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 right now’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 belongings have been one of many few belongings that didn’t have destructive returns.
Then we dive into the financials of an acquisition they product of a 4,000 acre, 150 12 months outdated farm in Northern California again in 2013 for just below $30 million. Craig walks by means of 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 12 months.
Craig shares some nice slides through 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 optimistic 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 acquired the very best ever ESG rating from the biggest agency
53:12 – Authorities-subsidized natural crop insurance coverage
55:15 – What the long run appears 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:
Welcome to the Med Faber Present, the place the main focus is on serving to you develop and protect your wealth. Be a part of us as we talk about the craft of investing and uncover new and worthwhile concepts, all that will help you develop wealthier and wiser. Higher investing begins right here.
Disclaimer:
Med Faber’s the co-founder and chief funding officer at Cambria Funding Administration. Because of trade laws he won’t talk about 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 mates at YCharts. For those who’re a monetary advisor, hear up. By now YCharts helps you to see return knowledge, value charts and different info, however now they’re taking it to a complete nother stage by serving to you create customized experiences and shows to boost conversations with shoppers 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 shoppers throughout quarter or year-end critiques. You possibly can even add your personal visuals and your agency branding colours and brand. Their new replace permits for customized storytelling, supplying 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 mates in compliance. Make your life simpler. Give YCharts a attempt to streamline your course of of creating shows. 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:
Good day everyone. We’re heading again right down to the farm right now with returning company. Craig Wichner, founder and managing accomplice of Farmland LP, the biggest farmland supervisor centered on natural farmland now managing over 1 / 4 billion {dollars} in belongings 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 belongings have been one of many few ones that didn’t have destructive returns. Then we dive right into a case research of an acquisition they product of a 4,000 acre, 150-year-old farm in Northern California again in 2013 for just 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 through 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 occurring in your life, your world? The place do we discover you right now? 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 little 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 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, lovely floor, lovely groundwater rights or water rights normally. Nice rising local weather.
Meb:
Yum. All proper, properly catch us up on the corporate. We’ll put up the present observe hyperlink listeners in order for you the sort 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 belongings, 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 deal with including worth to farmland. Enterprise has grown a bit as properly. We’ve about eight folks in fund administration and 45 folks 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:
Properly, one of many large issues that has actually modified or accelerated, we might do quite a lot of totally different adjectives, since we final spoke is a, I imply multi-decade outlined regime that appears to have shifted, which is of certainly one 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 a little bit bit about that. We speak about farmland market normally. You may give us an replace overview of the macro and the way it’s impacted curiosity and every part you guys are doing in your world.
Craig:
It looks like this extremely therefore time. One of many issues that I like about farmland is that there’s $3.8 trillion value of farmland within the U.S. Identical 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 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 have got an incredible deck. If we will’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 huge 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, this can be a nice slide. Relative to numerous sorts 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 following half about it’s the leverage ratios. So multi-family is round 51%. LTV workplace buildings are round 78% LTV in the whole sector, $3.2 trillion value of workplace buildings, 78% of that’s debt. And that’s why you see actually super adjustments occur when you have got rates of interest go up or have any credit score points. Farmland, there’s solely 13% LTV on the whole sector, so actually tremendously little debt and about half of that debt is simply working strains. 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 exhausting 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. Really, I’ll go to the subsequent slide right here only for background. And the quick story on that is that over the a long time 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 stated. And the hire 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 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 little bit 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 properly.
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 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, however it’s a little 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 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 rationale?
Craig:
The banking system may be very accustomed to 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 mainly the ’70s and then you definitely had a farm disaster of debt disaster in late ’70s, early ’80s. And banks have been mainly foreclosing on farmland that was not standard 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 house, farmers didn’t need something to do with the banks as properly. And a part of that was precipitated, truly … What drove it’s in 1971 the U.S. modified its agricultural coverage to inform everybody to mainly plant fence put up to fence put up and get large 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 over debt to plant extra corn after which the value declines precipitated 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 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 dad and mom 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 youngsters who develop up in that surroundings are those who’re operating, the banks now operating these organizations. Meb, in the event you do an funding and then you definitely determine you don’t like a sector, you simply don’t spend money on that sector anymore. For those who’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 the whole 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. Really often we like to purchase it a 100% fairness after which do enhancements with leverage if it’s lately priced.
