Episode #480: Craig Wichner, Farmland LP – Cultivating Wealth with Sustainable Farmland Investing
Visitor: Craig Wichner is the Founder and Managing Companion of Farmland LP, a number one funding fund that generates returns by changing typical business 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 increased inflation and the shifting macro surroundings has affected farmland as an asset class, particularly after 2022 when actual property had been one of many few property that didn’t have destructive returns.
Then we dive into the financials of an acquisition they made from a 4,000 acre, 150 yr previous farm in Northern California again in 2013 for slightly below $30 million. Craig walks via the funding and timeline to transform the farm to natural, the good thing about the conversion, and the way it helped the farm be re-appraised for simply over $75 million final yr.
Craig shares some nice slides throughout the episode, so if you wish to watch on YouTube, click on under.
Hearken 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 via an actual case examine
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 position that automation performs in farming
48:40 – How Farmland LP acquired the best ever ESG rating from the most important agency
53:12 – Authorities-subsidized natural crop insurance coverage
55:15 – What the long run seems to be like for Farmland LP
56:40 – Farmland LP’s upcoming investor occasions; be taught extra at farmlandlp.com; e-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. Attributable to trade laws he won’t focus on any of Camber’s funds on this podcast. All opinions expressed by podcast contributors are solely their very own opinions and don’t replicate the opinion of Cambria Funding Administration or its associates. For extra info, go to cambriainvestments.com.
Meb:
In the present day’s episode is sponsored by my buddies at YCharts. Should you’re a monetary advisor, pay attention up. By now you already know YCharts enables you to see return information, value charts and different info, however now they’re taking it to an entire nother degree by serving to you create customized studies and displays to reinforce conversations with shoppers and prospects. With its straightforward drag and drop design, the report builder permits you to customise over 30 visuals, making it nice for assembly with prospects and shoppers throughout quarter or year-end opinions. You’ll be able to even add your personal visuals and your agency branding colours and brand. Their new replace permits for personalised storytelling, providing you with the power to tug in save tables and charts, or add customized textual content bins that advisors love so as to add disclosures for our buddies 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:
Hi there everyone. We’re heading again all the way down to the farm at present with returning friends. Craig Wichner, founder and managing accomplice of Farmland LP, the most important farmland supervisor centered on natural farmland now managing over 1 / 4 billion {dollars} in property and 15,000 acres of farmland. In the present day’s episode Craig begins with an replace on his firm, after which shares how increased inflation and the shifting macro surroundings has affected farmland as an asset class, particularly after 2022 when actual property had been one of many few ones that didn’t have destructive returns. Then we dive right into a case examine of an acquisition they made from a 4,000 acre, 150-year-old farm in Northern California again in 2013 for slightly below $30 million. Craig walks via 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 yr.
Craig shares some nice slides throughout the episode, so if you wish to watch it on YouTube, click on on the hyperlink within the present notes. And if you happen to aren’t subscribed to our YouTube channel, what are you ready for? Nearly 15,000 buyers are subscribed, so hop on over. Please get pleasure from this episode with farmland LPs. Craig Wichner. Craig, welcome again to the present.
Craig:
Meb, nice to see you.
Meb:
You had been final right here in late 2020. I’m excited to get a catch-up. What’s occurring in your life, your world? The place do we discover you at present? This lovely, for these not watching on YouTube, this lovely [inaudible 00:03:13] within the background. The place are you?
Craig:
Simply north of San Francisco close to Larkspur.
Meb:
Let’s get a bit 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 at the moment are 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, lovely floor, lovely groundwater rights or water rights typically. Nice rising local weather.
Meb:
Yum. All proper, properly catch us up on the corporate. We’ll put up the present word hyperlink listeners if you need the type of intro episode. However stroll us ahead since 2020, what have you ever guys been as much as?
Craig:
Nice. Properly, 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 properly. We have now 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 positioned in Northern California, Oregon and Washington.
