Episode #186: Carter Malloy, “I Looked At Farmland And Realized…It’s Wildly Inefficient”

Episode #186: Carter Malloy, “I Looked At Farmland And Realized…It’s Wildly Inefficient”

 

 

 

 

Guest: Carter Malloy is Founder and CEO of AcreTrader. Carter grew up in a farming family and has a lifelong passion for investing and agriculture. Prior to AcreTrader, he was part of an equity investment firm for 5 years. Before joining in 2013, Carter was a Managing Director with Stephens Inc., a large private investment bank, where he was an equity research analyst focused on the Internet, Data & Analytics and Real Estate Processing sectors. Prior to Stephens, he owned small businesses focused on internet marketing and sustainable fuel technologies.

Date Recorded: 8/8/19

Sponsor: Mountain Collective

 

 

Run-Time: 1:02:57

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Summary: In episode 186 we welcome our guest, Carter Malloy. Meb kicks off the conversation with Carter’s background in finance and growing up in a farming family. When conducting research on the asset class. He saw attractive returns historically, but there wasn’t a great way for most people to invest in it. That insight spurred the idea for AcreTrader.

As Meb and Carter dig a little deeper into farmland, they discuss the return drivers, yield and asset appreciation, and the imbalance of demand vs. supply as a driver of returns.

Meb then asks Carter to get into the cycles of farmland investing. Carter covers leverage and cycles. The pair explore the Macro themes that have been in play over the last few years. Carter comments that it has been tough for farmers, and commodity prices have been low. He clarifies that if you separate the farmer from the land owner, the land owner has continued to do great.

The pair then get into the ideas behind Carter’s firm, AcreTrader. Carter walks through the inefficient nature of farmland investing, the platform, and the process AcreTrader goes through to bring investment opportunities to market as well as the ultimate vision for the platform.

Next, Meb and Carter also get into some examples of additional opportunities for farmland property including potential income opportunities like wind farms, solar farms, and mining that may be available to some properties.

As the conversation winds down, Carter lays out his thoughts on how farmland fits with investment portfolios and highlights the role it can play from a wealth preservation standpoint as a noncorrelated asset class in addition to providing protection from inflation.

All this and more in episode 186.

Links from the Episode:

  • 0:50 – Sponsor: Mountain Collective
  • 1:21 – Welcome our guest, Carter Malloy
  • 1:47 – Carter’s background and growing up in a farming family
  • 3:03 – Carter’s time shorting stocks
  • 5:31- Carter’s decision to return to Arkansas to invest in farmland
  • 7:26 – What the landscape for investing in farmland looks like today
  • 9:57 – Farmland/farming cycles
  • 14:47 – The macro forces impacting the farming sector
  • 16:28 – Leverage and returns for farmers
  • 18:56 – Sponsor: Mountain Collective
  • 19:33 – Inspiration for starting AcreTrader
  • 24:22 – How AcreTrader works
  • 25:42 – Typical investment on the platform
  • 30:44 – What it looks like from the investor side
  • 32:15 – Fees – AcreTrader
  • 33:00 – Time frame for investments
  • 34:03 – The marketplace functionality of the platform
  • 36:22 – Goal and capacity for the platform
  • 36:59 – What the investors on the platform look like
  • 37:40 – Nuveen
  • 37:59 – Getting AcreTrader off the ground in terms of investments
  • 39:09 – Ideal future for the platform
  • 41:06 – Process for farmers wanting to sell into the platform
  • 45:02 – Investor allocations to farmland
    • 47:05 – Forbes article Gold vs Farmland
  • 50:18 – Any exploration abroad
  • 51:28 – How investors may think about sourcing deals in farmland
  • 54:10 – Resources for farmland investing
  • 55:23 – One crop to invest in and one to avoid over the next 5 years
  • 59:26 – Most memorable investment
  • 1:01:15 – Best way to connect with Carter: AcreTrader.com

 

Transcript of Episode 186:

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’s 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

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Welcome, podcast listeners. We’ve got a great show for you today. Our guest comes from a Arkansas farming family and now he’s the founder/CEO of AcreTrader, a platform providing investors direct access to farmland as an asset class. Prior to that, he’s worked in equity investment research on the short side as well as a long-short hedge fund. Also is focused on internet, data analytics, real estate sectors. Welcome to show, Carter Malloy.

Carter: Thanks for having me.

Meb: Carter, I think Arkansas is like one of three States I think I’ve never been to. It’s like Maine, Arkansas, and maybe North Dakota. Where’s home for you?

Carter: Fayetteville, Arkansas. It’s the northwest corner there. It’s a pretty part of the world, but yeah, there’s not many of us.

Meb: Well, you and I probably crossed paths at some point in San Francisco. You were there for many years. I love that city. Before L.A., I was in North Beach and Russian Hill right above the Broadway Tunnel, right next to like a Chinese day school that would do marching drills every morning, I don’t even know what time, before I woke up, with loud symbols. It was a lot of fun. I loved San Fran. Anyway, so did you grow up on a farm?

Carter: I was born in a farming community. I grew up in the “big city” of Little Rock, Arkansas. But my dad and family were farmers, so grew up around farmland and that being talked about a lot.

Meb: When you say they were farmers, that means a lot of different things. What sort of farm exposure was it?

Carter: Sure. So my dad had the farmland acquiring bug. So I think over his life has continued to acquire small parcels and try to grow his farm. And then we farm commodities, so cotton, rice, soybeans, corn for the most part.

Meb: Very cool. And it’s a very similar story as my old man but in Western Kansas and Nebraska. All right, so you started out in the financial world, and by the way, focusing a little bit on the short side. Can you tell me a little bit about that? All the shorts that I know, they always have like a little bit of a screw loose because you kind of have to, right? I mean you have this world of optimism of everyone pitching you stocks and companies and you have to be a little curious and be able to dig deep. The shorts, it’s I think the most interesting part of the whole investment world, but probably some of the hardest too, particularly during this cycle.

Carter: Sure. So yeah, I think it takes an amount of healthy scepticism. I’m personally a very optimistic and yeah, I go to bed happy at night. I’m not worried about the world ending or anything like that, but spent a dozen years of my career in equity research and equity investing and a decent part of that focusing it in a long-short fund. And so it was always deep dive. And I think that’s the thing that I’ve always enjoyed the most is the diligence process of learning and digging into any one asset or any particular business. And whether it’s a great longterm investment or a company where there’s some nefarious activity and bad actors involved, it’s always fun to learn about.

Meb: Any particular memorable stories? Our last guest talked about how he lost about a third of his net worth trying to short Amazon back in the day, which was a fun one. But any particularly memorable stories from the short side?

Carter: Yeah, I think the lesson learned, a few times probably, was we were a very deep dive concentrated fund. It still is a great fund. But I think the one single manager for us as a company, and for you as a company, you’ve got a portfolio of investments. For the manager of a business, that’s his one investment and some of those people are willing to go to the end of the earth and back to hide things that are bad. In the short term and medium term even, market to market can be a really, really hideous thing for anyone trying to bet for or against stocks for that matter.

Meb: We’ve had a lot of short-sellers on the podcast and one of the things a lot of them say is that used to be a lot easier to find the frauds in like the ’80s and ’90s. And in general, whether it’s the internet as the great disinfectant, it seems to be harder in this day and age, but they still happen. As you look, a lot of the big ones from this past cycle were a lot of the Chinese companies in the reverse mergers and everything else, maybe three, four, five years ago. Was it hard to find shorts over this past cycle or do you end up finding some good ones or…?

Carter: You’ve nailed the differentiation. It’s easy to find them. To find things to work on, it’s hard to find good ones. To find when there’s a true dislocation between what the market’s valuing a business at and what that business is actually worth.

