Episode #276: Craig Wichner, Farmland LP, “There’s $2.7T Worth Of Farmland In The U.S…And That’s The Same Economic Value As All The Apartment Buildings In The U.S Or All The Office Buildings In The U.S.”
Guest: Craig Wichner founded Farmland LP in 2009 and is responsible for day-to-day management, business strategy and all investment activity.
Date Recorded: 11/12/2020 | Run-Time: 1:06:05
Summary: In today’s episode we learn the ins-and-outs of farmland as an asset class. Farmland has been an asset that’s been inaccessible for most people and Craig is trying to change that. We learn what piqued his interest in farmland and get an overview of the company, which now manages over 15,000 acres and $175 million in assets. He walks us through how the company manages the farms they acquire, focusing on both capital appreciation and increasing profits over time. We even talk about why owning an organic farm can serve as a hedge against a weaker dollar.
As we start to wind down, Craig offers suggestions to policy makers on how to encourage inexpensive and environmentally friendly practices for farmers.
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Links from the Episode:
- 0:40 – Intro
- 1:42 – Welcome to our guest, Craig Wichner
- 4:45 – What interested Craig in farming
- 5:35 – Working in biotech and shifting to farm investing
- 10:31 – His early days on the farm and the crops they focus on
- 15:37 – Case study on a farm they convert
- 17:59 – Managing vs leasing farmland
- 20:59 – How they find farms and regenerate them
- 23:26 – Getting young farmers interested in farming
- 29:42 – Funds performance and price appreciation of the land
- 33:23 – Extra benefits to investors
- 34:51 – Improving sustainability in their farming operations
- 39:19 – Policies that could improve farming overall
- 43:24 – Opportunity zones involved in farming
- 44:24 – Organic as a hedge against a weaker dollar
- 47:48 – Why larger firms are not following their model for farm investing
- 50:44 – Mispricing in the farm investment market
- 55:34 – Outlook for the next 10 years
- 57:07 – Economics of vertical farmlands
- 59:34 – Secondary markets from farmland
- 1:00:30 – Farming as an ESG investment
- 1:02:06 – Most memorable investment
- 1:04:16 – Learn more: FarmLandLP.com, investor.farmlandlp.com
Transcript of Episode 276:
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’s 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.
Meb: Hey, podcast friends. Another great show for you today on one of my favorite topics, farmland investing. Our guest today is the founder of Farmland LP, a leading investment fund that generates returns by converting conventional commercial farmland to regenerative sustainable farmland.
In today’s episode, we learn the ins and outs of farmland as an asset class. It’s been an asset that’s been inaccessible for most people and our guest is trying to change that. We learn what piqued his interest in farmland and get an overview of the company, which now manages almost 200 million in assets. He walks us through how the company manages the farms they acquire, focusing on both capital appreciation, and increasing profits over time. We even talk about why owning an organic farm can serve as a hedge against a weaker dollar.
As we start to wind down, he offers suggestions to policymakers on how to encourage inexpensive and environmentally friendly practices for farmers. All this and more with Farmland LP’s Craig Wichner. Craig, welcome to the show.
Craig: Glad to be here.
Meb: Where is here? You look like a beautiful verdant field somewhere in Valhalla. Where are you?
Craig: Well, I’m either at our 6,000-acre farm in Walla Walla, Washington or in Tiburon in Marin near San Francisco.
Meb: And it just looks like I’m in Walla Walla.
Craig: Well, I’m in my bedroom in Los Angeles. But for the listeners, by the way, we started posting these to YouTube. Check it out if you haven’t yet, podcast friends.
We were talking before we got started. This is totally unrelated to anything, but it’s actually somewhat related. As the listeners have been exposed to over the years, they know I talk a lot about farmland, one of my favorite asset classes. So we’re going to go deep on that today.
But you and I were talking a little bit about last names. Yours is Wichner, mine’s Faber. And it’s interesting only because my father’s side of the family, which is all farming, had immigrated from sort of Northeast France and kind of there’s some Germans in there too, and settled in Nebraska.
There’s like four or five areas in the U.S. where people settle from different countries and you still have the effects later today. But what I was getting to is a lot of people don’t know this, but you can actually, if your heritage did immigrate through Ellis Island, you can actually go type in your surname. So you can go type in “Faber” and find all the boats and all the names from people that have immigrated over the years. And it’s pretty fun to do, but it’s also endearing if you’re looking for kids’ names, as we were, thinking about who’s in your family to come up with some of the old school names that you don’t hear so much anymore. Anyway, you got a little European mutt too, right?