Meb:
Properly, one of many huge issues that has actually modified or accelerated, we may do numerous completely 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 swiftly rates of interest have shot up and inflation. Which is one thing that we haven’t seen in america or has been a priority for 40 years, actually. Inform me a bit bit about that. We speak about farmland market typically. 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 price of farmland within the U.S. Identical financial worth as all the workplace buildings within the U.S. or all the condominium buildings within the U.S. However once more, 40% of farmland is leased. Farmland actually is business actual property like these different asset courses. 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’ve gotten a fantastic 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 actually had 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 scale of Farmland. And you may see on the slide relative to, wow, this can be a nice slide. Relative to varied kinds of business 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:
Properly, that’s nice. The subsequent half about it’s the leverage ratios. So multi-family is round 51%. LTV workplace buildings are round 78% LTV in all the sector, $3.2 trillion price of workplace buildings, 78% of that’s debt. And that’s why you see actually large modifications occur when you’ve gotten rates of interest go up or have any credit score points. Farmland, there’s solely 13% LTV on all the 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 embody 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 laborious 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 subsequent slide right here only for background. And the brief story on that is that over the a long time since 1970 farmland returns have crushed inflation by 6.2% per yr. And the mechanism of that’s truly simply, it’s actually easy and straightforward when you perceive it, which is that rents on farmland, 40% of farmland is rented, as I mentioned. And the lease charges are principally 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 ends in improve in asset worth as properly 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 a bit bit extra annually with productiveness will increase and that will increase the returns per acre on the farmland and will increase the asset worth as properly.
That actually 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 via a three-year natural conversion course of and get rents of $750 an acre on that land.
Meb:
The analogy to business 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, nevertheless it’s a bit 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 related psychological idea, the business actual property rents versus farmland. What’s the easy takeaway, by the best way, 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 rationale?
Craig:
The banking system may be very aware of business 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 principally the ’70s and then you definately had a farm disaster of debt disaster in late ’70s, early ’80s. And banks had been principally foreclosing on farmland that was not standard with farmers and you’d principally 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 properly. And a part of that was prompted, truly … What drove it’s in 1971 the U.S. modified its agricultural coverage to inform everybody to principally plant fence put up to fence put up 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 grew to become, let’s overproduce corn and drive down the worth. You had lots of people taking up debt to plant extra corn after which the worth declines prompted issues with solvency for them with all of the debt.
Meb:
And I feel with anybody who’s been burned by debt too, you get some PTSD or actually any kind of market surroundings that burns you as soon as. You could 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 dad and mom and grandparents down the generations had 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 surroundings are those who’re working, the banks now working these organizations. Meb, if you happen to do an funding and then you definately determine you don’t like a sector, you simply don’t put money into that sector anymore. Should you’re a farmer, you’re a farmer, you’re not going to select 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 all the sector. And it’s actually the ethos of the sector at this level. The federal government truly has two GSEs, authorities sponsored enterprises centered 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 offer you 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, generally none. Truly normally we like to purchase it a 100% fairness after which do enhancements with leverage if it’s just lately priced.
Meb:
Bought it. Okay. It is sensible, I feel for most individuals once they give it some thought, that farmland intuitively, if you happen to had been to consider inflation or increased inflation durations, why farmland would do properly, I really feel like that’s considerably of an apparent takeaway. The 2 issues that I mentioned had been actually huge surprises to me from the final podcast. One was what we simply talked about. Second was that the position of, you talked about organics and also you dropped on the final podcast that only one% of U.S. farmland is natural. Is that’s nonetheless the case? That appeared like an incredibly low quantity to me.
Craig:
Properly, nice information, is as much as 1.2%.
Meb:
Oh child, it’s up 20%. That’s a greater strategy to say it, 20% improve. That’s loopy.
Craig:
It’s a surprisingly low quantity. Over 6% of the U.S. meals finances is spent on natural meals. The extra margins are nice, so 50 to 200% value premiums are there. And there’s large client demand. The CEO of Costco, 10% of all natural meals within the U.S. is offered via Costco, so it’s a tremendous 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 to be able to develop natural meals to be able to serve that market. And it’s that three yr transition to natural that actually holds individuals again, holds farmers again from changing.