Meb:
Bought it. Okay. It is smart, I feel for most individuals after they give it some thought, that farmland intuitively, in the event you have 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 stated have been actually large 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 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 option 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% value premiums are there. And there’s super shopper demand. The CEO of Costco, 10% of all natural meals within the U.S. is bought 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 the intention to develop natural meals with the intention to serve that market. And it’s that three 12 months transition to natural that basically holds folks 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 would possibly 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 large 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 it’s important to. For those who’re maximizing soil well being and doing regenerative agriculture, then you definitely 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 facet or how’s that work?
Craig:
That’s extra on the regenerative facet, however as a result of we do this, it makes it very simple for us to get licensed natural. Generally in crops you’ll want to rotate your crops. For those who 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 amazing 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 plenty of 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 a little bit little bit of soil nitrogen as properly, 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 definitely want these not less than three, however usually 4 crops every year after which rotating over time. That’s very difficult for a farmer. And if you consider the common commodity farmer within the U.S. has about $8.5 million value of land and tools they usually 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 should ship their youngsters to school or fund their retirement or numerous issues like that. So that basically is a giant barrier.
Meb:
this chart, I 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 way in which. And if there’s value premiums, 50 200% value premiums natural, why are extra folks not benefiting from this? What’s the hindrance?
Craig:
A part of the problem is that farmers themselves, 98% of farmland is owned by the farmers and a pair of% is institutional. The large barrier to the prevailing farmers is that three 12 months conversion interval. It’s how do they fund in essence that transition to natural. There’s quite a lot of experience points, such as you truly have to know the way to do that. It’s a lot more durable to develop 4 totally different crops every year and discover totally different markets to promote them to and have the tools to do 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 in the event you’re used to different types of business actual property. However we’re the biggest centered on natural and regenerative agriculture. I’d truly love for there to be extra competitors on this house.
I feel that there’s an amazing alternative on this, however after I go searching on the different institutional traders, two issues maintain them again. One remains to be a normal 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 consider that. They actually inform me that natural doesn’t work, though 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 movement from day one. They discuss concerning the money movement that they generate from day one, and you may’t take it by means of a price add course of in the event you bought the on getting money movement from day one. We inform our traders they’re not going to get money movement 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 may 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 referred to as everlasting crops. And when the traders are available in with that good long run time prize and that 5 years or extra time horizon, they usually know upfront they’re not going to get money movement proper to start with. Then it makes quite a lot 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 considering of boundaries 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 quite a lot 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 occurring for six months, it ought to have taken one week, possibly. We didn’t even do something, so we cleaned up the house. However I imply, my God, simply coping with the federal government. Is that this a giant 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 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 probably monocropping corn to 4 numerous crops, you have got 4 occasions 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 not less than $50 million value of farmland in a single tight geographic space, we’ve sufficient that we will say, “Okay, nice. Properly, we’ve 600 acres of land out there 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 one of the best sheep and cattle tenants for the pasture, one of the best natural tomato farmers or natural candy corn farmers for the vegetable rotations, inexperienced beans and one of the 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 little bit bit about you guys final couple years. You would both do it by means of case research, you would simply speak about broad phrases, what you guys have been on the lookout for, 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 will undergo any which method 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 through the conversion course of and actually created much more range on that. And there’s a brand new slide up right here if folks 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 lately appraised for a little bit over $77 million, and the conversion course of was fairly fascinating. 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 concerning the worth of water, Meb as a result of I feel that’s probably the greatest 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 farmland for this case research is, we purchased this property, had two tenant farmers on the land every farming about 2,000 acres, they usually 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. Once we purchased it, we took it by means of 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 improvement and simply loved farming 10,000 acres. And he stated, “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 right now, 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 right now. And went from two farmer tenants to seven farmer tenants on that land. And elevated the income per acre for us from just 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 completed is we recognized a number of the floor that was simply superb for natural blueberries on that floor, so about 600 acres.