Craig: Yeah. It’s kind of an Austrian name, but everyone moved around back then and it’s officially Hungarian.
Meb: Yeah. You know, it’s funny. We can trace both sides of our family back couple 100 years and we have these old family histories and it’s so strange to read them because I mean, particularly with farming and just life, even not that long ago, 100, 200 years ago, always had like 9 children, half of which died, you know, and everyone’s talking about fate and, you know, just the lifestyle, so different. Anyway. All right.
You needed to have a lot of kids back then especially in agriculture. You know, if little Jimmy fell in the combine, you needed a replacement. You know, you had to have a lot of kids, especially in agriculture.
You know, what I should have done with my background is I have a picture I posted on either Twitter or Instagram at one point where I was talking about tail risk when it comes to investing. And there’s a photo from… We had a wheat harvest in Northwest Kansas and the combine caught fire and burnt down the entire field. And it’s something that I never in my 40-plus years of life have ever even heard of and so I was talking about, you know, preparing for risks and the risk you always think about are bad crop prices, bad weather, you know, whatever it may be. Disease, I had never really considered that one. Thankful to have insurance, but I should have posted that on the background. We’ll add it to the show notes.
So, Craig, all right, let’s talk. Did you grow up on a farm? Where did the interest in farming begin?
Craig: I spent 10 summers growing up on a farm, but I am not the farmer of the crew. My family actually owns and manages a multi-family real estate apartment buildings growing up. Actually, my dad is a PhD in nuclear and chemical engineering and ran the electrical engineering division at Lawrence Livermore National Lab, and then nights and weekends, he’d be changing toilet plungers and fixing garage door openers at the apartment buildings.
And so that’s really how I grew up with the experience of managing investment real estate. And there are a lot of parallels to how we manage Farmland today.
Meb: You actually sound like a brother from another mother. You got a dad who is an engineer, same here. You kind of grew up with some foot in the farming slash, for you, more real estate. I was a bio guy too, studied biology and engineering. What was the next step?
Craig: So I helped start a biotech company that we ended up getting a drug approved for metastatic brain cancer and took that company public, then did software companies for about 10 years, and the last company that I did, the venture capitalist that had invested in our fund, I went to go work with them for a while and then very quickly migrated towards capital-intensive assets, private equity focused on things that had a great asset value. Maybe they depreciated over time but generated great cash flow.
I just love that it resonated with me. And so did that for a number of years until the 2008 crash and the dislocation. And at that time, I saw how just the repricing of debt in the U.S. going from very cheap debt to expensive debt changed the asset values all across the world, basically dropped them by 40% on average.
So all of a sudden you have this event, a credit event, and real asset values dropped by 40%. That was a big eye-opener for me and I spent the next couple of years really looking at. And I saw that either we were going to be…either a lot of that debt was going to be washed out and there’s a lot of asset owners that were going to be hurt, or we were just going to print and double the money supply in order to get out of the hole. Those are your two options for getting LTVs back into the normal ranges.
And I wanted to be on the other side of that equation. I wanted to be basically safe from that. And so over the next couple of years… I also had a daughter at that point, and that had me really thinking about what was I really doing to make a difference on the planet going forward for her whole generation. And so through that process, after a couple of years, you know, really identified farmland as a place I just wanted to put my money into, have some friends, did a lot of GIS research, a lot of analysis, and identified that Oregon was a great place to buy farmland.
So I took a road trip up there with three of my friends and spent a week talking with farmers, talking with professors, business people, etc., looking at properties, and really saw that actually farmland is truly a great investment asset class and that there were real opportunities to add value by converting it from conventional to organic and regenerative agriculture, basically bringing livestock back onto land, but that it would take at least $10 million worth of farmland for it to make sense if I was going to drive the tractor every day and it would take about $50 million worth of farmland to get that cost down to an institutional scale.
And so really on the road trip back from Oregon, I’ve been working on Farmland LP ever since, providing a way for people to invest in farmland, us to be able to do it at scale and really focus on getting the benefits of organic and regenerative agriculture in farmland. And it’s been going well.
Meb: It’s interesting because… Give us some context, what year would this have been for the timeline?
Craig: So we incorporated in 2009.
Meb: Right after GFC. Okay.
Craig: Bought our first piece of farmland in 2010, 154 acres. Now we’re up to 15,000.