Meb:
My brother’s doing it proper now in Western Kansas, if you happen to’re watching this on YouTube, this may even be me do the farm he’s doing. And he says it’s not straightforward and it takes some time.
Craig:
Three years to get licensed. And one of many huge challenges is definitely you possibly can’t simply mono crop, like essentially the most operationally environment friendly approach of managing farmland is to farm one crop yr after yr after yr, proper? And solely rotate when you need to. Should you’re taking a look at maximizing soil well being and doing regenerative agriculture, then you definately want principally 4 crops grown annually and you might 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 facet or how’s that work?
Craig:
That’s extra on the regenerative facet, however as a result of we try this, it makes it very straightforward for us to get licensed natural. On the whole in crops you might want to rotate your crops. Should 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 really want 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 a number of pesticides and herbicides on the land after which rotating. The rotation that they do is simply normally one yr to soybeans, which have an entire completely different set of pests after which rotate again, provides a bit little bit of soil nitrogen as properly, after which rotate again into corn.
That’s the first rotation, nevertheless it’s very depending on genetically modified crops and plenty of pesticides and herbicides. If you wish to go away from that, use extra pure programs, then you definately want these at the least three, however usually 4 crops annually 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 price of land and gear and so they make simply $250,000 a yr. But when they take three years and convert that via to natural, that’s $750,000 that they’re not going to need to ship their children to school or fund their retirement or varied issues like that. So that actually is an enormous barrier.
Meb:
Taking a look at this chart, I really like when issues are quite simple for me on the investing facet, and to me, 6% natural meals market share, 6.3, 1.2% natural crop land, there’s a selection there to be earned and it’s getting wider, by the best way. And if there’s value premiums, 50 200% value premiums natural, why are extra individuals not making the most of 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 massive barrier to the present farmers is that three yr conversion interval. It’s how do they fund in essence that transition to natural. There’s numerous experience points, such as you truly have to know the way to do that. It’s a lot more durable to develop 4 completely different crops annually and discover completely different markets to promote them to and have the gear to try this as properly. Scale turns into very, essential to deal with that. On the institutional facet, we’re at 250 million. We’re one of many 14 largest farmland managers within the U.S. which is a stunning quantity if you happen to’re used to different types of business actual property. However we’re the most important centered on natural and regenerative agriculture. I’d truly love for there to be extra competitors on this area.
I feel that there’s an incredible alternative on this, however after I go searching on the different institutional buyers, two issues maintain them again. One continues to be a normal bias towards natural, like the final bias towards 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, despite the fact that it’s a $60 billion a yr enterprise, in order that’s not true. After which the second factor is that they’re speaking to their buyers about shopping for an asset that generates regular money stream from day one. They discuss in regards to the money stream that they generate from day one, and you may’t take it via a worth add course of if you happen to offered the on getting money stream from day one. We inform our buyers they’re not going to get money stream for 3 years.
We’re going to take it via 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 buyers are available in with that good long term time prize and that 5 years or extra time horizon, and so they know upfront they’re not going to get money stream proper at first. Then it makes numerous sense, nevertheless it additionally shrinks the pool of buyers.
Meb:
As we’re speaking about this natural transformation, is it an enormous value? I’m pondering of boundaries and it simply appears so apparent to me. Is it one thing that, is there an enormous price to pay for this to get licensed? Is there numerous documentation? I imply, you and I had 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 occurring 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 an enormous barrier or is it truly, when you learn to do it pretty templated and easy and as costly, what’s the method for somebody who’s by no means been via 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 difficult in that whenever you’re switching from doubtlessly monocropping corn to 4 various crops, you’ve gotten 4 instances the complexity that you just had earlier than. Our farm administration workforce will get the land licensed natural. We map out a 10-year crop rotation plan on the land, and by shopping for at the least $50 million price of farmland in a single tight geographic space, now we have sufficient that we are able to say, “Okay, nice. Properly, now we have 600 acres of land obtainable for tomatoes yearly for the subsequent 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 properly. After which lease that out as basically multi-tenant business actual property.
