Episode #114: David Gladstone, Gladstone Capital, “Farmland Is One of the Most Stable Assets One Can Own”

Episode #114: David Gladstone, Gladstone Capital, “Farmland Is One of the Most Stable Assets One Can Own”


Guest: David Gladstone is the Founder and CEO of Gladstone Capital. Prior to founding the Company, he served as either Chairman or Vice Chairman of the board of directors of American Capital, Ltd. (NASDAQ: ACAS), a publicly-traded leveraged buyout fund and mezzanine debt finance company. Additionally, he has co-authored two books on financing for small and medium-sized businesses, Venture Capital Handbook and Venture Capital Investing.

Date Recorded: 7/18/18     |     Run-Time: 1:01:31

Summary: We start with David’s backstory, which dovetails into how he got into farming, and subsequently, launching a farmland REIT. Meb asks for David’s broad thoughts on investing in farmland.

David tells us “farmland is one of the most stable assets one can own.” He goes on to say how it correlates with gold, not with the stock market. David gives us an overview of the farming landscape – how corn and wheat are the big categories, but this isn’t where David goes with his REIT, too much competition. He focuses more on berries and specialty crops, which are far more profitable. He mentions how tree/vine/bush crops have a great long-term record for making money for farmers.

Next, Meb asks about operations – does David manage the farms? Just rent them out? David tells us they use triple net leases with their farmer tenants. Sometimes they will also have a revenue participation, but that’s unusual. David goes on to say how farmland is becoming more scare, so they choose farmers who are experienced and trusted. As an investment, farmland has done quite well. NCREIF publishes a farm index – it has done 12.2% annually over the last 10 years. David believes that due to the growth and stability of farmland, it’s an excellent place to put money – especially as it’s a hedge against inflation. He references a Buffett quote that touts owning farmland versus owning gold.

Meb asks whether there are any current trends in the farming space. David tells us the number of acres per person is declining. It’s now down to about 0.5 farmed acres per person in the world. The conversation segues into water. David makes the point that his team only buys farms with access to their own water. This makes a huge difference. He references the California drought in recent years and notes it was an incredibly profitable period for them since their farms, with their own water supply, continued operations.

Next, Meb asks about David’s framework for finding new farms. What’s the process, and what’s the capital structure? David tells us that’s what important is to have a tremendously strong farmer. They only deal with the top 20% of farmers in any growing area, so it’s a detailed vetting process. In terms of capital structure, they tend to finance about 50% of the purchase price. They use a variety of lenders.

The guys soon turn toward “risks.” David tell us that rising rates are a risk since they use debt. As rates rise, the price of the farms they purchase will need to drop in order to make the numbers work. Another risk are tariffs. This has a been a big problem for seeds. What if China or Mexico reduces their purchases?

There’s far more in this unique episode: David’s thoughts on expanding farmland REITs globally… the role of automation in farming… and why there aren’t more farmland REITS. If you’re curious about farmland as an investment, this is definitely the episode for you.

Comments or suggestions? Email us Feedback@TheMebFaberShow.com or call us to leave a voicemail at 323 834 9159

Interested in sponsoring an episode? Email Jeff at jr@cambriainvestments.com

Links from the Episode:

  • 0:50 – Welcoming David to the show and an overview of his career
  • 2:48 – The genesis that led to making farmland a publicly available investable asset
  • 8:37 – What is the management of these farms like
  • 13:29 – Themes for farm ownership today
  • 19:46 – Water and farmland
  • 22:16 – Original reason David decided to go public
  • 24:40 – Why aren’t there more publicly traded farmland REITs
  • 27:52 – David’s process for valuing, as well as buying and selling farms
  • 36:25 – Crops David is avoiding for now – citrus and cannabis
  • 39:51 – Risks to investing in farmland
  • 45:46 – How farmland could fit into an investment portfolio
  • 48:07 – Does David look at expanding to farmland overseas
  • 53:41 – Future of farming
  • 58:39 – Most memorable investment
  • 59:33 – Inspiration for getting into farmland investing
  • 1:00:44 – GladstoneLand.com
  • 1:00:46 – GladstoneFarms.com

Transcript of Episode 114:

Welcome Message: Welcome to the “Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here

Disclaimer: Meb Faber is the Co-founder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com

Meb: Welcome podcast listeners. Today we have an awesome show for you with the Founder and CEO of the Gladstone family of companies. In addition to running Gladstone, he’s also an author, having written two books on financing for small and medium-sized businesses. Gladstone primarily invest in loans of lower middle market businesses. But for our purposes today, our guest is going to focus on something near and dear to my heart, farmland and farming in the REIT space. We’re thrilled to have him on the show. Welcome, David Gladstone.

David: Thank you very much. Glad to be here with you today.

Meb: So David, your career has exposed to all sorts of financial investment markets. As I just mentioned in the intro, I’d like to get into to farming in particular, but before that, why don’t you give our listeners a little overview of your career, your kind of origin story. How did you get into this this business?

David: Sure. I’ve been in the lending and investing in small and midsized businesses since my career started some 30 years ago. So I’m an old hand at looking at small and midsized businesses and most farmers as you can imagine, fit that category. So it was pretty natural to be there. I bought a large farm, personally, in California in 1997. And 2004, I sold the operating part of it and kept the land. And of course, the person I sold it to, that was Dole, and they were my only tenant at the time. And since then, have bought any number of farms. And then in December of 2013, we decided to take it public as a REIT. And that was the first farmland REIT. All we do is buy farmland and turn around and lease it to good-sized farmers and have enjoyed a nice robust growth over the last five years. And I feel like there’s really no end in sight since there’s only about $2.7 trillion worth of farmland available to be purchased.