Meb: And that was original idea even from the get-go as a business rather than just you’re going to buy something as a hobby?
Craig: The beginning of the road trip, day one, two, and three were about us buying some farmland and having a little kind of plan B scenario. But very quickly that morphed into…probably the transformation happened kind of day four, or five, and six of that. It might’ve involved some pubs as well, but really saw the opportunity and the need really to do agriculture at scale, to do regenerative agriculture at scale.
The key problems in agriculture today are because we have one farmer owning one piece of land. And because of economies of scale, they focus on one kind of crop, maybe, you know, a second one if they need to. So farmers, you know, there’s $2.7 trillion worth of farmland in the U.S., 53% of the U.S. farmland grows to commodity crops, corn and soy. So the farmers will grow corn as much as they can and swap out the soy when they have to and then have to supplement with all kinds of chemicals, pesticides, and herbicides in order to make that rotation work and also subsidize with crop insurance.
But that’s really an unsustainable biologically rotation. And so to get it back to something that’s really biologically sustainable over time and actually more profitable over time, you have to increase the diversification and that requires a decent economy of scale.
Meb: So you drink too much pinot noir up in Oregon, which, by the way, is one of the most beautiful states in the country. Love the Pacific Northwest. I like your idea just from the standpoint of getting to go visit.
So you drink too much wine, you start to dip your toe in farmland. Was the idea from the beginning, from the get-go…and talk to us about what sort of crops you guys are looking at. You buying vineyards, you doing blueberries, you doing cannabis and kind of walk us through… There’s a lot to talk about, but you mentioned this concept of regenerative and what that means. Talk to us about the early days. What was it like? Were you wearing the boots driving the tractor?
Craig: Nope. They don’t let me drive the tractor. But really from the very beginning, well, one, it was looking at farmland as a better way of managing farmland, focusing on the soil biology and the soil health, and the need to do it at scale and what would that look like. And the biological rotation, you know, the fundamental premise of healthy soil biology is increased crop rotations. And there’s great research that’s done that shows that if you increased to three or four crops on the rotation, that you actually increase yield and decrease inputs and increase profits overall.
So the initial template model for how we would manage farmland was basically map out a 10-year crop on the land. So three to seven years as pasture with sheep and cattle on the land, then rotating into organic vegetables for two to three years and then rotating into grains for one to two years and then back into pasture.
So that’s really kind of the template…it’s called the four-field rotation that was developed by the British basically in the 1700s. And that rotation is basically kind of the foundation and the proof for a couple of 100 years of successful crop rotations.
The problem is here in the U.S. is that with the advent of essentially chemical fertilizers, the nitrogen plants from World War II that made ammonium nitrate for bombs, they basically kept those factories producing and said, “Hey, if you put this ammonium nitrate on the fields, you get increased grape production.” And that act, that moment basically allowed farmers to take livestock off of their land, put them in a feedlot, and replace the nitrogen that was previously provided through these crop rotations and just dump it on the field that way and in essence, created this alternate reality of conventional agriculture.
And it made sense back then. Your soil was so healthy. Your ecosystems were so healthy. You didn’t see the problems in the beginning, but now, 70 years later, we see all the problems. We see what happens when the soil breaks down and there’s issues.
And so just looking at it from a soil biology standpoint, does it make sense? The question was, does it make sense to bring livestock back on the land or does it make sense to focus on soil biology when you have these “cheap amendments” that you can add? And actually, if you do the math, you have to do it at scale in our view. If you do it at scale, yeah, it actually works better.
And part of the issue is that those input costs over the past 30 years, actually, have gone up 300%. So farmers are now spending 300% more and you might say, “Oh, well, that’s been made up in terms of the crop productivity and improved genetics for that side.” No, actually crop productivity has only gone up 30% during that timeframe.
So the farmers are left on the bad side of that bargain. And if you switch over to this new one, and we do that kind of rotation on parts of our field, but fundamentally what underpins our philosophy and our view of farmland is that if you get the soil biology right, if you get the healthy soil and healthy ecosystem right, you’ll have healthier plants, increased yield, and we can actually get price premiums as well through certified organic or other certifications, so you get increased revenue and it reduces your input costs. So you’re overall more profitable and it does work out. It proves out that way.