Meb: Now. All right, well let’s talk about what you’re doing now. So like a salmon going back to spawn, you went back upriver, back to Arkansas from NorCal. Talk to me about what attracted you to that idea.

Carter: Sure. So a caveat, again, a lot of my career was long investing as well. So I think a huge portion of my time was spent working 12, 15-hour days looking for great long-term investments. And was living in San Francisco and a neighbor knew I was from Arkansas and had been asking me how to invest in farmland. He knew that I’d been grown up in a farming family and my dad and I had been successfully buying and selling farmland in recent years. So in response to that question, I started doing some research and looking at farmland as an asset class as opposed to this buy and sell thing that I’d been doing. And I kind of realized pretty quickly that Dad and I weren’t necessarily these great successful farmland investors that were just astute buyers and sellers, but that actually like most people out there acquiring farmland, investing in farmland had seen really attractive returns.

And stepping back and looking at the asset class now, there’s upwards of $30 billion of professional farmland investment funds out there, private equity funds plus smart people like Bill Gates and the Mormon Church that have identified investing in this trend. But despite there being trillions of dollars of farmland in the U.S., there wasn’t an attractive way for most people out there to invest in it. So here’s this asset returning 12% historically give or take with far, far lower volatility than most other higher returning assets. We’ve got a lot of this data on the AcreTrader website, but it’s really surprising.

This asset’s been out there high-performing in a very stable manner, and there’s a ton of it, but no one is out there bringing it to market for regular investors. If you wanna go put $10,000, $50,000, a million dollars, whatever it is into in the farmland, it’s incredibly difficult to get access to it. So I’ve ultimately teamed up with some lawyers and farm managers and technologists, and we built a business plan and that’s turned into AcreTrader today. So fast forward today, we’re live, we’re working on millions of dollars of deals. We’ve got a truly huge pipeline of other farmland deals and we’ve got an online portal where you can go on and sign up and buy farmland in minutes.

Meb: So there’s a lot to unpack about this. We’ve talked about farmland a few times on the podcast. We talked about the struggle that you mentioned where unless you’re buying the dirt yourself…and that comes with all sorts of headaches because you have to operate it somehow, and a lot of people either don’t have that expertise or don’t wanna do it because it’s a headache, or the big challenge too is that there’s not really any public vehicles. So there’s maybe one or two REITs. I think there used to be two or three and one acquired the other one. It’s also…a hard part for people is the diversification. So even if you invest in a private fund, that private fund may only invest in one crop or one state. So, much like buying stocks in just one sector, it’s hard to have that sort of exposure. So you mentioned a couple of things about the farmland return profile and it’s been great, it’s been one of history’s best asset classes. Talk to me a little bit about the composition of it and how it works. Farmland in general, you buy some dirt, what are the return drivers?

Carter: Sure. So there’s two…just as it is with most real estate, there are two primary return drivers, yield and asset appreciation. Historically, they’ve been split roughly evenly. Today, yields are a little lower because commodity prices are low due to a number of external factors, but those two things combined have come out to that 11%, 12% call it, total annual return you’ve received. And probably that return is without leverage, so that’s before accounting for any additional juice if you so choose to put debt on the land.

But the real driver there, the thing that is blatantly obvious to see is demand versus supply. So we have a growing number of mouths to feed in the world and in the United States, and we only have so much land and the amount of land is shrinking. We’re losing three acres per minute of land here in the United States. So it’s one of the few assets out there where there’s a physical limitation to the amount available and that’s shrinking. So you don’t need a PhD in econ to understand the basic forces of supply and demand at work here. More mouths to feed, less land out there. I think that’s a big part of thesis of why you’re seeing so much professional money come into the asset class. It’s still tiny, $30 billion over $3 trillion where less than 1% of the asset class is professionalized by these guys. But that’s why you’re seeing the growth and investment in it today.

Meb: I think you’re also seeing a transition in at least a lot of places the younger generation may not have as much of an interest in doing these mom and pop sort of land ownership. It’s becoming a little more institutional, but still even then it’s tiny compared to what you think it is. Talk to me a little bit about the kind of cycles of farmland, you mentioned leverage, love to hear you talk a little bit more about that. Because I remember when we go back to the farm in Kansas and Nebraska chatting with people who said, what was it, like early ’80s maybe, when a lot of farmers got upside down on being too leveraged? Talk to us a little bit about how that’s played out over time and the various cycles we see in farmland.

Carter: Sure. So the early ’80s is the great example of the true farm bear market and I’ll fast forward a moment and talk about one we’re seeing today as well. But in the 80s, you had a very real correction in the asset price because the amount of leverage in the system went up pretty dramatically. There was a lot of very real speculation going on, high loan-to-value ratios and you had this number of factors influencing at one time very high interest rates suddenly made that debt really expensive and the bank started calling the notes and started the vicious downward spiral.

Meb: And it’s important to note too that this is always things that drive all of what you just talked about to happen was the past 10 years or returns were monster. So it’s like everyone is like, we’re just crushing it in farmland in the same way that people do extrapolate to infinity, they salivate and they wanna take more risk. So that’s where [inaudible 00:11:11] come from, right?

Carter: The salivation and let’s take more risks and make more returns and hit up this get-rich-quick scheme. The Buffet theme that you’ve harped on in the past on your show is that the destroyer of wealth is leverage and leverage is hugely important to the economy and investing as well. But at the same time, you do wanna have some portions of your portfolio not levered to the end. So this early ’80s bear cycle for farmland, valuations had gotten real wild real fast. You had high interest rates and Russian grain embargo, you had a lot of external factors. Foreigners were buying farmland in a really rapid rate and about 13 states clamped down laws and said you can’t do that anymore. So suddenly had the sharp reversal of price.

What’s fascinating is, again, we talked about there’s two ways you make money in owning farmland, asset appreciation and yield. And so in inflationary times as it was, you were making a big yield. So in the year where you lost, and this was true in a couple of years in the early ’80s, the value of the land across the U.S. went down 10%, you’re making a 7% yield. The nominal losses were low single digits.

Meb: And I think the stat that you had in one of your papers was, and this is the Farmland Index, but said that there was only declines in 5 of the last 50 years. Now part of that is smooth because you’re probably not…it’s not like a publicly-traded security, but even then that yield provides a very consistent buffer.

Carter: Well said. I think you could fast forward to today and I can highlight the more current examples. We’ve gone through the big nasty bear cycle of the early ’80s and learned that the nominal losses were not a material destroyer of wealth. Capital preservation is obviously important to all investors. Fast forward to today and there’s a unique circumstance and close to home for you. You mentioned Nebraska earlier. Nebraska is in a full-blown bear market right now where the western half of the state is drying up effectively. The aquifer underneath it is being depleted, the rain cycles are bad. And so you’ve seen, for specific reasons in Nebraska, real problems with farmland values.

Meb: So funny you mention that because I remember growing up and my father talking about this. He was talking about the aquifers. He said, “One day we’re gonna start depleting it.” And it was just so funny how walk forward 10, 20, 30 years and it’s happening.

Carter: Absolutely. And we as a platform in the western half there don’t…we work with farmers there but we don’t actively invest there for those reasons. The statistics of the bear market are fascinating. So the last 4 or 5 years, the prices are down about 13% end to end of farmland. Mind you, that’s after a triple-digit run the 10 years before that, but the prices are down 13% or so. However, during that four or five years, you were still earning a 4% cap rate on that land. So in sum total in a full-blown bear market in Nebraska, the landowners have still done better, made more money than they would have if that money had sat in a CD or a deposit account.