Meb:
Sounds altogether too wise. Let’s discuss a bit bit about you guys final couple years. You could possibly both do it via case research, you could possibly simply speak about broad phrases, what you guys have been in search of, what you’ve been shopping for, any market traits 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 possibly can kick it off and we are able to undergo any which approach you need.
Craig:
Most likely one of the simplest ways to reply your query is an instance of a farm that we’ve taken all over the conversion course of and actually created much more variety on that. And there’s a brand new slide up right here if individuals need to have 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 just lately appraised for a bit over $77 million, and the conversion course of was fairly attention-grabbing. Once 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 feel that’s among the best causes to purchase farmland, is definitely to get what I feel is essentially the most miss priced asset class round which is water.
However simply taking a look at farmland for this case examine 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 had 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 via a five-year crop rotation. And the income was beneath $350 an acre for that. Once we purchased it, we took it via an natural conversion course of. One of many farmers needed 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 performed. Simply tell us whenever you need it.”
And the opposite group we truly labored with to assist truly do the work on the land as we had been changing it to natural. And fast-forward to at present, the place prior 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 vital improve within the efficiency of the land, and it really works. And truly these numbers replicate solely one of many issues that we’ve performed is we recognized a number of the floor that was simply ultimate 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 via the maturation means of these blueberries. Our internet final yr, 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 a bit little bit of debt, I do know, we talked about it at first. How do you see that? Are there any kind 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 just a few years in the past we had been very comfy with debt. Sometimes, we wish to see 30% plus or minus 10% on debt is an affordable LTV quantity as the costs elevated. And due to a number of the debt that was obtainable within the area with the federal government sponsored enterprises, you had been capable of get it at a reduction to already low cost free cash charges. Now the debt markets are simply not practical. Because the charges had been going up, we shifted over to a 100% fairness for getting the properties after which utilizing debt to do the enhancements. However now we’re just about taking a look at only a 100% fairness for the entire thing. Within the case we had been capable of 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 lot of farmers on the podcast, and I feel if you happen to had been to do the phrase cloud or have a look at the phrases that get used most, water’s up there. Possibly dig a bit extra, inform us a bit deeper about why that is so essential? How do you shield your self towards errors right here or getting in bother with a property that both could not have the correct water rights or that sooner or later in relation to international warming or altering geopolitics and borders, the way you shield your self?
Craig:
And now we have an enormous display screen principally 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 filth and the water individually, and whenever you try this, we regularly really feel like we’re shopping for the filth and getting the water free of charge.
Meb:
I used to be going to say, what’s the normal breakdown if you happen to had been to really … Is it 90% land worth, 10% water mentally? I do know there’s most likely not a precise 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 offer you some examples to anchor this. In Oregon, for instance, 10, 12, about 15 years in the past or so, the dry land costs had been as little as $2,500 an acre, and the water rights had 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 have a look at very, superb information, the worth of that water proper, both on a money stream foundation or on an asset worth foundation. As a result of actually water is a property, similar to proudly owning a chunk of actual property, simply related to farmland, blended and blurred along with farmland. Water is one thing that actually has large worth. Australia has arrange a water market, america has not. If that occurs it is going to be an enormous change.
Meb:
You guys presently are California, Oregon, Washington, is that proper?
Craig:
That’s right.
Meb:
Going again to how buyers take into consideration this, the place it slots in. We’ve lengthy talked about actual property and actual property should not homogenous. You could have actual property, which is clearly very completely different, business actual property. Even inside business actual property you’ve gotten information facilities, you’ve gotten single household housing, you’ve gotten workplace area, college, medical, on and on and on. You could have farmland and issues like that. However even once more, inside farmland you’ve gotten corn and wheat within the Midwest versus blueberries within the northwest versus hashish in California versus wine grapes. It’s additionally a really various asset class. Which were mentioned, we are inclined to lump actual property collectively for related traits. However 2022 is an effective instance. The place many kinds of actual property did very poorly farmland was most likely to my data, one of many solely few lengthy solely property that had nice efficiency. Is {that a} truthful remark? I’m attempting to consider even what else could have endured final yr. Shares and bonds clearly did horrible, however farmland put up a strong yr. Is that correct?