Meb: So to give you a little background, we talk actually a lot about farmland on this podcast. Some of my fondest memories, my father grew up on a farm in Nebraska, no running water, outhouse and still have a lot of family in sort of that area of Kansas, Nebraska. Actually, gonna be an Omaha next week, podcast listeners, shoot me a note. First beer was on a farm. I spent a lot of time. My first time driving was on a farm. But the funny thing is a lot of investors, farmland is not even a consideration in their portfolio. And so talk to me about…I mean, it’s pretty innovative idea, and like you mentioned, you guys were the first to do it. Kind of talk to me a little bit about the genesis of how you decided to launch this is a public vehicle, why you decided to do that, how you came up with the idea, kind of all the genesis of kind of what made you want to do this?

David: Well, thinking about farmland as one of the most stable assets one can own, it correlates heavily with gold. It does not correlate at all with the stock market. So think of it as an asset that doesn’t move around much in terms of valuations. And if you looked at farmland, you’d find the big category, of course, would be corn and wheat and those kind of products you’d see out in the Midwest, where you were just talking about. Wheat don’t really go in that area where there’s a lot of competition. There’s competition all over the world for corn and wheat and any of those Midwestern big farms that you’d think about. And they haven’t been very profitable in the last five years, simply because prices of all the seeds have been down dramatically.

I think a lot of farmers are wondering if they’re gonna make it or not in that area and are probably looking for other things to put it into. Soy has been okay, but it’s not been the barn burner. So I came out of buying a farm in California that grew strawberries and other berries as well as vegetables. And these are all specialty crops. And these specialty crops happened to be extremely profitable compared to say corn or wheat. And so we’ve specialized in the specialty crops, primarily fruits and vegetables. And then in the last few years, we’ve moved into other areas such as the tree crops and the fine crops and the bush crops. So if you are eating blueberries today, they’re one grown on a bush that’s about six-foot-tall and nice crop and a very great specialty crop because most people feel the benefits of things like blueberries and strawberries.

We have lots of strawberry farms and we’re also into some of the tree crops and the tree crops are things like cherries, almonds, pistachios. These are crops that the trees could last for 20, 40, 50 years. And so you’re keeping alive a tree and garnering your product from that tree and able to sell it. All of those specialty crops are grown in the United States and most of them are eaten in the United States. So we do have in the almond area, you have some shipments out of the United States, a large part being to China. So that could hit the skids someday. But at this point in time, everything is growing well in our crops. And so we are in Florida as well because Florida obviously is an area that has a lot of fruits and vegetables are grown in Florida.

And so as a result, as we look at the world that we’re in, it’s very different from what most people would think of as a farm. I wake up in the morning and go out and cut wheat, nope, not our area. And that’s why we stayed in those areas because they are highly profitable. They have great long-term track records of making money for farmers in California. Probably 90% of the strawberries grown in the United States come from California, a little bit from Mexico, and a little bit from Florida, but most have grown in in California. Same thing with almonds. So we’re very heavy in California. We have an office in Oxnard. We have an office in Salinas.

And we probably open up some offices, say, in the state of Washington, because we have a lot of cherries and grapes and things in Washington, and it’s just a wonderful growing area and that makes the difference. Crops in, say, Iowa that are growing corn are going for 6,000 to 8,000 an acre of strawberry, depending on where would it end up in the $40,000 to $80,000 per acre because of the huge profitability of what they will generate. All these REITs that are in different areas, it depends on what the property will generate in the terms of revenue and profits as to why they’re so profitable for people. And so as a result, buying those properties cost you a lot of money. An acre of land in downtown New York would be highly expensive and same thing would be true of an acre farmland in Oxnard, California. But obviously, not as much as in New York. So it’s just what that land can generate in terms of profits that make them very exciting.

Meb: I got a 100 follow-on questions for you. But I was laughing as you were discussing this because I liked it. You know, we’ve historically had wheat on our farm, which I like to kind of describe as T-bill-like returns, but with none of the certainty and a lot more effort. So as we’re doing our wheat harvest, as we speak right now, in Western Kansas, I can sympathize. So talk to me a little bit about…a lot of the listeners probably didn’t grow up on farms, or familiar with farming. What is the operations like? Are you guys actually managing these farms? Do you own and then lease them out to farmers? How does it work for you guys?

David: Well, this is a triple net lease. So we are REIT and we have a triple net lease with the farmer. The farmer farms it, grows it, makes money as a grower. We just charge rent. Sometimes, we have a participation in the revenue but that’s unusual. And most usual for us, means that you have a lease, it goes up in price, sometimes on a yearly basis, but sometimes on a two-year basis. And so it’s much like any other triple net lease. The difference of course is that you’re leasing to farmers. Most of these farmers, in fact, I don’t know of. I know of only one that is rated by any kind of rating agency. So all of these farmers are midsized farmers. They’re not rated and as the risk profile.

But since these farms have been rented since the 1930s that we’re buying, and so they’ve been farmed since the 1930s. It’s pretty awesome kind of property because you don’t really worry about renting them because they’re so scarce. In California, probably 50,000 acres a year are taken out of farms and go into whatever, school, industrial area, houses, and something else. So farmland in California is going down in terms of numbers. And at the same time, farmland is going up in price, because it’s more and more scarce to find it and rent it. So we don’t worry about renting it so much as we do of just getting the right farmer that will take care of the farm and we turn and look at this as just being a real estate partner with farmers.

And so we choose farmers that we know and trust. And if you looked at farmland in general, and this includes all the farmland. If you looked at the index, there’s a group called NCREIF that keeps up with the index of farmland. They have about $8 billion worth of farms that they follow, including all of ours. So many of us will put our farms in those indexes. The index over the last 10 years has been 12.2% over the last 10 years with no loss years. And while others would be strong, and in you all know what the last 10 years have been like in REITs. There’s REIT index and there’s certainly an index for NASDAQ and all the other indexes out there.