Meb: Yeah. It’s interesting because I had tweeted somewhere around that period where I said, “Name the asset class…” I’m gonna murder this, but I was like, “The best-performing asset class over the last 10 years has this much yield.” But at the time I was like trading at a high P ratio, essentially because prices had just run up so massive and I was gonna try to find…we’ll add this to the show notes, listeners. I was trying to find it in my tweets but we’ll post it. But I was laughing because then, of course, it went through this kind of fallow period of, again, not negative really the last cycle.

Carter: That’s the key, right? There are not many assets out there you can point to and say, “Show me a bear market. Oh my gosh, what happens in a bear market? And the reality is small, if any, nominal absolute losses, sign me up.” I’ve made a career bet on this asset class that over the coming 5, 10, 20 years, it will continue to be a great wealth creator that it has been for the previous generation.

Meb: What are some of the macro forces that have been at play the last few years? I mean you’re hearing a lot going on with tariffs. I know a lot of row crops, although perking up seemingly now the prices have been kind of muted. What’s the landscape look like today?

Carter: Yeah, so it’s tough for farmers, I think is the quick answer. We’ve had really great farm weather for the last three or four years, present year excluded, and really low commodity prices partly as a result of that. But ultimately, those farmers, because of low commodity prices, and this year in particular with poor weather and low commodity prices, life is tough for them. It’s always tough being a farmer. It’s hard work. They’re all small business people and have to run for margin and therefore continue to scale their company. But I think what’s fascinating is you’ve got to separate the farmer and the landowner. The landowner has continued to do well.

And the farm owner…this is perhaps something that’s passed over quite a bit. The farm owner’s ultimately backstopped by the government. The government subsidized their insurance. And if there is a disaster in their area, if your county has a bad year, in many cases you still get a check from the government even if your farm had a good year. So it’s one of the few landlord-tenant relationships I could come up with where the tenant is government backstopped. This was a landlord…sure, commodity prices and yields can impact rent prices over time, but the data is there to suggest that that stall in rent prices we’ve seen in the last five years should continue to its previous march upward as the ultimate revenue to the farmer has grown.

Meb: Yeah, I think there’s probably no more certainty than the government is very, I feel like, supportive of the domestic farmland industry for lots of reasons. But you mentioned this and I skipped over it, but I wanna come back to it. Talk to me a little bit about leverage and the returns. The ’80s leverage got really high. Now it seems like leverage for most farmers, despite maybe being in trouble, may be pretty mellow. And then maybe talk about…we haven’t really mentioned real estate, which is the number one thing that every single person on this podcast listening is familiar with, buying a house, investing in real estate. That seems very simple, and then you mentioned farmland and no one has really ever done that. Talk to me about any comparisons with real estate and then just this concept of leverage too.

Carter: Sure. So on the concept of leverage, it’s an easy one to tackle. In that horrible bear market we were discussing, the debt-to-equity values there got up to a high 20%, low 30% range. Compare that today, we’re in the low teens, so it seems that that is way less of a problem in terms of leading indicator or potential problem within the overall farm economy and farm system. And comparing it to real estate, that’s probably the largest differentiator is most of the time you don’t have debt at all. When you do, your maybe loan-to-value is 50% and that tends to be a max, 50% or 55%. Compare that with if you’re an investor in a retail center or residential real estate, you have personally invested in several different types of real estate asset classes and the leverage ratios are 80%. So it’s great cap rates earning a nice cash-on-cash return, but you gotta remember that after the value of that asset cracks by 20%, suddenly your equity is worth zero. And that negative cut of leverage is pretty dangerous. I think something that we all flirt with in our mortgages and in our real estate ownership, and as long as you’re in it for 30 years, I’m not sure it’s a huge differentiator, but…

Meb: And to be clear, a lot of listeners forget this fact, but the average equity is leveraged to the company by the S&P 500, those companies have debt on the books. And so a lot of people don’t think about that and that’s one of the reasons equities are more volatile than bonds that equities are leveraged. So it’s an area that, going back to this concept of asset classes in general, you don’t have to accept any asset class prepackage. You can add leverage to it. You can take leverage away by adding cash. But in general, investing in something like farmland and or even real estate, if you buy a house for cash, you’re probably much lower exposed than you would have if you bought it with 10%, 20% down. Same thing with farmland. You buy with cash, totally different investment than if you only put a little bit down. So the summary, listeners, I think is important is you don’t have to accept any asset in the way that it’s packaged to you. You can always lever it up, lever it down to your heart’s content.

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Meb: Let’s start moving over to your inspiration for starting this company, being an entrepreneur, moving from the cushy job of hedge fund land to starting your own gig. What was the idea there?

Carter: I touched on it briefly earlier. I think the big idea is spent a career investing in efficient markets and looked at farmland and realized that it’s not just kind of inefficient, it’s wildly inefficient. And therefore, there are returns to be made in those types of markets. I think you spoke to the difficulty of investing in farmland earlier and I’d like to circle back to that theme in a moment. But ultimately, professionalization of this asset class is something that’s desperately necessary for the success of the farmers, for the success of the investors, and we as a company see an opportunity to help assist in that transition to a more modern marketplace. For us, it’s very simple. On one side, we’ve got $3 trillion a farmland. On the other side, you’ve got countless amounts of capital looking to invest or work with farmers and farm owners. And right now as it stands, there is no real efficient marketplace there for information, transparency, liquidity, security, just a basic understanding of the asset.

So for us, we are very regular posters of content. We continuously write white papers and information just to help people. It’s pretty easy for us, not being altruistic, just saying, “Look, here’s all the data we have.” We’ll spill it out there, share it with everyone involved, farm owners, farm investors, etc. And by helping just increase the amount of transparency in this industry, I think we can grow a really big business alongside that when those people do decide to transact.

Meb: And so what made you think you could go do it? Just the blind optimism of being a young entrepreneur. You said, okay. So how’d you come up with the idea? I mean was it something where you’re just like…because very easily you came from a private fund world, you say, “Maybe I’ll do a private fund, go raise a bunch of money,” but you took a different path. And tell me about the origin story of the company. Is it just you? Is it other people involved? How’d it get started?

Carter: Sure. So the origin’s pretty easy, it was my dad and I basically kicking around an idea of doing something that’s not a fund. There are plenty of farmland funds and some of them are really great that are out there. But the issue is it’s $1 million minimum typically and usually a long-term lock on your capital. And that’s not an answer for most people. We wanted to have a solution where you could come up with $10,000 or $100,000 and get access to the asset class. So that was the, I guess, genesis of AcreTrader and really is, like I mentioned earlier, it was a neighbour asking me, “Hey, I wanna invest with you and your dad.” And started looking around and went, “Oh my God, there’s nothing here.” In the world of commercial real estate, it’s there, it’s called crowdfunding. We use a lot of the same regulatory mechanisms and structures that the crowdfunding platforms do. We don’t use that term crowdfunding a lot because it can be a little kitschy. And I think there are some not great players in the industry. And so if and when there’s shakeout with some of those platforms, we don’t wanna be associated with the negatives there.

Meb: “Like who?” says the short-seller. We’re gonna skip over the names of the terrible ones, but…

Carter: Some are great. There’s some really great ways you can get access to commercial real estate online, but those guys just ignore the alternative assets and just look at commercial real estate crowdfunding, $10,000, $50,000, $100,000 checks at a time, those platforms have raised $4 billion or $5 billion in the last 5 or 6 years and over a billion of that in the last 12 months. And so it’s clear that there’s an explosion of interest in alternative assets and doing so in a frictionless manner online. And we simply wanted to match the demand of people wanting to invest in farmland with the supply side, which is the farms out there that are interested in transacting.