We went out, we established a partnership with Driscolls, we’ve experience in blueberries, so we truly planted them ourselves, and we’re simply partway by means of the maturation strategy 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 a little bit little bit of debt, I do know, we talked about it to start with. How do you see that? Are there any kind of fence posts or broad factors of reference you employ for a way a lot debt you’ll make use of on a farm or an operation or a purchase order? How do you consider it?
Craig:
It’s fairly delicate to debt costs. Up till a number 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 affordable LTV quantity as the costs elevated. And due to a number of the debt that was out there within the house 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 various farmers on the podcast, and I feel in the event you have been to do the phrase cloud or have a look at the phrases that get used most, water’s up there. Perhaps dig a little bit extra, inform us a little bit deeper about why that is so necessary? How do you defend your self in opposition to errors right here or getting in hassle with a property that both might not have the best water rights or that sooner or later relating to international warming or altering geopolitics and borders, the way you defend your self?
Craig:
And we’ve a giant display 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 dust and the water individually, and while you do this, we regularly really feel like we’re shopping for the dust and getting the water free of charge.
Meb:
I used to be going to say, what’s the standard breakdown in the event you have been to truly … Is it 90% land worth, 10% water mentally? I do know there’s in all probability not a precise breakdown, however is there a assemble you consider 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 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 would possibly promote for $5,000. Okay, however you fast-forward to right now. 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 will have a look at very, excellent knowledge, the worth of that water proper, both on a money movement foundation or on an asset worth foundation. As a result of actually water is a property, identical to proudly owning a bit of actual property, simply related to farmland, blended and blurred along with farmland. Water is one thing that basically has super worth. Australia has arrange a water market, the US has not. If that occurs it will likely be a large change.
Meb:
You guys presently 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 belongings and actual belongings should not homogenous. You might have actual property, which is clearly very totally different, business actual property. Even inside business actual property you have got knowledge facilities, you have got single household housing, you have got workplace house, 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 have been stated, we are inclined to lump actual belongings collectively for related traits. However 2022 is an efficient instance. The place many sorts of actual belongings did very poorly farmland was in all probability to my information, one of many solely few lengthy solely belongings that had nice efficiency. Is {that a} truthful remark? I’m attempting to consider even what else might have endured final 12 months. Shares and bonds clearly did horrible, however farmland put up a stable 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 properly. Farmland actually is fascinating 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 consider farmland costs, the dominant value 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 giant markets which can be diversified. One of many fascinating issues concerning 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 bought primarily based 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 nearly this commodity priced asset with a liquid market by means of the public sale system that may change very quickly. And there was quite a lot of capital going into that house. 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. For those who’re an outdoor investor, a non-professional investor, it’s more durable to search out property and more durable to search out an operator for these belongings. And in order that’s why these markets have gone up lower than the Midwest. and it ends in 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 shocking to me.
Craig:
It’s an incredible rising local weather, however partially as a result of it’s irrigated so we will present simply the correct quantity of water that’s wanted, whereas the Iowa farmland is extra rain fed and a little bit bit topic to the variability, so we will 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. in the event you 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 very fascinating 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’ll be able to say, “right here’s my farm, I can’t do something with it,” which I feel is a characteristic, not a bug. Discuss to us a little bit 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 will increase normally, however it does imply that each investor who is available in must be verified, third-party accredited on that. 50K minimal, We wish folks 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 doable. And we do have institutional traders, giant wealth administration companies have their shoppers make investments with us and excessive net-worth people and household workplaces 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. At any time when that could be, sooner or later. Discuss to us a little bit 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, sorts of crops? How do folks get the cash out? What are the mechanics of the fund for somebody who might make investments right now? Can they withdraw on 20? I’m attempting to do the maths. What are we, 2020, 2033. I can’t even say it someday sooner or later.
Craig:
2023 is correct 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 not less than $50 million value of farmland and one tight geographic space. So we will 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 usually in these geographies. Plus we’ll add 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 quite a lot of alternative in these areas. And the funding usually, it’s formally a 10-year fund with one 12 months non-compulsory extensions. We inform the traders to not count on money movement through the first three years after which because it’s out there, we’ll distribute that money movement, 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 sort of 30 plus 12 months belongings, farmlands simply this nice asset class. And so we’ve designed it in order that sure, our job is to extend the money movement and supply liquidity to traders as shortly as doable. But in addition 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 desirous 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 doable, however I additionally need to be stored on my toes and never give them a cause to need to exit. These are nice belongings and we do give it some thought multi-generation.