Meb: Well, it falls into this category of almost common sense. I don’t know if you were inspired, but certainly some of the threads and themes from Michael Pollan’s work where he talked about the Omnivore’s Dilemma or the four or five books on food he’s written. And you read it and you’re just kind of just thinking, “That seems so obvious.”
A somewhat related tangent was my wife and I; she had never seen the movie, recently watched “Idiocracy.” Have you ever seen this movie?
Me: And so for the listeners, I’m not going to spoil anything, but it’s a little too close to home in 2020, by the way. Is that they can’t grow crops anymore because they’re spraying Brawndo on the crops, which Brawndo is essentially Gatorade, because it has electrolytes. Anyway, it seems, you know, a little too close to home.
So talk to me a little bit about maybe some case studies or just kind of how you guys do it. Maybe walk through one farm or one area on your approach. You know, you buy the land, you’re going to convert it, this whole concept of regenerative, what it looks like, what crops you’re doing, all that good stuff.
Craig: Yeah. So it’s probably easier to see starting where we are now and kind of looking backwards and what underpins it. So now we have 15,000 acres in three states, Northern California, Oregon, and Washington. One of the things that we identified was that we needed at least $50 million worth of farmland in one tight geographic area so that we could have an onsite farm manager and really manage that farm as a system, as an ecosystem.
And we get that land certified organic. We determine what the ideal crop rotations are on that land. Basically, our people really look at what’s the best crop to grow on that land now and over the next 10 years and how does that fit in with the other crops around it. So what’s going to generate the best soil biology, but also what’s going to generate the best economics?
And then once we determine that, then we can say, “Okay. Who’s the best farmer for this land?” In some cases, there are 40 different crops that grow on our land. So we’re not the experts in all of it. No one farmer would be expert in all of those, but our model is based on… We farm about one-third of the acres ourselves and we lease out about two-thirds of the acres.
So we’ll produce things like Oregon pinot noir, and organic blueberries with Driscoll’s, and organic vegetables in Oregon. But we also lease out ground to organic vegetable producers in California or other people who specialize in any one of those particular crops.
And it translates to higher revenue per acre and higher income per acre. And this is where the commercial real estate analogy comes in. You know, there’s $2.7 trillion worth of farmland in the U.S. and 40%… And that’s the same economic value as all of the apartment buildings in the U.S. or all of the office buildings in the U.S. So it’s a large asset class and 40% of farmland is leased.
Meb: And can you explain to the listeners what the difference between managing yourself versus leasing is?
Craig: So the 40% of leased farmland in the U.S., that land basically is owned by people who now live in cities. We’ve gone from a society that 48% of people used to live on a farm in 1900 to today like 2% of the population is involved in agriculture in some ways. But a lot of those people, their kids, grandkids, great-grandkids now own these properties now live in cities, and the farmer next door is typically the one who farms it. And they’ve probably been paying the same lease rate for the past 25 years. And it may have even gone from, you know, parent to child who is now the farmer or even grandchild who is now the farmer paying basically a flat rent to grow in general a commodity crop on that land.
And the problem with leased land is that no one has a motivation to improve the land. The farmers lease the land. They’re just looking at what their annual income is. The landowner doesn’t invest in the land because they’re probably not going to get an increase in rent on that land. They could be hundreds or even thousands of miles away from that farmland.
And so basically it’s producing a crop, but it’s essentially a fallow asset. It’s like if you had an apartment building and you didn’t touch it for 25 years and then farming it yourself is a lot of work. And that means like for the blueberries, for example, we do extensive analysis in terms of what’s the best crop that’s going to grow on that land. We look at the soil chemistry side. We make sure that soil chemistry is right. We get the soil biology right. So we look a lot at mycorrhiza in the soil and make sure that conditions are favorable for the mycorrhiza. We select the right blueberry varieties, grow the right blueberry plants, great partnerships with Driscoll’s and other people, and then actually grow the crops, you know, put in the irrigation systems, grow the crops and distribute it. And then the profits, we distribute that to our investors.
So, totally different work amounts, leasing out land versus farming it ourselves. But there’s that middle ground of active management. And that’s really where we come in. So we buy the land. And so we have five people in fund management and 45 people in farmland management. These are expert soil agronomists, expert farmers. Some of them grow the crops, but some of them just manage the properties.
And so we develop that 10-year crop rotation. We get that land certified organic. It’s a three-year process to get land certified organic, and then determine that crop rotation, and then find the best farmer tenants, farmer partners to work with, whether they’re sheep or cattle managers or people who grow organic tomatoes or grains. We manage that whole process to maximize returns for the investors.