Meb: Okay, so you guys said, “All right, we’re gonna do this.” What was the process? How long did it take? When did the company get started?

Carter: Yeah, so it was probably a year of work with some software developers, lawyers, advisory board members. We’ve got some really great advisory board members. We got the current chairman of the London Stock Exchange, the former CFO of amazon.com. We’ve got some former head of operations for JB Hunt. They’re really great people for me to work with because what we require as a culture internally is radical transparency. I know you’re very familiar with that, but the idea of try not to get your feelings hurt and if we are brutally honest with each other in our criticism, in our feedback, we can develop as people and as a company quicker and be more successful. And so having that board of advisors, having some great attorneys and our great general counsel we have today to provide that early feedback to help develop the business plan and continue to modify, and then ultimately build the technology around it, build the payments to compliance systems, the backend administration. I think what you see on the website at acretrader.com is the tip of the iceberg in terms of our functionality and we’re really proud of the team and the systems we have in place behind the scenes. But long story short, launched the platform earlier this year.

Meb: Oh wow, you’re new.

Carter: It’s a new company. Yeah.

Meb: You know, I’ll give you a compliment, website looks great. Not surprising since you’re from the Bay Area that you found some good website designer somewhere, but it looks great.

Carter: So we’re clear, way more time than just this year of building it. It was just something that I personally and we as a culture didn’t wanna launch early and roll out something that was half-baked.

Meb: Sure. So walk me through it. How’s it work? Give me an overview, what’s the vision, how’s the actual process go down?

Carter: We’ll talk about the process then I wanna circle back to the difficulty of the process and why that’s a big advantage perhaps later. But it’s really simple in terms of our process and how we bring these farms to market. So we come through hundreds of farms, mostly off-market listings. We’ve got a team internally that looks at the supply side, if you will, that focuses on farmland valuation. One of those guys managed a few hundred million of farmland before AcreTrader. So these guys know dirt in a way that I never will and we’re, I’d say, really, really picky about kicking out anything that would have any real fleas on it or any problems. So once we boil it down to one or two farms here and there, we’ll take an individual parcel, we put that parcel in a unique LLC and the investors purchased shares of that LLC. So very simply, it’s like an IPO for an individual farm.

Meb: So do you buy the farm first and then solicit investor interest or you solicit investor interest and once it hits a certain level then go buy the farm? Or do you sign like an LOI? You identify it, then what?

Carter: You got it. Usually, more LLI focused or real estate contract focused. And so, but in the background, we handle all of that and everything from working with the farmers and the managers to the paperwork and the payments. Investors simply purchase shares and receive payments. It can be a truly passive investment for them, just like owning a stock or some wonderful ETF.

Meb: So. Okay, give me, what’s the typical farm size you’re buying and what’s the minimum for an investor, and do you have to be accredited?

Carter: So typical size we look at is a couple hundred thousand to a couple million. Working on an almond farm right now, it’ll probably be closer to a $3 million deal, but that’s the typical size of farm and the investors, usually around $10,000 what people start with. I think if you look across the real estate crowdfunding platforms, people tend to invest about $100,000 in their first year. We certainly reached that threshold.

Meb: And I would assume most that are putting money in are attempting to diversify across a number of listings, eventually?

Carter: You got it. So most people come in, the minimums on the farm are sometimes $5,000 or $10,000.

Meb: And you have to be accredited.

Carter: You do have to be accredited, for now. We’re working on a non-accredited product in the future, but right now it’s accredited, which is a couple hundred thousand dollars of income or a million dollars in net worth. We certainly want to open that up to everyone. So we still encourage non-accredited investors to come on, become more educated about the asset, sign up and we’ll let them know as soon as it’s available. So that’s the basic mechanics of the investing. It’s pretty simple, you own shares of an LLC. That LLC owns the title of the farm. I personally have invested so far in each farm and we’ll hopefully continue to do so. In terms of the management of the farm and what we take care of, what’s a fascinating component of farmland and something you mentioned, farmland versus real estate earlier, the tenant farmer pays rent one time a year, typically, and typically that’s even cash rent before they plant for the season. So unlike other forms of real estate where you’re out chasing monthly payments and vacancies and problems and broken toilets, but farmland is super boring. Your vacancy rates tend to be close to zero. Your default rates tend to be close to zero.

Meb: And are you identifying those farmers ahead of time when you’re buying it? You say, “Look, we’re gonna buy this and we have this tenant farmer in place,” or do you make any sort of agreement with them ahead of time, or is it even the farmer who’s selling it but then going actually just farm it? What’s a typical way you do it?

Carter: There’s not a typical structure. What I’d say what is typical is the farmer has to be good and there has to be backups. We look for the tenant pool, if you will. So we want there to be a number of local farmers that are able to come step in in case the existing farmer either has a problem or is not adhering to best practices for soil sustainability or maintaining the ditches, things like that. So tenant liquidity, if you will, is important to us. And then having good tenant relationships. So you mentioned a sale-leaseback. That’s something we work on a good bit and we love that. When a farmer says, “Hey, I wanna free up some capital, but I really wanna lease this land. My dad and his dad and mom before that managed this land and I wanna stay on it,” we love working with those types of situations.

We also work with farmers that wanna expand their operations. So farmer says, “Hey, I’ve got a young upstart farmer, I’ve got a couple that we’re absolutely in love with these guys, they’re this prototypical early 30s, they’re actually out there in the field. They didn’t leave the farm community, but they’re hyper-smart, great business people, and they wanna expand their operations, but they’re capital-constrained.” That’s farmer’s biggest problem always, especially when you need…to expand your operations, you need another million dollars. That’s tough. We love working with those, call them, great entrepreneurial business people that wanna expand their operations.

Meb: Okay, so let’s do the math simple just so we can walk through an example. Let’s say you buy a million-dollar farm. What’s the geography? Are you guys looking all the way across the country and what’s the prop types? What’s your screening criteria as far as geography and focus?

Carter: Our focus is dirt and water, less so than where that dirt in the water are. We want quality dirt or quality soil and we want access to water. But in terms of where we were, we’ve had a pretty good focus on the Delta in the Midwest, which is where most of the productive, highly productive row crop land is. We have been doing more and more work in California working with a few sponsors here in the States.

Meb: Is it just because you’re looking at all those funny looking crops out of Humboldt now that are gonna be grown in greenhouses?

Carter: You know, we get a surprising amount of investor demand for hemp and marijuana. Very, very surprising.

Meb: Growing up, I was exposed to marijuana at a very young age visually. I remember riding around with my dad on a truck, and I can’t remember if it was Kansas or Nebraska, and he would joke, he was like, “Look, you know, that’s…” my mom pronounces it as “mary-juana” with this weird Southern drawl. My mom’s from North Carolina. And he was like, “Look, that’s, you know, marijuana growing.” He’s like, “It’s growing wild.” And I was like, “That’s weird.” It was just like, huh, interesting. This is reefer madness in the ’80s where you’re just like, “It’s so illegal. Oh my God, I can’t believe it’s growing wild. Like, are we gonna get arrested just looking at it?” I mean looking back on that, I’m like, oh really? It’s just growing wild. Just randomly in Nebraska, like sure, sure. Okay. So geography is across country, but focus probably closer to you guys in general where traditional crops…but I’ve also seen y’all thinking about doing cotton, corn, soybeans, even rice.

Carter: Yep. We working on some citrus, some almonds right now. The hemp and marijuana thing is something that we have not taken part in yet and likely will not for some time. And some people are gonna get rich, some people are gonna lose their shirts, and it just feels highly speculative.

Meb: It’s just not a commodity.

Carter: Sure. But it feels highly speculative right now. And we’re like conservative rednecks. I don’t wanna get out over our skis.