Meb:
What occasions over the previous few years has precipitated essentially the most curiosity? For those who might correlate it? I’m wondering 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 acquired to determine if I’ve an excessive amount of cash in a single financial institution. B, is it a financial institution that 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 few years, I imply clearly 60/40 getting smashed final 12 months whereas farmland outperformed it by what, 20 proportion factors, some simply astonishing quantity. Is there something specifically the place your telephone begins ringing off the hook otherwise you beginning to get emails, apart from the Med Faber Present? The rest that’s like, oh, persons are truly waking as much as this idea?
Craig:
Properly, you do have very sensible traders that aren’t considering contained in the field, and also you’ve simply completed an outstanding job on actually articulating a number of the advanced developments which can be taking place in nice methods for transferring ahead. However actually through the COVID interval, I acquired the sense that folks have been actually wanting, they have been involved concerning the international economic system. The federal government had simply printed an amazing amount of cash, elevated cash provide 30% or extra, they usually needed to place their cash someplace secure. And in order that was a normal theme for folks. And that did have an excellent impact on folks coming to Farmland LP.
Meb:
Yeah, I’m all the time desirous about the place traders come from, their motivations. And in your space it’s fascinating as a result of there’s people who in all probability come to you from A, “I don’t have farmland publicity side.” There’s folks which can be it from a pure diversification or return perspective. There’s different folks which can be 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, stated in another way.” After which I think about it’s additionally a mixture of people, household workplace, all sorts. Do you assume it’s just a bit little bit of every part? What’s your expertise been over the previous variety of years? You going to get all, I think about it’s a little bit more durable for the common monetary advisor. I imply, except they’re putting say, “Hey shoppers, bunch of you guys make investments.” Since you don’t have a public car, which for that channel makes it a little bit more durable for somebody at UBS or Morgan Stanley or one thing. There’s a little bit little bit of every part and motivation’s diverse as properly.
Craig:
I feel so. However Invoice Gates popping out as one of many largest farmland homeowners, I feel additionally had an impression on folks. And in the event you do the maths round that, he put round 5% of his belongings in farmland. And that’s an excellent anchor quantity for folks. It’s best to have diversified business actual property publicity, actual belongings 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 folks’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 planet a few week in the past. It’s primarily tomatoes and hashish, however it’s one of the technologically superior buildings I’ve been in, I feel 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 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 every part, air-con. However right now 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 might even farm eight various kinds of crops is the power to effectively work these various kinds 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 taking part in and the way shortly is that like adoption curve taking place right here in 2023?
Craig:
There’s an amazing quantity of expertise that’s being superior on the farm. And it’s tractors, chopping heads, automated harvesting tools for everlasting crops as properly, not simply wheat and corn that you just would possibly usually take into consideration. However for instance, in the event you have a look at blueberry harvesting. One blueberry harvester with 4 folks 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 mainly do every part totally different along with your vegetation 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 folks as a substitute of 125 folks. So you actually get dramatic value financial savings, high quality will increase as properly.
Speaking concerning the vertical farming, we might do vertical farming on our land. We’ve quite a lot of nice land. We’ve water, sunshine, labor, et cetera. However after I do the maths, 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 amount of cash that it prices them to construct a 60 acre greenhouse, I might purchase 10,000 acres of irrigated farmland. Greenhouses are depreciating belongings. Their working prices are excessive, sometimes round twice the associated fee per pound of meals than farmland grown stuff. However actually in 10 years the query is, “Properly, would you reasonably personal a 10-year outdated 60 acre greenhouse or 10,000 acres of irrigated farmland?”