So as a result of this stability and this continued growth in farmland prices, we just feel like this is an excellent place to put money. A lot of people just buy farmland and obviously it’s very hard just to sit down and buy a farm. But the nice thing about our company, of course, is it’s publicly traded and the symbol is LAND. So you can call your broker and be in the farmland business. And most people are buying it not so much for the yield because it’s only yielding about 4.6%, but primarily because it’s a hedge against inflation. If you wanna be ahead of the curve in terms of inflation, I think farmland is the place you wanna be. I know Warren Buffett said on one of his programs that he was being interviewed on that he’d rather own all the farmland in the United States than all the gold in the world.

And certainly, well, I don’t think Warren has a lot of farmland. His son owns a lot of farmland out in the Midwest. So I think from that perspective, he understands it. And the basis behind all of this if you just think about it, is people have to eat. You can’t grow food without dirt, and so he who owns the dirt can command prices for the food that’s gonna be consumed. And it’s a strange business in one way because you don’t have anything you can depreciate. Every now and then, you might have a cooler or box barn or something like that that your amortizing and give a little bit over shield, but at the end of the day, this is just dirt and it’s great dirt. That’s the key is buying the right dirt in the right area.

Meb: So a couple more questions on some of the comments you’ve made. One is so if you look back in history, you know, as you mentioned farmland for not just the last 10 years but for the entire 2000s was on a tear for the most part. It just had fantastic returns. Last few years may have cooled off a little bit. But really, arguably, the best performing asset class for this cycle. But for those who go back longer to the 1990s and 1980s in particular, farmland had, you know, like any asset class goes through ups and downs and cycles.

So maybe talk a little bit about just kind of right now in the farming community where… I still think the vast majority of farms are individually owned or, you know, a lot of the big money institutions are also investors like TIAA-CREF, perhaps Calipers, sort of big money shops like that. Where do you kind of see the history of farming macro trends now versus… Does it look similar to the past? Do you worry that like the 1980s Farm bust where a lot of farmers got really over leveraged with debt? Are there any comparisons or is this kind of a different time? Any general themes that you can tease out?

David: Well, the general theme, of course, is driven by the fact that the number of acres per person worldwide has gone down and it keeps going down. You’re now down to about one-half acre per person in the world that’s used for farming. So much farmland has been converted to homes and parks and businesses and apartments and all of those kinds of things. It’s a fairly alarming rate, if you think about it. And, yes, there’s been some production enhancements over time to make farms more profitable and able to grow more. But about 80% of the farmland in the United States is owned by families, by individuals, and about half of that amount is not farmed by them and just rent it out.

And as any investment advisor will tell you, there is a major change in the amount of wealth that’s gonna go through the transition. The average farmer today is about 56 to 58 years old. Many of the children of farmers don’t want to farm, don’t want to be associated even with a farm. We bought a farm recently from a family, and the mother and father were in their 60s, and the son was a lawyer in San Francisco, and the daughter was a…I think she was a dental hygienist in Boston and they didn’t want anything to do with the farm, didn’t even want to hold it, even though the family had owned it for several generations. So we bought it from them at a reasonable price.

And of course, hopefully, they are enjoying the money that we paid them for the farmland. The point being here is that there’s a massive change coming in terms of farmland that’s gonna be sold. And while there are institutions like insurance companies and pension funds that are buying it, because it does match what they do. If you’re a pension fund, you need something that’s going to have value in 20, or 30, or 40 years when somebody retires. Same thing with insurance companies, if you’re insuring someone’s life and you expect them to die in 30 years, you want to be able to match that up.

And so, land again becomes one of those assets that is creeping up in price as well as creeping up in terms of the income it can produce. And as I mentioned for the last 10 years, about 12.2%, our company is early in its growth and so it only has around 65,000 acres of farms. So we’re still tiny and got plenty of room to grow. I think the thing that people should look at when they’re thinking about this is what kind of farms you’re in. And we’re in row crops, but not the standard row crops that most people think about, like corn, which can be changed every year. If something doesn’t work, you could plant strawberries one year and rutabaga the next year if you thought rutabaga was gonna be in.

So you’ve got flexibility. And some of the things that we buy, such as tree crops like almonds and vines like grapes and bushes like blueberries, those can go around forever. We were looking at some fig trees and fig trees have been growing for thousand years. And so you might…I was looking a little far out for me to do anything about it when it comes do. But at 1000 years, you wouldn’t really care. Figs are the same way. Many of the nut trees will go for 40, 50 years. So that’s a different crop and a different risk profile in the sense that you have to ensure the trees to make sure that if there’s an earthquake or some kind of storm that you can recoup, get back some of the money that you got invested and you’ve got a wait then from a tree doesn’t really produce any almonds for three to five years.

So as a result of that, you’re gonna lose some money you just won’t lose as much as if you were completely wiped out. So we have insurance on those crops, on the crops that are in the ground. We don’t really insure them because they’re one season kind of insurance. You can buy insurance, you can’t buy a lot. The government has insurance for the smaller farmers. And a lot of farms have specialty crops. About half the crops that are grown in the United States today are specialty crops like we’re interested in. So about half of the enormous number of acres that are out there today are in specialty crops so we’ve got plenty of room to run. They don’t turn over that fast.

You got to have people in the farm areas. We have offices for example in Oxnard and Salinas. We’ve opened up a new office in Raleigh, North Carolina for the farmland in the Carolinas. We have people that are covering Florida, going out and meeting with farmers. So you just gotta be out there to make it work. Water, I know, everybody has asked the same question. “What are you gonna do about water?” Well, we don’t buy a farm that doesn’t have water. If you don’t have wells on it, we’re just not interested in buying it. We don’t wanna take that risk. You got enough risk in the sense that your plants are alive and that you’re outside.

