcast listeners will publish present notes to at present’s dialog mebfaber.com/podcast. When you love the present, in the event you hate it, shoot us suggestions at [email protected]. We like to learn the evaluations. Please evaluate us on iTunes and subscribe the present wherever good podcasts are discovered. Thanks for listening, mates, and good investing.