Craig:
That’s correct truly. On common, farmland is up about 10% and only one yr over yr, so ’21 to ’22 and a few areas just like the Midwest are up. I’m taking a look at Iowa for instance, at up 19.7% after which some areas on the West Coast round eight, 9, 10% as properly. 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 value is that Midwestern farmland, however there’s 300 completely different crops rising on the West Coast and it gives 50% or extra of fruits, nuts and greens for instance within the U.S. so very, very, very massive markets which might be 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 based mostly on CSR factors, corn suitability ranking 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 via the public sale system that may change very quickly. And there was numerous capital going into that area. However it ends in imbalances, as a result of the farmland, for instance on the West Coast doesn’t have that very same liquid markets. Should you’re an out of doors investor, a non-professional investor, it’s more durable to search out property and more durable to search out an operator for these property. And in order that’s why these markets have gone up lower than the Midwest. and it ends in imbalances as a result of if you happen to 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 a fantastic 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 a bit 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 value of that farmland, Iowa farmland has been promoting for $20,000 an acre was once a excessive value. 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. if you happen to needed 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 properly. 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 feel an excellent normal 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 possibly can say, “right here’s my farm, I can’t do something with it,” which I feel is a characteristic, not a bug. Speak to us a bit bit about the way you guys put collectively these funds. So for buyers, 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 typically, nevertheless 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 buyers, massive wealth administration companies have their shoppers make investments with us and excessive net-worth people and household places of work as properly.
Meb:
After 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 that could be, someday. Speak to us a bit bit about, all proper, so fund three for instance versus the prior funds. What’s the purpose on the composition of that? Is it going to be 5 completely different geographies? Is it going to be one particular geography, kinds of crops? How do individuals get the cash out? What are the mechanics of the fund for somebody who could make investments at present? Can they withdraw on 20? I’m attempting 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 at the least $50 million price 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 condominium constructing. And that makes it very easy for us to purchase the 100-unit condominium constructing subsequent door or the 1,000-unit condominium constructing subsequent door with out actually increasing our headcount on that. We have now 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 usually in these geographies. Plus we’ll add another geography.
At this level it’s most likely going to emphasise Oregon and Washington simply we just like the pricing dynamics the place they’re proper now. We expect there’s numerous alternative in these areas. And the funding usually, it’s formally a 10-year fund with one yr elective extensions. We inform the buyers to not anticipate money stream throughout the first three years after which because it’s obtainable, we’ll distribute that money stream, then they’ll have a possibility to exit on the finish or they will keep in so long as they need. So, I view these as type of 30 plus yr property, farmlands simply this nice asset class. And so we’ve designed it in order that sure, our job is to extend the money stream and supply liquidity to buyers as rapidly as attainable. But additionally not drive them out, not drive them to have a taxable loss after which simply attempt to search for one other property.
Meb:
I think about some persons are fascinated by this generationally the place if given their alternative, they might most likely 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 buyers liquidity as rapidly as attainable, however I additionally need to be saved on my toes and never give them a cause 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 prompted essentially the most curiosity? Should 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, properly A, I obtained to determine if I’ve an excessive amount of cash in a single financial institution. B, is it a financial institution that will disappear beneath 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 yr 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:
Properly, you do have very sensible buyers that aren’t pondering contained in the field, and also you’ve simply performed an exceptional job on actually articulating a number of the advanced traits which might be occurring in nice methods for shifting ahead. However actually throughout the COVID interval, I obtained the sense that folks had been actually trying, they had been involved in regards to the international economic system. The federal government had simply printed an incredible sum of money, elevated cash provide 30% or extra, and so they needed to place their cash someplace secure. And in order that was a normal theme for individuals. And that did have an excellent impact on individuals coming to Farmland LP.
Meb:
Yeah, I’m all the time fascinated by the place buyers come from, their motivations. And in your space it’s attention-grabbing as a result of there’s those who most likely come to you from A, “I don’t have farmland publicity side.” There’s individuals which might be taking a look at it from a pure diversification or return perspective. There’s different individuals which might be most likely taking a look at 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 otherwise.” After which I think about it’s additionally a mixture of people, household workplace, every kind. Do you assume 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 a bit more durable for the typical monetary advisor. I imply, until they’re putting say, “Hey shoppers, bunch of you guys make investments.” Since you don’t have a public automobile, which for that channel makes it a bit more durable for somebody at UBS or Morgan Stanley or one thing. There’s a bit little bit of all the things and motivation’s various as properly.