So the weather will have an impact on what you’re able to grow and how much you’re supposed to get from your farms. Now, everybody says, “Well, California had a long drought.” Yes, they did. It was one of the most profitable times for us and our farmers simply because we have water on all of our farms. And a lot of the farms in California are near smaller cities. For example, Watsonville, great place, lovely city. They built two processing plants. So every time somebody turns on a spigot in Watsonville in this case, there’s one in Oxnard as well, it goes to the processing plant, and unfortunately, people in Watsonville don’t want that as drinking water. So what do you do with all that purified water? Well, they pipe it out to the farms. We have turnouts on our farms and these turnouts, keep you in plenty of water as well.

I think our top crops would be interesting to most people because strawberries tend to be the biggest revenue generator. And those strawberry vines… And for example, just to use a number, you’d need 10,000 acres of corn to equal one big farm of 140 acres of property in California and strawberries. It’s that magnitude of difference between farmland in California and farmland in the Midwest. So growing strawberries and blueberries and almonds and all of those things are relatively profitable. About a third of our farmers are doing organic. And we don’t have anybody using GMO except for a couple of small farms in the Midwest, one in Nebraska and one in Texas. If you called your stockbroker, they’ll give you a lot of information about it. Unfortunately, recently, one of the competitors that we have that’s public has run into some trouble because it is heavy in corn in the Midwest. And so they’ve been on a downslide and it’s pulling our stock down even though we don’t have those kinds of problems. So we’re down a little bit.

Meb: The question in general is, what was the original reason to go public? You know, you’ve seen this trend in the United States where the number of public companies is really declined just because it’s a huge pain in the butt to be a public company. What’s the thinking behind that? And in from an investor standpoint, I wish there was dozens, if not, there’s, there’s hundreds of REITs already that cover everything from malls to commercial to housing to everything else. And we’ve long been saying, you know, “I really wish there was more farmland REITs.” One, why did you guys decide to go public, and two, why are there not a dozen or more of these farmland REITs out there for people to invest in?

David: Well, I think the reason we went public is we already have three other public companies. One REIT that does commercial and industrial. A very nice company trading under the symbol GOOD. But we have two others that are business development company. One, makes loans to small and midsized business and the other is a buyout fund. So we already had three public companies. I’ve been in public companies all my career, so it’s fairly natural for me to be in a public atmosphere. And the competitor that we had, who really just copied all our documents and went public afterwards is a company called Farmland Partners. And they were extremely heavy in the Midwest.

And the corn downturn over the last four years, maybe it’s five years now, has been very depressing on their stock and they’ve gotten a lot of shorts and now we have some shorts in our company in which is insane because we’re 100% occupied in all of our farms, and none of them have any problems. So I don’t understand how our short. I guess, it’s symbiotic kind of relationship that if somebody else is in trouble we should be in trouble as well. But we’re not. And I love it, the shorts have to cover the dividend, and we pay a monthly dividend. So every month they’ve gotta ante up some more money in order to cover the dividend that they’re short in, the stock that we’re short in. So I’m looking at this and thinking that somewhere along the way, there will be a short squeeze and those guys will get their just desserts because they didn’t check out the company.

Meb: You sound like Elon Musk here. But so why hasn’t there been more out of curiosity? Is it just because it’s complicated? Is it because that most people that are doing it private don’t have the experience on the public side? Is there not the demand from the institutions? Because, look, I would love to allocate to a whole suite of farmland REITs. I would love to I have a farmland ETF. But I’m just curious, why do you think there hasn’t? In your market cap has gone from I think 50 or up to like maybe 500 million now. Why has more people not done this?

David: I think it is the difficulty of finding and buying a farm and then the difficulty of making sure you’ve got a good farmer. There are number of private areas, as we’ve already mentioned, some of them in insurance companies and pension funds that have developed huge staff around buying and owning and renting and, in some cases, farming farmland directly. You mentioned one of the great companies that was set up in the area of, I think it’s, I hate to say, it but the Gates Foundation is now farming farmland and I don’t know why they wanna do that but that’s what they’re doing. And I don’t know that they’re set up to be as active as you need to be in the farmland area.

I mean, we have farmers that are out in the field working for us and know what’s going on. And so you’ve got to have a pretty big staff and a pretty big orientation toward certain farming areas. We were only in about a half a dozen big farming areas and then maybe another half a dozen of smaller farming areas. And you have to know that area inside now you have to know the farmers there. So if you look at the what’s going on in that farmland area, you just got to go down to deep and most people aren’t trained. I just can’t imagine an investment banker going out into the farm fields and trying to understand what’s going on there. I know that some of them do, but it’s just such an area that’s not right for public companies or even big private companies that I think the specialty of being in farm land is something that’s a deterrent for almost anybody going out there.

And as you probably already mentioned and seen, there aren’t a lot of investment bankers that came from farmland and are now doing transactions in New York City or San Francisco. So there’s a lack of experience of people that are on the farms or have been on the farms, going into the areas that would be necessary for them to go out and do transactions in purchasing farms and those kinds of things. I think it’s a great area because it’s so stable. We love the stability of farmland. And the fact that it’s not going away tomorrow that you’re not gonna burn down the building and it’s highly unlikely that even after an earthquake, the farms are going to be damaged so much that somebody won’t be farming them. So it’s all about having people on the ground that keeps, I think, a lot of people from going into it.

Meb: Kind of 100% agree. I mean, despite the fact having spent a lot of time on a farm growing up as my two brothers and I had inherited some farmland from our father, the operations of running a business, one, there’s a pretty steep learning curve, and then two, having to do that without the expertise of all of our family members that are local would have been just a nonstarter. So you have this kind of massive pain in the butt arbitrage that I think is probably very similar to the reasons you described.