Meb: All right, so you’ve got a million bucks, you buy a farm. I put in 10 grand. What happens next?

Carter: Sure. So for you, the investor, on the portal, you can log in and see updates. We update information from the farmer, pictures, stories, all kinds of fun information about the farm itself. But in terms of what you have to do as an investor is nothing. That’s the exciting thing for us is this is a truly passive investment. You’re not worrying about broken toilets or any other problems you may have with real estate or even stock markets where there’s this daily frightening mark to market you’ve gotta deal with. We take care of all the back end process. We pay out dividends to the investors and the farms have different lifespans on them, but 3, 5, 10 years and at the end of that we go out and seek the best price.

Meb: Interesting. So it has a finite time horizon. So that actually is pretty cool because you guys are obviously optimized to get the best price. So unlike a private equity firm or a lot of these venture capital allocations, when your time horizon is TBD, you know, you’re locked up for 7, 10, how many ever years until the investments bear fruit, in your case, it’s actually predefined ahead of time?

Carter: It is. We also have ranges in there. And so we have the ability to…somebody comes along in year two and says, “Hey, I’m gonna give you this stupid amount of money for this farmland,” we have the ability to exit earlier. If we had the ability to pull forward an investor’s IRR, we don’t think many people would be upset about that. And likewise, if the market is for one reason or the other not optimal at the point of exit, we can wait a little longer to make sure we optimize the exit prices.

Meb: What’s the structure as far as fees? You guys do 2 and 20?

Carter: No, we charge a 75 basis point annual management fee and we charge the seller of the land when they sell it into the platform. And then we charge a standard real estate brokerage fee you would pay regardless when the land is sold at end of life. So carries, a 2 and 20 is great for the fund manager, not always great for the investor. So for us, what we want is to scale a platform. We wanna bring liquidity and transparency to this marketplace. And our thesis is that if we do that in the lowest fee manner possible, we will have volume and volume begets volume and that’s how great businesses like Visa and Uber and Airbnb were built. Bring a great deal to both sides, make it a win-win, truly, for both sides of the marketplace and you can scale your business.

Meb: What’s the time, sort of, frames? If I go onto your site, I can see usually there’s a couple of offerings going on. How long do you normally…what’s the gestation period, is it a month, is it six months?

Carter: We just fully escrowed at a farm yesterday or day before, so it was this week, and that was about three weeks. It seems obvious as we build more and more traffic to our site, more and more users in our database, it’s thousands and thousands already, but as that grows, your timeframes will shrink further and further. You see this today on some of the crowdfunding platforms, they’re doing it inside of a week. There’s one in particular offering really weird assets and esoteric high-return, high-risk assets, they’re closing deals literally in minutes.

Meb: You’re talking about CryptoKitties or what are we talking about?

Carter: No, they’re doing like maritime shipping contracts and structured settlements. Very odd stuff, but cool stuff. It’s really exciting to learn about, but they’re literally closing deals in minutes.

Meb: It’s fascinating. You see so many different and weird asset classes starting to pop up. This is obviously one of the oldest in history. Okay, so a couple other questions. These are more just kind of practical questions. Did I see somewhere that you could theoretically invest through your IRA if you wanted to?

Carter: Through a self-directed IRA, that’s correct.

Meb: There’s one we talked about on the show before called Alto IRA that’s pretty cool that lets you do private investments through angel list and this is, investors, I think most listeners, most people assume you can toss them stocks, bonds, mutual funds, ETFs into your IRA, but a lot of people don’t know that you can actually throw all sorts of other things in there too and avoid having to pay capital gains taxes on a yearly basis. Did I also see that there’s some sort of marketplace function to your website? Talk to me about that.

Carter: In terms of liquidity. So when you invest in one of these deals, ideally we’re all investing for the term of the investment. It sort of defeats the point of passivism if you wanna buy something and immediately sell it.

Meb: Which is already better than private equity or something else where it’s like an unknown lockup for indefinite amount of time. This one you’re like, all right, I’m getting it in 3, 5, 10 years.

Carter: Right. There’s some VC firms out there that the money’s still in there 15 years later. So yeah, that’s the idea is it’s you have an identifiable timeline, identifiable exit. However, the ability from a regulatory standpoint, you have to hold the thing for one year or one year call it a post IPO if you will, post offering lockup. After one year, you have the ability to sell it to your friend or your neighbor and we would like to build a marketplace and are working on this trading system to allow people to interact and buy and sell on the website.

Meb: There’s been a big development on that in late-stage private companies. We’ve had the Equities In [SP] guys on a few times where they kind of provide companies, shareholders liquidity and vice versa and there’s been a few others that have doing it for a really long time, like almost like a brokerage. And that’s interesting, I think as an investor, you would wanna counsel people, “Look, you should be in this for the duration of the timeframe,” and I assume that if most of these guys, they want liquidity, it’s gonna be at a discount, I would assume, or well, I mean it’d be hard to tell because there is no known market clearing price.

As an investor, I would love to be like, “Hey, I would love to be buying…” it’s almost like a closed-end fund where they often trade at 5%, 10% discounts. Where I imagine in the coming years I’d be like, “Hey Carter, talk to me.” Anytime there’s a marketplace where people want out, I’m a buyer, but that’s a nice feature. It will be interesting to see how that develops in the coming years. So what’s the eventual goal and what do you think is the capacity that you guys…do you think there’ll be this focus of one or two farms at any given time or all of a sudden it’s like…what does it look like in the future?

Carter: Sure. I think that the all typically one to three farms offerings at a time is usually the way you’d wanna conduct it for a number of reasons we can get into. But ultimately, having just a few offerings at a time, but the ability to continuously come back and see new deals and new deals and different types of farm assets and farmland assets is what’s exciting for people.

Meb: I assume these thousands of interested investors, it’s gotta be mostly individuals.

Carter: It is. Most of our databases of users of customers is individuals, but we do work with a number of family offices and a number of private equity funds as well.

Meb: Well, I imagine financial advisors at some point, whether they’re directing it or just subjectively or just saying, “Hey, this is an interesting option, you could put some money into this,” would probably be a big eventual funnel as well.

Carter: Yes. As the world of RIAs, the registered investment advisors out there moves towards a fee simple structure, it’s positive for the client in that they really are looking to the client’s best interests and the name of that is usually diversification. Lucky for us, there are other people had done great work on this too. TIA, Nuveen has a really great series of white papers out about adding farmland to your investment portfolio as a diversification tool.

Meb: How do they do it? They do as private funds?

Carter: They do. So they actually own a very significant farmland private equity fund.

Meb: Yeah. They are big investors. We’ve sent out, circulated some of their white papers because I think they’ve done a really good job. Listeners, we’ll add these to the show notes. We’ve sent out a bunch of the idea farm over the years on farming and they do a particularly good job. Do you guys take VC funding or are you just totally bootstrapped? How’s the actual company get up and…?

Carter: I funded the company initially, personally, and I’ve since taken on some…just closed a pretty good-sized round of funding as well, so.

Meb: Congrats. You do that through individuals? You should have launched an offering on your site, gets a little too meta. I mean we did it. We’re probably one of the few assets…I don’t actually know of any other asset managers that have done a crowdfunding round. I think we raised about three million bucks. I mean I guess it’s crowdfunding. It was accredited but we just offered it to our kind of audience, said, “If you’re interested.” We didn’t use any platforms because they’re kind of…some of them were expensive. Was it just kind of friends and family or did you do institutional, how’d you go about it?

Carter: Individuals and some institutions. So individuals tended to be farmland execs, sort of technology executives and investment banking executives, and then the VC fund in there as well.