Meb: So much of this just seems obvious, you know, where, as you think about investing in markets, and I mean, again, you don’t even have to say farmland, just listing the inefficiencies and there’s this spread of what we call frustration arbitrage or just work. And you hit upon a couple macro factors. I mean, I don’t know anyone my age and younger that is continuing the farm business of our relatives, you know, in the states that we knew. I mean, it’s an older generation that’s doing it and they’re starting to retire.
And so on the ownership side, there’s just not that many people out there doing it the way that you are. So walk me through how hard is it to transition a property from… And you guys own over $100 million worth right now. Is that it’s about right?
Craig: A hundred and seventy-five. Yeah.
Meb: Awesome. We’ll round up. We’ll call it 200. So 200, walk me through how you identify properties. So identification of a new property to buy and then the process to move it to regenerative and organic, because I think the organic, doesn’t it take like a number of years to actually certify it? Walk me through that whole beginning process. If somebody wrote you a $10 million check, how do you go about allocating new purchases and transition?
Craig: A lot of questions in that.
Meb: I know, sorry.
Craig: Some quick answers, and we’ll probably broaden out. It takes three years to get land certified organic. It takes three years from the last time that non-organic compounds were used on that land. So sometimes we can actually get a harvest in less than two years if a chemical was used in May and the harvest isn’t till June, then we can actually compress that timeframe. But three years is the time period from the last time non-organic compounds were used on that ground.
And in terms of the transition process, you know, we have wonderful systems in place and we have great people in place who understand soil health and maximizing the soil biology on that land. So when we look at new properties, we’re able to kind of put that learning onto that ground and essentially templates or some quick analysis that we’re doing, and then get that up to productivity in generating nice profits quickly.
You brought up a great point, which is that the farmers are old, who’s basically going to take over after this? And there’s a big barrier for young farmers to get onto land. So the whole paradigm right now and actually let’s start… I’m going to take you down a little rabbit hole.
Meb: Great. My favorite.
Craig: But it’s a nice rabbit hole. You actually have to go back to Abraham Lincoln. Here’s the U.S. Basically most of the population is on the East coast of the United States. And yet we’re taking over all this land in the Midwest and the West. And the question is, how do you get people to move across the country? Well, Abraham Lincoln signed the first Homestead Act. And that said, if you went out and you improved a piece of ground such as planting a crop on it, they’d give you 160 acres. And that was about 160 years ago. That program lasted for about 75 years. And by the end of it, you get 320 acres of land.
And the U.S. went from 100 million cropland acres to 500 million cropland acres over that 75-year period. Effectively, the U.S. basically gave away most of the farmland in the U.S. That’s how most people in the U.S. got their farmland. And now you fast-forward just basically 90 years to today and that land has been passed down kind of generation-to-generation. Their kids are not staying on the farm. Their kids are going to the cities or going to colleges. They’re doing whatever they’re going to do.
And what you’re left is basically kind of a vacuum. The people who are staying on the land, it’s important to understand the average commodity farmer today, growing corn or soy or something like that, has $8.5 million worth of land and equipment, but they’re making about $250,000 a year.
So how many people do you know could raise $8.5 million with a promise to generate just $250,000 a year? How many people would sign up for that gig? Not a lot. That’s commodity agriculture. That’s where it is today. And those are pretty much entirely steeped in commodity agriculture in the mindset of adding chemicals to farmland. The younger farmers, the new farmers understand the benefits of biology, but they need to compete at scale. How do they get to scale on that so they can produce food at basically the same kind of cost? It’s really quite challenging.
And we also have $2.7 trillion worth of farmland that’s owned today that’s going to be passed on over the next… you know, it’s different numbers but basically 20% to 30% over the next 10 years or so. Where does all that money come from? How do you change the ownership? How do you change the philosophy that’s going in to manage that land?
And that’s part of the analysis of where we come in and that commercial real estate analogy comes in, which is that, you know, in your business, you’re not going to buy an office building to run your company, but yet we kind of have this philosophy that, “Oh, well, farmers should have to buy their farmland in order to run their business.” It doesn’t need to work that way. Commercial real estate, REITs, etc., have solved that problem, whether it’s office buildings, or apartment buildings, or factories, or warehouses like Amazon.