Talk to me a little bit about a couple things. One, farmland valuations, do you see it as a time where, in general, they’re pretty high, pretty low? Is it crops specific? Is it region specific? And then also, what is your process for as you guys go out and acquire new properties or sell them? Like kind of what’s your framework to say, “Hey, you know what? We’re kind of done with strawberries in Washington or we don’t really like this property or it’s gotten too expensive.” And how do you do it? Do you service it using debt, new shares? Like what’s the whole process of buying and selling the farms?

David: Sure. In the buy side, we’re dealing with farmers and we want to know that we’ve got a tremendously strong farmer that’s renting our properties. So we primarily deal with, say, the top 20% of the farmers in any growing area. So if you’re in Watsonville, we would want a top grower there. And so the goal is to talk with the farmers and make sure we’ve got the right farmer. And we work with them and they generally will find, I don’t know, probably half of the farms we see. We see because the farmer says, “Joe next door’s ready to sell his farm, would you buy it for us and let us rent it?” And so that goes on quite frequently for us. So we get a boost from the farmers that we’re already working with and then we’ve spread the word pretty good in most of the farming areas that we are buyers of farms.

And so anyone who’s gonna sell has probably heard our name or if they do a little bit of research would find that we’re buyers. And our press releases go out pretty frequently, so if they did any kind of search on the internet, they would probably find us out there as a buyer. Now, when we find a piece of property and we have a great tenant, we go through a processes, about 40 layers of things that we go through. And generally speaking, we’ll find something that says, “You got to take a second look.” For example, there might be a buried storage tank for oil on the property. And so you got to go fix that and get it, make sure it’s already out of the way and not going to be something that’s gonna bother you in the future.”

And so you’re going through this process and we have a very detailed process that we go through in order to qualify a property. Any kind of new tenant would go through the same kind of process that we would go through if we were gonna lend them money or buy their business. We have a long process for the tenant. So those are the things that you do in order to make sure that you’re getting into transaction with the right person. And generally speaking, if you like and have done good work with one of the tenants, you’ll end up at respecting them if they want to buy something because they probably have better information about the property than you do. So you follow them around. It’s all tenant oriented for us. And as a result, we’re constantly talking to tenants and talking to people that are in the business and learning about the business.

And as I mentioned before, I bought a large strawberry and vegetable operation. So I got to know a lot of the farmers in California and Florida because most of the bigger ones are in both areas and they’re in the three big growing areas of California. Oxnard would be the first. Ventura County would be the envy, what you’d call that. And then you move on up to Santa Maria and then the big area in the Salinas Valley as well as all around Oxnard. There are lots of places there that are growing everything from strawberries to garlic. And so, as a result, you get to know those farmers. We’re getting to know don’t know them as well as we’d like to in Oregon and Washington. And I suspect, as time goes on, we’ll end up in other areas. We do have one very large farm in southern part of California and also in Arizona.

So as a result, I think as time goes on, we’ll just end up with one person in all of those areas, and sometimes two, just to make sure that we’re covering it all. And you got to have people on the ground or you’re not going to find them. I think that’s not true in the Midwest as much as it is in Florida and California. Well, also in Georgia and North Carolina or Virginia and New Jersey and Michigan, and those are all places you pretty much need somebody on the ground. But if you’re in the cornfields, a lot of those come up and are auctioned off. And as you mentioned before, in the ’80s, they were growing crops, and the crops didn’t come in very well. And they had to go back to the bank and borrow more money rather than paying it back. And then they planted the second crop, second year of crop and same thing happened. And so then they were going out getting the third year of crop and having three years of crop failure just about did in many of the best farmers out there in the Midwest.

And also, as you will know, the leverage that they got from the bankers pulled a lot of the banks down. One of the things that we worry about, of course, is debt and we get debt from a lot of different places. We will leverage our farms about 50% of the purchase price is in debt and we get long-term mortgages on these properties. And we get them from a variety of places. First of all, there’s a public company called Farmer Mac that will do mortgages on farms and that is, well, it’s not a government entity but they do sell their notes through the government assistance and as a result get pretty cheap rates from them. There’s also Farm Credit. They are very large organization with about six different banks located in different parts of the country that specialize in farm loans for growing as well as farm loans for mortgages. So we get both of those.

And then there are the more traditional kinds such as MetLife. MetLife is a great lender in the ag business. And then the largest lender of all is Rabobank, which is a foreign bank, but all over the world they are lending money. So we get money from those four sources. There used to be some U.S. banks such as, oh, I don’t know, Bank of America was very large lender. They’re not as large today as they were years ago. And certainly, the same thing is true for other big banks, Citibank, and all of those have been in farming and lending for a long time. And they do a good job, but they’re mostly oriented toward revolving lines of credit. Whereas you give them give them credit for supporting the banks that are growing food. And when the food is sold, they get paid back.

And they’re in that business of revolving lines of credit. And not so much in the mortgage side, the long-term lending side. Although I’m assuming that all of them do some sort of long-term lending to take care of their customers, both the long-term and the revolving side. I think if you looked at all of the farms in the United States, you’d find that the specialty crops and are doing extremely well, and others are not doing very well. Even cotton has had its problems. We are looking a lot a lot rice farms now just to get an idea of what’s going on in rice business and it’s very stable right now. Rice, you would think,would be as any of the heart crops, any of the hard seed crops would go would be in a problem. But they’ve done a very good job and…

Meb: Where are people farming rice? What states?

David: Rice mostly in states like Louisiana, Arkansas, where there’s plenty of water.

Meb: Did not know that. And pretty soon you guys might…depending on how the legislation keeps going, you guys might start farming some cannabis, some hemp soon.