Meb: I imagine most of them, I mean it’s kind of an obvious…if you get it, the asset class, and you get the opportunity, it would seem a very simple mental bridge to saying, “Hey, the platform as well would be a good investment opportunity.”

Carter: As employees of AcreTrader, we’ve all made the career bet that that’s exactly the case.

Meb: What’s the vision look like? If we’re gonna walk out 1, 3, 5, 10 years, what do you see on the horizon?

Carter: Again, this idea of just being the marketplace for farmland and capital to find each other is the ultimate vision. And the great news is when you’re dealing in a multi-trillion-dollar asset class, you can build a pretty significant business doing that. And for us, it’s about transparency. It’s about access to information and liquidity, security, etc. Just changing this market so that the owners understand what they have and the investors understand what they’re investing in and how to access it.

Meb: What is even the state or status of farmland sourcing? I mean is there like a Zillow of farmland? Is there like a large brokerage that’s online or is it incredibly…I imagine it’s incredibly scattered.

Carter: It’s wildly scattered. So we are partnered with the largest farmland brokerage and they have a little over 200 agents, which is great in the world of farmland, but for some context, Realogy, which owns a bunch of the brand name residential real estate brokerages, has 100,000 employees, some number of hundreds of thousands. JBL CVRE, these large commercial real estate firms, same thing, tens of thousands of employees. So the world of farmland brokerage is extremely fragmented and I think that that highlights what we were discussing earlier is the difficulty in the funnel of identifying good farm assets is a big part of the secret sauce. And it’s something that we’re really, really excited about is a large portion of this industry transacts privately or off-market or through these brokers, but with little visibility or the broker may…a small, local broker may only show it to a small, local crowd and the thing may trade at an absolutely huge discount. Actually, I believe at one point I heard on your show that your brother had sold some land and the way he did it was he called the neighbours.

Meb: Called the neighbours, who wants it?

Carter: Right. That might be the majority of cases and that’s definitely not what you would call an efficient or even a functional market and that structural inefficiency of the farmland market is obviously a massive opportunity for us as a business and importantly for the investors on our platform.

Meb: It’s funny you mentioned that about our family because let’s say I’m a farmer and I call you up, I say, “Carter, we wanna sell our farm to you,” what is the general process? I saw on your website, it said for farmers, or farmers, contact us, or something. How’s that work?

Carter: Sure. So it’s difficult. As the quick answer, there’s a lot involved on our end, whether that’s managing just the number of people that go to that piece of our website and are coming to us saying, “Hey, I wanna sell my farm to you.” We then go through the identification process. We have a three-stage due diligence process that the extreme majority of farms don’t make it onto our website as a result of that. Then there’s the actual transaction to manage and the management of the farmland on the backend.

In terms of how we work with the farmer, most of those farmers, we get to know their assets pretty quickly. We’ve got some software tools we use both with internal ones we’ve built as well as external services and data services, so we can help that farmer understand valuation ranges, what that looks like, what rents are in their county. You know, you’d be surprised at how rigid and how little information flows in this economy and so the farmers are really thrilled to hear what we have to tell them just because it’s actual fact-based and data-based information. Again, most of those people, they say, “Okay, great, thanks. Have a nice day.” Or more of the time, we say, “Okay, great, thanks. Have a nice…cool farm, but not for our site.” We’ll help them in transacting, help them value it, help them find a broker. We still continue to work with them.

Meb: Do you ever have a situation where let’s say you bought a property and you get a phone call one day or as we do like one of these spam letters about once a week or once a month, it’s a wildcatter, it says, “Hey, actually, Carter, I think that there might be some oil on your land,” or, “Hey, we’d love to put a wind farm or solar farm,” are those things you would entertain or is it kind of out of scope?

Carter: If they produce additional income for the farm, the answer is a big, fat yes. You wanna see those things as free options and there are [inaudible 00:42:59] actually just recently with another solar development company that says like, “Hey, look, if you buy this farm…” they provided lots of examples. “You buy this farm, there’s a really good likelihood we’re gonna put solar on it.” And that’s cool, but we’re not paying for that, right? Like, if it’s a great farm and great dirt, good water access, good farmer, and a good economic situation, then we’d love to take a look at the farm. If we happen to have an opportunity to put solar panels or a windmill or anything else on that farm in a later date and increase the income to our investors, then absolutely. I mean, I think that’s the core of what we do is we wanna make sure our investors are acquiring good assets and making money.

Meb: What happens if, for example, you have a great property, 10 years go by and you’re like, you know what, we don’t wanna sell this. We love this property. We love the yield. We love the situation. What are you gonna do then? I mean, this will be 2029, or whenever, even if it’s 3 or 5. Have you thought about that?

Carter: Sure. And just mentioning, number one rule is to try to do right by your investors. We can’t guarantee anything. It’s absolute paramount importance internally to us that act on behalf of our investors and represent their best interest. And so if we get the 2029 and there is some very strong reason to continue holding it, then there are some scenarios where we could take it out to them and say, “Hey look, do you wanna remain in this?” If it’s two or three people but a million dollar farm, then that’s a very easy conversation to have. If it’s 200 people in that farm, then it becomes a little more difficult to manage.

Meb: Is it usually like 50 people in an investment or does it vary?

Carter: Anywhere from 1 to 50 and so we’re happy to help. And we do have a lot of people, a lot of interest from family offices that say, “Wait a minute, you can acquire this land for me and I’ll pay you 75 basis points instead of paying somebody 2 and 20?” So we’re happy to help people acquire single farms.

Meb: And I imagine you’ll get more of that where you get like almost like, “Here, we’re gonna allocate $50 million over the next three years, have at it. I want blueberries in Oregon and rice in Arkansas and corn in Kansas. Go find it.”

Carter: You got it. We’re happy to help them. And we do, we actively working with a number of funds and family offices to source like that.

Meb: Makes sense. All right, so an investor listening to this, traditional investor, has zero allocated farmland. It’s probably the biggest missing piece of the global market portfolio, the difference between investable and non-investable. If you look about the global market portfolio of investible assets, I mean the other big one, of course, is single-family housing, that’s not well represented as an asset class around the world, but farmland, in particular, would probably be number two I would think. How do you think about in terms of their portfolio, what’s a good way to think about where should they put it in, how much?

Carter: We are always careful. We’re not a registered investment advisor so we don’t tell people how much they should be investing in farmland, but we are happy to provide materials and third-party research that show that TIA paper we were discussing earlier that show some allocation is beneficial to your portfolio. So I think what’s interesting at this point in time is that it’s been a great asset historically and it’s tended to outperform other major assets like stocks and bonds. And again, we’ve got a lot of state on our website at AcreTrader.

But I think as a wealth preservation or generational wealth preservation mechanism, what we’re selling is not a get-rich-quick scheme. So let’s be clear, this isn’t you’re gonna make a 15% or 20% IRR. If you do, great, and people have done that plenty historically with farmland. But we’d like to approach it as, “Hey look, this is a dead-simple, boring asset class where you can make some good returns over time.” And it serves as a…it’s a non-correlated asset class. So in portfolio diversification and modern portfolio theory, it’s obviously important to have those in your portfolio. It’s non-correlated, it has served as a great protection against inflation. So you’re getting the same benefits of having gold in your portfolio, but you’ve got gold with yield. The farmer’s paying your rent every year.

Meb: Gold’s got a negative yield. You gotta store it, you gotta pay someone not to steal it.

Carter: And the supply is growing, right.

Meb: Soon to be fixed income, you’re gonna have a negative storage cost too. Half the world does already.

Carter: No joke. But with gold, so many people have gold in their portfolios. I stubbornly still have a little bit in mine, I’m consistently replacing it with farming.