So that’s what we do. We basically look at this and say, “Hey, you know what? We’ll buy the farmland. We’ll let investors who don’t have to live on the farm, don’t have to drive a tractor, invest in the farm, and it’s going to be managed according to principles that they can understand, organic regenerative agriculture. And we bring the expertise to convert that land to organic, put the right crop rotations in the land, and either farm it directly or bring in other farmers who are experts at growing that.”
And that’s a great way of managing farmland. And it’s really quite different than just doing a sale-leaseback on farmland where you might buy one property and then lease it back to the farmer. There’s no transformation happening there. It’s pretty much the status quo.
But when we do this transformation, the impact is really quite large. So, for example, land that used to rent for $250 an acre, after we convert it to organic, we lease it out at $700 an acre. So that 40% of farmland that’s leased, the value of that farmland is based on the value of the crops that you grow on that land.
So if you can increase the value of the crops that grow on that land, then the farmer’s going to get a higher return because they’re growing more valuable crops and the investors will make more money from that land. And so that’s what our business is based on, basically adding value to farmland.
So we buy conventional farmland that’s growing the low-value commodity crops and we add value in three ways. Number one, we get that land certified organic, gives us access to the 50% to 200% price premiums. Number two is we change the crop mix that’s grown on that land. So switching it from commodity corn to organic vegetables or from grass seed to Oregon pinot noir, wine grapes.
And as far as economic transformation that happens there, that’s, you know, can go from $1,000 an acre gross revenue, Oregon pinot noir. We generate $8,000 to $10,000 an acre for the wine grapes at 40% to 50% gross margins. And it takes three to five years to kind of ramp-up to that. But as long as your timeframe is longer than five years, it’s the best thing to do for the land.
Then the third way that we add value is by investing in technology and infrastructure. So we get all of our 15,000 acres satellite imaged every day or two so we can see the crop progress on the ground. We invest in drip irrigation systems. We invest in water rights or water distribution, large equipment, and also value-added production facilities. So whether it’s a organic seed cleaning facility or cooling and packing facility for blueberries, that’s the kind of stuff that we would do to add value. And you can really significantly increase the value that you get from the crops that are grown on your land. You’re capturing much more of the value chain when you do that.
Meb: So you guys have raised two funds, again, almost $200 million in assets and been at this for over a decade now. Walk me through how the funds look. I know you guys have had a great IRR in the first fund. Also, what does that look like as far as breakdown, as price appreciation on the land? How much of it is just income from actual producing and leasing, all that good stuff?
Craig: We have two funds. You can round up to $200 million and I’ll stick with the $175 million.
Meb: After all the listeners of “The Meb Faber Show” send you new checks, you’ll be over $200. So what’s your minimum, by the way? Is this institutional only is this million-plus? What’s the minimum?
Craig: It’s accredited investors, but it’s a 50K minimum.
Meb: Oh, man. Special for “The Meb Faber Show.” It’s normally a million. Craig says you can go down to 50K listeners. All right. Keep going. Tell me a little bit about the composition of how the returns look.
Craig: And one of the reasons for the minimum is we do want people to reconnect with farmland. And maybe they didn’t have any personal connection, but their parents or their grandparents definitely did. And so this is a fun asset class. You know. So, yeah, we make it as accessible as possible for people.
So the first fund, we started with about $50 million worth of farmland. We’ve generated a net return of about 69.7% net gain, and that’s after all conversion costs, after even the proforma management fee on that, and that fund is still going, still operating. We’re still adding value to it, planting more organic blueberries and other permanent crops, both operating directly and leasing out to other people. So it’s a great long-term asset class.
The second fund has a little over $90 million worth of assets in it today. We have all the farmland in there already bought, already acquired that we’re going to buy in that. The additional capital that we raise will go towards doing more of these value-added improvements. So, for example, we already have 230 acres of vineyards in that fund and we’ve already planted 130 acres, which we’ll start producing this year and next year on that. But we would plant more. We also have a lot of things going on in our property in Washington as well.
As far as returns, a lot of the returns have been from appreciation where it’s actually important to buy well. And I think we’ve done a very good job on that, but also, like last year, we distributed from fund one about $1.25 million. So we are doing distributions in fund two. We typically tell investors not to expect cash flow for the first two to three years. It just takes time to acquire the land and do these conversions. But as long as your timeframe is five years or longer, it works well.
By the way, our second fund… The first fund is a 30-year fund and investors can get out basically anytime that they want. Every six months or so, they can give us redemption… But I got tired of explaining a 30-year fund to people.