David: No, we don’t do that. We stayed away from that all together and we’re also not in the citrus side of the business that much. We’ve got a few citrus farms in California. But, as you know, the Florida citrus crop has been decimated by a disease that everybody thought by now would have been conquered, but it hasn’t been. So it’s a very difficult climate in California for growing any kind of citrus because there’s a particular disease of the trees that just stops them from really producing much fruit. And the other side of the orange business is that people have shied away from drinking orange juice. It’s probably down by 50% from its high watermark. So not only did you have customers going away from oranges, you had this disease that’s been killing orange trees. It may come back. I like orange juice, and I’m sure there’s still a lot of people that like orange juice.

The other thing is you do have competition from really lots of different places. But places like Brazil grow lots of limes and oranges and those kinds of tree crops and they don’t have the same problem that Florida does. And if you look in the grocery store, sometimes you’ll find oranges from Spain, from Israel. So orange is shipped very well all over the world. And so you can put them on freighter and ship them just about anywhere you wanna go. And so, as a result of that, there’s pretty good competition in the orange side. And demand for orange juice has gone down. I see a lot of the people like Coca Cola are introducing orange juice with other things in it such as alcohol and so maybe there’ll be a revival of orange juice, but I can’t imagine this gonna be that big.

On the cannabis side, you know as we looked at it, and just wanted to make sure we weren’t missing something, the cannabis business is going reasonably well. The difference is that the growing side of the business doesn’t seem to make any money. There seem to be a lot of freelancers on the growing side in their houses, as well as in parks. And California had become cannabis centres and, not willingly, but people go into the parks and go pretty deep and then they’ll grow the cannabis there. Some of the fires that were started in California have been blamed on the cannabis grower, but not so much the grower as it was the cartel in Mexico who went up there and started fires to burn them out. But I don’t know if that’s true.

And cannabis will be a pretty good-sized crop and I’m sure over time. We’ve just stayed away from it because of the general problems in the area. The hemp business is coming back because hemp is a good product for a lot of different things other than getting high. There is a camp that doesn’t have any of the psychedelic drugs in it that others would have. So that’s a business we’ve looked at. We’ve not done anything in the hemp side of the business. And hemp has been grown for centuries, obviously.

Meb: You mentioned a number of risks. So the short-term stuff like droughts or certain problems affecting the citrus. Like what are the biggest risks of kind of investing in farmland? Did you see rising interest rates? Is that something people seem typically concerned about with farm land? Is it any other macro forces? Is it the risk of tariffs? Is there any kind of global or macro forces that you think are the biggest risks? Interest rates? Anything comes to mind?

David: Obviously, interest rates, as they go up, and since we use debt in order to buy properties, the property prices gonna have to go down so that the yield would be sufficient for someone that owns it and rents it out to make money. And you see some of that impact going on now as rates have move some and I suspect as rates continue to move. You’ll see that going on. I think that the biggest problem that worries everyone right now is tariffs. There aren’t any tariffs on strawberries because not many strawberries go outside of the United States. You got 14 days to get a strawberry in somebody’s mouth or it’s gonna be wishy stuff and so as a result, you’re not gonna be able to sell it. So you gotta get it out and get it moved and all of the crops that I know of.

Wth exception one guy who sells some to Japan, he has a specialty strawberry that he sells to Japan because there’s such picky shoppers in Japan and he has it down, packed it, sells his box of strawberries as probably two to three times the price we get. So he’s willing to go through the agony of getting it to Japan. On the other hand, if you think about it, the big problem with tariffs would be on the seed side. There’s a big worry about what will happen if the Chinese don’t buy as much corn as they bought from us or if Mexico doesn’t buy what they’ve been buying from us. On our side, the only one that has any kind of impact would be the guys growing almonds. The Chinese probably eat about a third of the crop that’s grown in California. And we went down a different path. We have organic almonds and organic almond sell for about twice the price of the regular almonds and the Chinese don’t really care whether they get almonds that are organic or not. They’re just interested in almond. So we don’t have a lot in that area.

So if there was a blowback on that one and a tariff on it, I don’t think it would hurt us at all because the guys who are buying almonds that are organic or some of the people that do bag lettuce and those kinds of things, they put a mixture in there and some of its organic, and of course there are many health food places that want organic almonds. And if you look in the stores, that organic almond sell pretty well as even in the grocery stores. If you think about what we do, we’re primarily in the produce section of the grocery store. We’re not in much of the other areas, although I’d like to be more. There’s a shortage of popcorn right now, so I’d like to be in the popcorn business.

And there’s a lot of green beans that are canned. And we’re not much in that business yet. We do some sweet peas. But generally speaking, we’re not in the can side of the business. And that’s a nice business. It’s a really straightforward business. So at the end of the day, I think if you looked at what we worry about every day, it’s really the farmer and what they’re doing and are they doing it right and what our people will go out and look at the farm and try to evaluate how good the farmer is. And generally speaking, we don’t have a problem with any of the farmers that we have today. We did have one situation in which two of the farmers had a company and both of the men died in one year and the families really they didn’t have anybody to run it.

So they sold the business and the people who bought the business didn’t want one of our farms don’t really know why other than it was pretty late in the season, and they weren’t gonna be able to factor it in. So, as a result, we took the farm over. And the guy in Oxnard works for us and I, of course, know how to farm. So we just farmed it for a year. And then about two months ago, we signed the 10-year lease with a farmer who wanted that farm very badly. And you can get in a little jam every now and then. But weather’s always a problem. We’re always watching weather both the frost line and when it comes down low and is gonna knock out some of the some of the crop and in addition to that, you’re looking at how hot it is and how cool it is and trying to figure out how your produce is gonna do under those circumstances.

But I think weather is probably number one on the list and there seems to be plenty of markets although every now and then a market will go through high scarcity, which means the farmer who has that product is gonna be able to sell it for a higher price. But more often, this year for example, there were too many blueberries in Georgia and a lot of those crops did not make it to market because no one would buy them. There was just too many in the market and people actually threw them into farm. I know one guy who threw about half his crop in his catfish farm. I guess catfish like blueberries but the idea is that sometimes you don’t win if there’s too much of a product in the marketplace. And I think they worry about that, supply and demand..