Craig:
I feel so. However Invoice Gates popping out as one of many largest farmland house owners, I feel additionally had an affect on individuals. And if you happen to do the mathematics round that, he put round 5% of his property in farmland. And that’s an excellent anchor quantity for individuals. It is best to have diversified business actual property publicity, actual property publicity, and round 5% in farmland is only a adequate for Invoice Gates. And I do assume that there’s simply elevated concern about how leveraged in a normal 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 needed to ask was, what’s … I toured one of many largest greenhouses on the earth a few week in the past. It’s primarily tomatoes and hashish, nevertheless it’s one of the technologically superior buildings I’ve been in, I feel ever. And also you begin to see the position of robotics actually speed up on the farm. I imply, I joke on right here on a regular basis that one 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 degree 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 various kinds of crops is the power to effectively work these various kinds of, it’s completely different to chop some wheat than it’s to reap some strawberries on and on. What’s the position that automation’s enjoying and the way rapidly is that like adoption curve occurring 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 properly, not simply wheat and corn that you just may usually take into consideration. However for instance, if you happen to have a look at blueberry harvesting. One blueberry harvester with 4 individuals on it may well harvest as a lot as 125 hand harvesters. And actually most blueberry fields on the market are arrange for hand harvesting. You need to principally do all the things completely different together 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 properly.
Speaking in regards to the vertical farming, we may do vertical farming on our land. We have now numerous nice land. We have now water, sunshine, labor, et cetera. However after I do the mathematics, and AppHarvest might be an excellent 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, sometimes round twice the price per pound of meals than farmland grown stuff. However actually in 10 years the query is, “Properly, would you reasonably personal a 10-year previous 60 acre greenhouse or 10,000 acres of irrigated farmland?”
Simply from an funding standpoint, I’m an enormous fan. I nonetheless assume there’s large worth on the farmland facet. If I assumed that there was numerous alternative within the managed surroundings sector, we’d be investing there as properly. 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 assume tomatoes, strawberries, hashish, et cetera.
Meb:
Yeah. What’s the hip ranking 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 have a look at that. And possibly I’ll offer you 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 concerned about what the ecological worth was of what we did. They really gave us a $250,000 grant and we introduced in two consulting companies to take a look at what we did and quantify it for us. And so these two companies checked out each tractor cross, each crop that went on the bottom, each enter that went in, and on $50 million price 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 if you happen to dig into the numbers a bit bit, what it confirmed is that if that land had been managed conventionally, it will have prompted $8.5 million price of ecosystem service hurt. And the best way that we managed it created $12.5 million price of ecosystem service profit. So, an actual double backside line return each to the buyers 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. Should you see an ESG rankings on MSCI, these are the backend guys behind it.
They went in, we went via a three-month course of with them. They rating you on a number of completely different measures and offer you an final rating out of a 100 factors. Should you get 50 or under, you’re doing dangerous for the world. Should you get 50 or above, you’re doing good for the world. The common agricultural agency of their system has a rating of 17, so not doing properly for the world. And we acquired the best rating that they’ve ever given to any one in every of their 10,000 companies. We obtained a rating of 82 on that. And we beat insurance coverage firms and tech firms and biotech firms and every kind of firms on that. And there’s a 12-page report that’s obtainable on this. However for us it’s essential not solely to get licensed natural, which is a federal regulated commonplace. But additionally have these third occasion scores which might be delivered. You’ll be able to’t get a 100 on stuff. Some pretend trade scoring is rather like, “Oh, you’re all sustainable.” “Properly, oh nice, I assume we are able to go house. We’re all performed.”