Simply from an funding standpoint, I’m a giant fan. I nonetheless assume there’s super worth on the farmland facet. If I assumed that there was quite a lot of alternative within the managed surroundings sector, we’d be investing there as properly. However it’s actually slender collection 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 if folks 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 inquisitive 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 go, 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 acquire to the investor, however we additionally delivered 46% internet acquire 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 a little bit bit, what it confirmed is that if that land had been managed conventionally, it could have precipitated $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 offer 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. For those who 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 offer you an final rating out of a 100 factors. For those who get 50 or under, you’re doing dangerous for the world. For those who 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 properly for the world. And we acquired the very best rating that they’ve ever given to any certainly one of their 10,000 companies. 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 out there on this. However for us it’s essential not solely to get licensed natural, which is a federal regulated commonplace. But in addition have these third occasion scores which can be delivered. You possibly can’t get a 100 on stuff. Some pretend trade scoring is rather like, “Oh, you’re all sustainable.” “Properly, oh nice, I suppose we will go house. We’re all completed.”
However it’s truly actually necessary, identical to you by no means say, “Oh, we’re completed when it comes to delivering earnings on the sustainability facet,” 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 considering of other yield. Clearly, farmland is a fairly easy return stream, whether or not it’s by means of the crops in addition to appreciation of the land. Are there different different yield sources you guys ever have a look at for these properties? Is carbon certainly one 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 incredible, 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 completed on about 3% of farmland acres within the U.S. Farmland is the second-largest carbon sink out there after the oceans. There’s actually an amazing alternative to sequester carbon there. The problem has been, it’s sophisticated to truly mixture the carbon. Each totally different soil sort, each totally different geography, each totally different crop rotation has a distinct protocol that must be developed with the intention to quantify the quantity of carbon, not less than in response to the way in which that the carbon markets are structured right now.
And the profit, if carbon costs are $20 per ton, they may 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 12 months, that’s 10 to $20 further earnings per 12 months on that, which is ok. For those who’re producing $300 an acre typical hire 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 hire, 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 stated, “Concentrate on $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 the same method in our enterprise of getting distracted by shiny concepts when the principle focus is correct 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 right now that you just assume is necessary 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%, they usually 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 folks. And that makes positive that these farmers can keep in enterprise decade after decade, regardless of the climate cycles. For those who don’t develop meals one 12 months, you’ve acquired an actual societal challenge. That is the rationale why the federal government will mainly guarantee that all of the farmers succeed.
Properly, it takes 10 years the way in which the crop insurance coverage is ready up. It takes 10 years’ value 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 acquired a ton of crop range that’s now out there for crop insurance coverage from the federal government. And so we’re in a position to get crop insurance coverage for increased revenue margin crops that basically take away the chance. You get 80% crop insurance coverage in your crops. We develop 40 totally different crops throughout our farms, so we get quite a lot of inherent diversification and with that crop insurance coverage on it. It actually creates this beautiful magical asset class. You don’t have hire insurance coverage to your condo buildings or workplace constructing insurance coverage in your workplace buildings, however we’ve 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 traders to nonetheless get into the house.
Meb:
Hear, hear. Properly, what’s the long run appear 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? Develop a bit and carry on doing what you’re doing. However is there anything in your mind that you just’re desirous 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. All the things is completed at value, it’s not a revenue heart for us. We do it at value. In order we scale up these prices mainly get amortized over extra acres. I feel we’re at a really good stage to develop 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 prime quality farmland with nice water rights into the long run. Long run we’ll create these, we’ll do one thing enjoyable round as soon as the belongings are all totally money flowing in order that it’s simpler for everybody to take part in, however we will 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 folks discover out extra about you guys? What’s one of the best locations?
Craig:
Yeah, so our web site @farmlandlp.com is a good place to get in touch with us. We’re truly having an investor occasion at our California farm that has the blueberries initially of June. After which within the fall we’ve 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 ought 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 folks say our blueberries are one of the best tasting blueberries that folks have ever had, and it’s quite a lot of enjoyable.
Meb:
Cool. Properly, Craig, it’s been quite a lot of enjoyable as traditional, becoming a member of you, catching an replace. Thanks a lot for becoming a member of us right now.
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 put up present notes to right now’s dialog mebfaber.com/podcast. For those who love the present, in the event you hate it, shoot us suggestions at [email protected]. We like to learn the critiques. Please evaluate us on iTunes and subscribe the present wherever good podcasts are discovered. Thanks for listening, mates, and good investing.