Meb: Supply and demand. That’s Econ 101. We got about three more questions and we gotta let you go. You say you’re an institution, Caliper is somebody or even the average investor. We talked a lot here about what we call the global market portfolio, if you were to actually just go out and buy the world. The one big thing missing often from the public side of assets, it’s really easy. You go buy a couple ETFs, you get stocks, bonds, globally, simple. But the two kind of big things missing are often private real estate and farmland. Do you think at all or when you talk to kind of institutional investors is what a reasonable, in terms of their asset allocation, you know, where does farmland fit in? What sort of percentage is the portfolio? You mentioned some of the characteristics. Is there any sort of way you think about where it fits into the traditional investment portfolio?

David: I think it does. When we were out talking to folks on our IPO, we found that a lot of people wanted to be in the farming area, but there was no easy way in and certainly no easy way out in terms of investing. And a lot of those were natural resource guys, as well as some of the hedge funds were using it to hedge against inflation. So we found people that are in the ag area, that is they own people like here, they own the fertilizer guys and the seed guys but had no way of tapping into the land side, meaning that one of the inputs into growing food is the rent that’s paid by the farmer and they wanted to be in that.

So we matched up with them very well the ag investor or the natural resource people and have had them as pretty steady clients over the years. And I think we will continue to be that because we’re one of the few places they can get away into the farmland side of the economics needed to grow food. And I think the other thing that goes on in farmland purchases is just people who are told by so many investment advisors…I’m trying to remember the guys’ name who’s in Boston who is always studying and writing newsletters. Anyway, he was advising people to buy farms and, lo and behold, ran into him buying a farm in North Carolina. He was buying farmland for some of his investors.

Meb: It might be Grantham and GMO. Is that the right group?

David: Yeah, it is Grantham, yeah, that’s Grantham.

Meb: They’re a big huge multi-hundred-billion-dollar shop. But what extent also, I meant to ask you this earlier, is do you guys ever look globally? Is it a scenario where you say, “Look, we have enough opportunity in the U.S. It’s easier. There’s rules.” Or do you ever say, “You know what? Farmland in Brazil or Argentina or Turkey or Czech Republic is screaming buy right now, maybe we should think about expanding globally?” Have you guys ever thought about that at all?

David: Yeah, we think about it. But there’s so much property in the United States that we just need to hunker down and capture as much as we can over the next 10 years. And I think we will be all well rewarded by owning farmland in the United States of the right kind, obviously. Yes, we look at farmland… You take TIAA-CREF and those guys who are all over the world. I don’t know how I would buy farmland in Argentina. I wouldn’t be able to figure out the political risk and just the risk of being in Argentina and trying to get the crop back to the United States. Certainly, you have to be in the seed business, something that shifts easily.

Every now and then you’ll see blueberries or raspberries come out of Chile. It’s only when the crops are down in California and the seasons reversed, of course, that you’re seeing raspberries coming to the United States from Chile. And the prices are off the charts. I wish I had some way of growing them, but we may go someplace like Chile one day. It’s not gonna be anytime soon. We don’t play any games with our financials either. So as a result, I know one company that was actually lending money to their tenants and the tenants would make the payment on the lease and they would count that as a good lease payment. I don’t think that works for me. And so we’re really a clean company audited by Price Waterhouse.

And I think people should gather around us and buy the shares simply for the reason that it is just a plain vanilla place to put money that’s gonna continue to grow over the next… And one guy asked me and he said, “What should I do?” And I said, “Why don’t you just take a million dollars,” he’s fairly wealthy guy. I said, “Buy the stock and put it in your child’s either his inheritance, his trust fund or something and never look at it again.” And I said, “That’s what I’ve done for my children. That’s what I look at it and it’s gonna be here. It’s not going away. We aren’t making foolish investments.”

Yes, something could happen, people call me when there’s wildfires in California. All of those wildfires are up in the mountains and all around where we don’t… If you go over California, all the flatland is being farmed, and it’s not anywhere near that. And they call me when there’s a flood. “Did you get flooded out?” No. None of our farms have ever been touched by the floods in California because they’re down in the flatlands and the flatlands are all drained away by the rivers that are in the flatlands in there. So as a result, I think it’s one of those assets that if you can stand just making say, for four and a half percent and the dividend, and getting a good inflation protection, it’s just gonna be there and people gotta eat.

And the greatest farmland in the world and you can take it from the other side, the greatest farmland in the world is the L.A. planes and that’s now covered with houses and buildings and everything. So there’s nobody growing anything there other than maybe, you know, an orange tree in the backyard. And one day all of the land in Oxnard in Ventura County, which is a wonderful growing area has the same kind of population growth that you see down in L.A. And it’s, you know, a lot of tech firms are up there and it is growing at not at the same pace that L.A. is expanding but it’s growing. And that land that we have there, for example, we have a 620-acre farm that in three minutes, you can walk to the ocean and the beach.

And if I could zone that for townhouses today, it probably be worth a million and a half an acre rather than $70,000 or $80,000 an acre farmland. One day the people who own this company are gonna see that piece of property gets owned and they’re going to say, “Wow, this is a home run.” But it’s not in the cards in the next 10 years. It just won’t happen because the cities have to expand into that area in order to get it zoned. You can’t get a piece of property zoned if it’s not inside one of the city limits. It just will not happen because you have to put it on the ballot and, you know, ballots in California are about 16 pages long and you’re one of 200 things they have to answer, and people just won’t vote. They wanna keep the land farming.

Meb: I’m gonna start growing strawberries in my backyard after listening to this…

David: You should.