However it’s truly actually essential, similar to you by no means say, “Oh, we’re performed by way of delivering earnings on the sustainability facet,” there’s all the time one other step you possibly can take. There’s all the time issues you possibly can 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 easy return stream, whether or not it’s via the crops in addition to appreciation of the land. Are there different various yield sources you guys ever have 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 yr on every of our 15,000 acres. It’s a fantastic, basically byproduct of specializing in wholesome soil biology and good land practices. Cowl cropping for instance is among the greatest methods to extend, so soil carbon, and it’s solely performed on about 3% of farmland acres within the U.S. Farmland is the second-largest carbon sink obtainable after the oceans. There’s actually an incredible alternative to sequester carbon there. The problem has been, it’s difficult to really combination the carbon. Each completely different soil sort, each completely different geography, each completely different crop rotation has a special protocol that must be developed to be able to quantify the quantity of carbon, at the least in keeping with the best way that the carbon markets are structured at present.
And the profit, if carbon costs are $20 per ton, they could be increased than that now, however let’s use $20 a ton. If we’re sequestering half a ton to a ton of carbon per yr, that’s 10 to $20 further revenue per yr on that, which is okay. Should you’re producing $300 an acre typical lease and you may get an additional 10 or 20 bucks, properly, 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 habits.
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 feel it applies. I typically get seduced in an identical method in our enterprise of getting distracted by shiny concepts when the principle focus is true in entrance of my face, really easy to do. Craig, we talked about loads. What did we miss? Something that we haven’t touched on at present that you just assume is essential 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. Principally 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 guarantee that 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 offer crop insurance coverage for individuals. And that makes certain that these farmers can keep in enterprise decade after decade, irrespective of the climate cycles. Should you don’t develop meals one yr, you’ve obtained an actual societal situation. That is the rationale why the federal government will principally guarantee that all of the farmers succeed.
Properly, it takes 10 years the best way the crop insurance coverage is ready up. It takes 10 years’ price of rising a selected sort of crop in a selected county to ensure that it to be eligible for crop insurance coverage. Properly, we’re now 25 years into natural certification. We’ve obtained a ton of crop variety that’s now obtainable for crop insurance coverage from the federal government. And so we’re capable of get crop insurance coverage for increased revenue margin crops that actually take away the danger. You get 80% crop insurance coverage in your crops. We develop 40 completely different crops throughout our farms, so we get numerous 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 condominium 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 great dynamics for buyers to nonetheless get into the area.
Meb:
Hear, hear. Properly, what’s the long run seem like for you guys? I imply, final time we talked, I imply, I feel the reply I think about is simply plant and develop, proper? Increase a bit and carry on doing what you’re doing. However is there the rest in your mind that you just’re fascinated by as we glance out to 2024, 2025?
Craig:
We’ve spent the previous variety of years actually constructing out our farm administration firm. We have now this 45-person farm administration firm that actually is simply wonderful. Every thing is completed at value, it’s not a revenue heart for us. We do it at value. In order we scale up these prices principally get amortized over extra acres. I feel we’re at a really good stage to broaden these areas that we’re in with out rising headcount on that and actually benefiting from the economies of scale. And we’ll simply proceed to be centered and execute on shopping for top quality farmland with nice water rights into the long run. 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 yr 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 good place to get involved with us. We’re truly having an investor occasion at our California farm that has the blueberries at the start of June. After which within the fall now we have investor occasion up in Oregon the place we harvest wine grapes. We actually prefer to get the buyers out to the farms.
Meb:
Yeah, man, that must 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 wonderful to get again out on the farm and actually truly see sustainable regenerative agriculture occur at scale. And folks say our blueberries are the very best tasting blueberries that folks have ever had, and it’s numerous enjoyable.
Meb:
Cool. Properly, Craig, it’s been numerous enjoyable as typical, 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, if you happen to loved this episode, try the hyperlink within the present notes for our first episode of Craig that was launched on the finish of 2020. Podcast listeners will put up present notes to at present’s dialog mebfaber.com/podcast. Should you love the present, if you happen to hate it, shoot us suggestions at [email protected]. We like to learn the opinions. Please overview us on iTunes and subscribe the present anyplace good podcasts are discovered. Thanks for listening, buddies, and good investing.