Meb: Oh hey, congrats, 2019, it’s perking up.

Carter: Well, yeah, I suppose, but you know, arguing against myself, we just wrote an article for “Forbes” comparing gold versus farmland. There’s a very obvious and very strong argument for farmland as a potential replacement for gold.

Meb: It’s interesting, we joke a lot about allocations and the old Talmud allocation, which goes back 2000 years, is invest a third in business, a third keep in reserve, so we said that as bonds, and a third in land and we interpreted that as real estate. But theoretically, it probably should be chopped up in half and farmland. I think the problem I had is that the simulation I did had monthly returns. I don’t know if NCRIEF…is it NCRIEF? How would you say it, NCRIEF?

Carter: That’s a good one.

Meb: Acronyms. Anyway, the farmland index. I know it as annual data, it may have quarterly, I don’t think it has monthly.

Carter: Yeah, they got quarterly in there, but no monthly.

Meb: So the simulation was not done on my side. But it makes sense, anytime you have assets that are uncorrelated, not to a perfect degree, and there’s not that many of them out there in the world, can’t start inventing new…I mean you can, but this is one of the oldest ones in history that probably particularly individual investors have the least allocated to it.

Carter: And again, the U.S. farmland market, to add on top of that, a physical limitation on the supply that’s shrinking and a physical increase in the demand for the products coming off the farm.

Meb: It’s funny because so many of the institutions have become famous, Harvard, Yale, for timber, for example. But let me ask you a question. What institution have you ever heard of that has the largest allocation? You don’t have to name the institution, but have you heard of anyone who’s putting 25%, 50% in farmland? It’s gotta be somewhere in Iowa or Illinois. Some sort of college endowment.

Carter: I know a lot of farmers that are 99% invested in farmland.

Meb: Or 100% and some.

Carter: But in terms of endowments, I’d say some of the smart buyers that we see out there, some of the larger buyers are the Mormon Church and the Bill Gates Foundation, for example.

Meb: Smart money, we talk about a similar idea concept where, you know, a lot of our investment portfolios, we allocate a very large chunk to the strategy trend-following and we say we put in half, which is vastly more than anyone on the planet that we know of that does it for clients. And I always ask even the trend-following managers, said, “Do you know any institutions that put in more than like 10?” And the answer’s always no. So we’re a big outlier, of course, but I think the same thing applies here because man, I would love, love to allocate to a bunch of clients on a public level. Maybe we’ll figure out a way to roll you guys up into a public offering at some point.

Carter: It’s alluring and there are a few farmland REITs out there and they’ve got some great assets inside of them. But to me, one of the reasons we love farmland is to get away from the mainstream financial system to diversify. The REITs, unfortunately, have been really volatile investments. I mean one of them had a “Seeking Alpha” write-up and the thing was down 40% or something.

Meb: Oh, Seeking Alpha.

Carter: That’s another podcast.

Meb: God bless him. I used to write articles about it in the early days. I said in so many cases where we talk about businesses that have built…they’re incredible businesses, but kind of almost on slave labor. The last post that we did was like the amount of free content “Seeking Alpha” has got for free is $70 million or something. It might’ve been $100 million. Anyway, so I imagine you guys have an enormous runway opportunity set in the U.S. that will keep you busy for 20 years if you wanted to. Is there a ever design on eying anything abroad? Is there any point in doing that?

Carter: Sure. Yes is the short answer. Right now, the opportunity set in the U.S. is incredible. We today have a pipeline of, give or take, by $300 million of farmland we’re looking at and engaged on.

Meb: So I imagine the early days, it’s more of a constraint is eventually building the marketplace, getting enough users and dollars flowing to where there’s a balance on opportunity versus…but the good news is at least you get a filter in the best opportunities.

Carter: Right. Being careful, thinking about the U.S. is I think one of the…my dad always used to say one of the foundational things of capitalism, in particular in the U.S., is title law. And actually, this morning I spent working on title stuff. That doesn’t exist in a lot of countries. You get to Central America or South America where there’s some great farmlands and great cap rates, great returns, and the title laws can get a little squishy or go to some more real return countries in Africa or even like Central America where the government can just change their mind and come take it from you, that doesn’t seem like an investment we should ever consider.

Meb: Yeah, I’m sure the main benefit of using y’alls platform is that you guys are doing the due diligence, you’re sourcing the deals. How would you recommend to end investors that are gonna start allocating, how should they think about sourcing the deals? I mean one way is, obviously, if you just diversify across all of them, but if they’re gonna pick and choose…I think I saw on your site, and you may correct me if I’m wrong, you give an estimate of potential income. Did I see that some you like categorize as maybe higher risk or lower risk or something? How should people think about building a portfolio or allocating or differentiating between ones they should or should not invest in?

Carter: Yes, so we’ve got some relative scoring mechanisms to look at a farm versus another farm. I think that we spend a lot of our conversation talking about farmland versus other assets, but you bring up a great point that inside the world of farmland, there are different profiles, different investment profiles. And so what I think is important for everyone to do always is do homework. Before investing in anything, you should read about it. In our case, you wanna read up about us and wanna read about what we’re doing and the individual parcels. I think it’s really important that you get to know what’s you’re investing in.

But yeah, there is a differentiation. Row crops tend to be fairly similar return profiles. So in general, we have two buckets we sort of think of, which is permanent crops and fruits and vegetables versus row crops. So in my mind, row crops are these, the Delta, the Midwest, these highly dependable year in, year out, you plant it on an annual cycle. The growing season is much shorter than that, but you grow some cotton or some corn and you’ve got a good year, bad year, and then the next year you start over. In the world of almonds, per se, or pistachios or peaches or carrots, the cycles can look a lot different. The risk profiles can look a lot different. Almonds can produce a lot greater cash-on-cash return.

Some of those are even the high single digits, and we’re working on an almond farm right now, but it has a different risk profile because if you haven’t done your diligence and you’ve got bad water, bad access to water, then you can end up with some really bad years. If you have a farmer that’s not keeping up with potential threats on an annual basis, then you can have a year where your returns get really hammered by some base of species. All to say it, there are a lot of considerations between row crops and permanent crops, for example, but as a whole, they all tend to act pretty similar. You’ve got a tenant, that tenant pays you rent, in most cases and especially with row crops, and so the financial profile should look pretty similar across most of them.

Meb: But as part of the due diligence process, you should not drive up on your quad or four-wheeler in Arkansas to the farm and do on the ground due diligence.

Carter: Call us first so we get…

Meb: That’s funny. I love the idea. It’s an interesting way to think about it and look forward to you guys building it out. What are some other resources…you mentioned there’s, to my knowledge, there may be, I don’t know, are there any good books on farmland investing? Is there any other resources, conferences? If people really wanna cannonball in the pool, where should they think about learning more?

Carter: There is a great book, I believe it’s just called “Investing in Farmland” by Greyson Colvin who runs a fund. Great guy. Really straightforward, consumable content. So it’s not some 300 pages of super-heady financial data. It’s very easy to read and a very informative book, and so I’d say that’s been a great resource. There are some good blogs out there. The University of Illinois, for example, does a good job, farmland and economic analysis blog out there. In terms of conferences, there’s a really great one, Global Ag Investing, and that’s a conference really centered around the funds and the family offices that are investing professionally in agriculture. That happens once a year in New York. They have an international one as well. That’s a really great, great conference in New York City to dive in and really get to learn more about ag investing. Kevin van Trump is a great resource. He puts out a daily email to subscribers but also has a conference as well, so that’s another great resource for learning about farming and farm investing.