Meb: …and selling them to my co-workers. You know, we don’t have time to get into it today. But I think the new tax legislation on opportunity zones could be really favourable to farming across the country and something I’d love to look into.

David: Very favourable. The tax people are treating the plants like trees and vines as, yeah, amortisable in one year. So if you’re planting your tree, you can amortise it off in one year.

Meb: So we asked Twitter for some questions. And a lot of the questions came under the banner of thinking about the future. And so thinking about a few macro forces, I remember driving around the farm in Kansas and thinking to myself, “Why in the world, for the row crops in particular, are humans involved at all?” You know you see a future, whether it’s 5 years from now, 10 years from now, where this is almost all completely automated, both the planting as well as harvesting. But talk to me a little bit about the future of farming. A, the role that automation may or may not play with your crops, and second, are things like vertical farms in cities or lab-grown meat. Are these positives? Are they negatives? Are there challenges for kind of the business? Any general thoughts on kind of the future in farming in general?

David: Yeah, farming is going through a transition. Many farms who are farmed, obviously with labour mostly. And now of course, in the Midwest, the one good thing is most of its mechanical now. They buy the piece of machinery that is driven off of satellites and they sit in their air-conditioned cab and watch a movie while it’s being harvested. It’s no longer a guy out there with a horse trying to farm. It is highly automated. That’s the good news. The bad news is that everybody else around the world has it automated and they can beat you out when it comes time to selling. On the specialty side, they’re still a lot. Strawberries are traditionally have gone through a little bit of change, but mostly still harvested by hand. And there are lots of other crops that are harvested by hand.

And so as time goes on, and I’ll give you one example we have a large cabbage farm in Florida and the harvesting is automated. It will pick the head of cabbage and as a result…so the harvesting is already automated. But planting used to be by hand until this year. This year, there’s a new piece of equipment in which they put the plant inside of a string of gauze and the gauze is fed into the machine and the machine jams them into the ground and as a result it can go six rows across. You only need two people, one to drive and one to make sure the gauze is going in correctly. And it can go up to 15 miles an hour on it. So the world has changed in cabbage for growing and harvesting. And that’s what’s going on in all of the other areas. There are two machines vying for leadership in strawberry picking. The machines can identify the strawberry very easily, but they can’t pick it as fast as humans.

So it’s a bit slow, but they’re getting faster. It seems like every year they’ve got a little faster machine and so it’s probably…won’t be long before that will be automated. Apple picking is a lot by hand but they do have apple picking machines. It’s a big pipe and that goes up to the apple and it has the eyes on the pipe and the pipe will go in there and take the apple and drop it in a basket. So that’s going on and grapes are still harvested primarily by hand. But as time goes on, these boys in Silicon Valley seem to dream up any kind of way they can to make a buck and I’m sure they will keep working on it. We own a company and our buyout fund that is a producer of almond harvesting equipment, which shakes the tree and has a big net underneath to catch the crops.

And so it’s a transition that is probably not going as fast as anybody would like it, but unfortunately, it’s going at its own speed and just takes a long time to get automation into that area. I think most people should plan on most of the crops being done by machinery as time goes on. I’m a big fan of… I don’t know. AI is something that everybody talks about, but it is getting very close in all of the areas not only in farming, but everywhere else. Artificial Intelligence is invading just about every area you can think about and it is making farming possible that wasn’t possible even three years ago.

Meb: I mean, it’s funny you mention, I mean, thinking about like the just the very basics of like the flyover planes that would do fertilizer or look at it crop fields for hot spots, now you can do that with a drone. And not only is it a drone, instead of using human eyes, it’s using technology that lets you see areas that you wouldn’t even know we’re hotspots or underwater or whatever. So it’s pretty fascinating. Probably a lot of opportunity in that world for ag tech sort of companies and ideas as well.

David, last question we always ask all the guests is, if you think back over your career, is there been any investment it could be a trade, it could be good, it could be terrible, it could have worked out wonderful, it could have been a straight up zero, is there one that sticks out that’s been your most memorable investment as you look back over the past decade?

David: Oh, I think buying a whole bunch of farms has been by far the most entertaining and most fun to work on. I was in the other sides of the business and still am although there are people that are running them such as buyouts or production company producing this or doing that service and lending to those. Those are old hat to me. Cycling back in 1997 to buy a farm and start down that path, that’s been quite a lot of fun.

Meb: What was the original inspiration? Were you just on an airplane and the strawberry farmer next to you said sort of chatting about it or were you kind of reading the article in Forbes? What made you go down that path?

David: A long story in that they wanted to sell the farm, and this is Monsanto, and a friend of mine didn’t know anything about farming or buying businesses and he came to me and said, “We ought to buy this.” And I said, “Run like hell. Nobody wants to be in farming.” And then got into it and realized that it was very good business to be in the specialty side. And so we bought it and he got in some trouble and I ended up buying him out and continued on in this process. And it’s been great fun. And I think that’s easily the most memorable and will probably be one of my last.

I’m getting to the age of that I may try to retire although my wife says I can’t come home for lunch, so I gotta go someplace. So at the end of the day, it’s great fun to be in the business. And I think people who want to learn about it can learn a lot by going on our website. And we have two websites. One is gladstoneland.com. But the most fun one is to go to gladstonefarms.com and that one has information about each one of the farms. And so you can jump in there and learn about all these different products that are produced on the farm and learn a lot about what’s going on in the farmland world.

Meb: Awesome. David, it’s been a lot of fun. Thank you for joining us today.

David: All right. Thank you very much.

Meb: Listeners, you can find the links. We’ll post the show notes to mebfaber.com/podcast with a lot of the stuff we talked about. We’ll add some more resources on farming as well in general. If you’re loving the show or if you’re hating it, please leave us review. We’d love to read all of them. Thanks for listening, friends, and good investing.