Meb: If you could pick one crop currently, 2019, to invest in, what would it be, and this is just for the next year or next five years, and one to avoid, what would they be? Gun to your head. You only have one choice. All the disclosures apply.

Carter: Full disclosure, dirt and water is…I hate to say, oh, we’re agnostic towards crop. Dirt and water is with matters, right? And so in terms of geographies, we have some certain like no-no areas that we don’t go to. In terms of crops, if you’re you, you love trend investing, beets and kale and avocados are doing pretty fantastic.

Meb: Kale used to be a garnish. You know, it was like the thing you got on your plate with a hamburger and French fries just to round out some color and no one ate it. And now it’s like the most…I mean, people put in smoothies.

Carter: You have to eat it or else you’re going to die, right?

Meb: Yeah. We just started a subscription to a smoothie company, which is so great, Daily Harvest, where they just mail it…you’ve seen it. They send like little cups with the smoothie, and there’s another one called Kencko. Two different ones, Daily Harvest sends you actually frozen fruit in a cup and kale and whatever else, bee pollen, and whatever they put in it. You just fill it up with water or milk, put it in a NutriBullet or whatever you have, and voila, you have an amazing smoothie. Kencko’s a little different where they freeze-dry…freeze-dry, is that the right word? But it basically turns it into a powder that retains the ability of to have the fiber, so you could throw those in your like suitcase. Anyway, it’s totally unrelated, totally unrelated. But the interesting part is you could see how some of these crops on the periphery that are seen as sort of macronutrient benefits, trendy or not, could have big demand.

Carter: Yeah. But trends are dangerous. Actually, in talking about smoothies, you made me think about my dad drinking orange juice every morning. Let me be clear, table oranges, clementines, things you eat, that’s okay. Citrus groves, purely for making orange juice, are in decline because around the office talking about no invest in the juice-juice because my kids, they don’t even know what that is.

Meb: Yeah, because I mean it’s sugar water essentially, which is why it’s so good, why kids you love it. But you talk to doctors nowadays, they’re like, you’re literally…I forget who it was on Twitter was joking when someone said they were going on a smoothie diet. What do you call it? Not a cleanse. They’re like, “You mean bingeing on essentially sugar water for a few days?” But it’s funny, I love a lot of the smoothie ideas. But we used to get…my aunt and uncle and cousins grew up in Florida and they used to send us, I mean, I look forward to it so much, a box of Florida oranges around holidays and, oh my God, those are the best things on the planet. So good.

Carter: For sure. But in Florida right now, they’re pulling out orange groves and replacing it with commodity crops. Just the demand for juice is going down.

Meb: What was the big one in the last cycle? And this was actually a big…there’s one like family in California that owns half of the almond groves, but it’s an L.A. family, but they own all of the Central Valley, but they had been the ones behind a lot of the pomegranate juice, the Pom juice. With so much marketing and like every two or three years there’s like a new…Justin’s a vegan over here. So what’s the most new trendy food item right now, 2019? You guys know? You got anything for me?

Carter: I don’t know. But the trend thing is dangerous. Trend following is good, but when you’re dealing in annual or even 3, 5-year type of…for trees, 25-year type of planning seasons can be really dangerous. I think the one that comes to mind for me is acai berries. Remember how big that thing was 10 years ago? Now they’re almost gone.

Meb: So, long kale, short acai. Sounds like a good way to do it. All right, so resources. There’s been a bunch. It’s interesting because I’ve never heard of that book or that conference, would love to attend. I think that’d be a lot of fun. You know when it takes place by any chance?

Carter: It’s in the early to mid…call it early next year.

Meb: You guys should have host one in ag investing. You can hold it out, take some farm tours in Arkansas.

Carter: We absolutely will. And you know the guys and girls in the office are gonna shoot me when you asked for resources and I did mention, of course, acretrader.com.

Meb: Well, I’ll use the show note links we when we toss it up. How many folks y’all got there now?

Carter: Give or take a dozen. Then we’ve got a couple of awesome interns that bring some fun college life into the office too.

Meb: All-time resource. We don’t do a good enough job of having an interim program here. We need to start one of those. As you look back on your career, and this could involve your hedge fund days, it could involve AcreTrader, it could involve growing up in Arkansas. Do you have a most memorable investment? Good, bad, in-between?

Carter: For me personally, the most memorable ones are the worst ones. That tends to be when you make mistakes, if you at least try to pay attention to them, you can learn a lot and I can drone on for hours about getting involved in value traps.

Meb: Good, let’s do it. We got hours.

Carter: Underwriting the mistakes and short selling and getting killed by companies. So in terms of career bed and actual capital, AcreTrader has been my largest and most memorable by far, not just because of the investment, but I’m especially proud of the people. We’ve just got a really great team of good people that are coming in early and leaving late and we’re building a big business and there’s a huge opportunity in front of us and it’s the most excited I’ve ever been in my career.

Meb: How many farms you guys done at this point? You guys in double digits yet?

Carter: So yeah, we’re working on that, quickly on our way there. So in terms of investments as well, I also, I think I said it earlier, but I invest in each of these farms personally.

Meb: Unlike most mutual fund managers, it drives me nuts. Well, it’s good to see you have skin in the game, but it’s the same way that we think about doing private investments. We’d kind of detail at long length on this podcast my journey there, but I would think about the same with the farmland. Let’s say, look, I’m gonna budget 10% of my portfolio, do it over 5 years so you don’t get the whole cycle. Just kick you in the face all at once. That’s the biggest mistake people always make. Doesn’t matter if it’s investing in a single stock, investing in a single area, they love to just go all-in for some reason. Now, I contrast this with going all-in on, say, a diversified portfolio, all-in on something, whatever it may be. It seems people, for some reason, love to do that. Carter, it’s been a blast. I think I know the answer to this. Where can people go to find more information on you and what’s going on?

Carter: Yeah. Acretrader.com. Acre is spelled A-C-R-E.

Meb: Did you guys have to buy that domain or was it available?

Carter: I bought it but strangely for a relatively small amount of money.

Meb: So man, that person is listening and kicking themselves because that’s a really good name.

Carter: They could have got me for a lot more than they did probably.

Meb: Any terrible names you guys turned down that you thought you were like, maybe let’s do this instead?

Carter: Oh man, I have a whole page of names that I thought I was so clever coming up. But funny enough, I was actually looking at it a month or so ago. I put them all in this cart. It’s so embarrassing. I’m really happy with the one we chose.

Meb: That’s funny because I own probably, I don’t know, let’s call it 50 domains and every once in a while we’ll get a spam email and it’s basically people trying to sell you a domain that’s like a riff on a current domain and I get them like almost daily. And I forget that I own some of these ridiculous domains and it just makes me laugh because they’d be like, “We see you own BaldAds. Would you also like to own something else?” And I was like, God, why do I still have that domain? It’s like a $10 tax per year on some ridiculous idea that…So listeners, if you want to start a BaldAd company for people putting ads on their bald heads, talk to me. That domain will not go for very much, maybe a surfboard or two, surfboard and a six-pack of craft beer, probably sell that domain for. Carter, it’s been a lot of fun. Thanks for joining us today.

Carter: It’s been a pleasure. Thanks for having me.

Meb: Listeners, we’ll add links to AcreTrader, everything we talked about, all these farmland resources. If you wanna do a deep dive to mebfaber.com/podcast, I would love to hear reviews, feedback, anything else you guys wanna tell us. Questions for the radio shows, feedback@themebfabershow.com. Subscribe to the show on iTunes, Radio Public, Breaker, anywhere good podcasts are sold. Leave us a review. You think it’s wonderful, terrible, anything in between, we love to read them. The funnier the better. Thanks for listening, friends, and good investing.