So the second fund, that’s just eight years remaining. We’ll probably give the investors an opportunity to stay in longer, right, if they want. But during those eight years, it’s going to be heavily weighted towards appreciation that we’ve created by planting vineyards, planting blueberries, growing organic vegetables, etc. And there will be cash flow, but it’ll be more kind of backend weighted. But at the end of those eight years, it’ll be strongly cash flowing. And we’re giving the investors an opportunity to exit if they want, sell a portion of the farmland and get those investors out, or they can stay in and just benefit from that cash flow long-term.
Meb: Investors get any like extra benefits, like being able to show up for a wine harvest and stomp some grapes or go pick their own blueberries? Do you guys have any sort of, pre-COVID, I guess, investor meet-ups?
Craig: So every year we have investor events. So investors come to our farmland in California, or Oregon, or Washington. We’ve done events in all three of those places. Two of the crops, we like to do the Oregon investor day during the grape harvest, so kind of at the tail end of the blueberry harvest and right in the midst of the wine grape harvest, and that’s nice.
So we grow the wine grapes and we sell those wine grapes under contract to five great wineries that turn that into wine. We’re not in the wine business, we’re in the wine grape growing business, but we do have a small portion that’s made, not for sale, but just basically for us and our investors as well. So investors do benefit from wine grapes. We had our first organic blueberry harvest in California this year. We were going to invite everyone out, but the logistics got a little complicated. But next year, we’re going to have everyone out in the May, June timeframe to our farmland in California for those organic blueberries. And people have said they’re the best tasting blueberries that they’ve ever had.
Meb: You can mark it as liquid dividends, both grapes and blueberries. Well, good. Once we’re all vaccinated, cross fingers, I’ll come join you guys. It would be a lot of fun.
Craig: You’re invited.
Meb: You have a nice slide that I thought was pretty interesting on sustainability in fund one, particularly the impact it’s had. Maybe broadly talk about, you know, some of the areas that you guys have improved. You talk about pesticides, and nitrogen, and, you know, all sorts of CO2 ideas. You want to give us an overview of sort of what that means?
Craig: Sure. So, you know, it’s important to understand that our way of looking at farmland and managing farmland is built on improving the production and profitability of the land, using a great understanding of biological sciences and good soil agronomy. Now, the benefits of that, looking at it from that way and looking at it as commercial real estate and bringing the right farmers on the land at the right time, but having that, if we get the crop rotation right and the cover cropping right and all of that, then it just naturally generates increased returns and great biological benefits, great ecosystem benefits.
It’s very easy for us to get certified organic. There’s not a lot we would change in our model to get our land certified organic. It just kind of falls out naturally of what we do. But when you actually calculate what the benefits to the ecosystems are, it’s pretty wonderful. It’s pretty incredible.
So every year, we report on how many pesticides we prevented, how much fertilizer we prevented, how much food we produced, etc., so just some core benefits. But I used to go back to D.C. a fair bit about once a quarter and the USDA basically wanted us to quantify the benefit to the ecosystem that we did by our farming methods. And they gave us a $250,000 grant so that we could bring in two great consulting firms to actually calculate what’s called the ecosystem service value. And we’ve structured this all.
But one of the groups calculated what the quantity of soil carbon we sequester, how much clean water did we regenerate, how much pollinator habitat did we add. So there were a number of different categories that they looked at. And they looked; by the way, at every field on fund one over eight years, every crop that was grown, every tractor pass. They calculated what this value was on a field-by-field basis.
And then the other group took those numbers and determined what the economic value was to the ecosystem. And at the end of the day, the report showed that not only on this $50 million worth of farmland did we generate a 69.7% net gain to our investors, but we also generated a 46% net gain to the ecosystem from that. And those are benefits that the community experiences. It’s not cash in the pocket of the investors, but it is a net benefit.
And actually, it’s even more interesting when you dig a little deeper. What they showed is that if the land had been managed conventionally, that it would’ve caused $8.5 million worth of ecosystem service harm. And the way that we were managing that land created $12.5 million worth of ecosystem service benefits on that. So it really swung it from the negative to the positive and showing that our fund and the way that we manage farmland is a true double bottom-line investment.
And we were thrilled about that. They’ve actually asked us to apply for a $2 million grant so we can expand it to additional farms, make it easier to do. And the fundamental premise here is that if you actually factored in ecosystem service value to the commodity cropping practices, that we would be able to calculate essentially tremendous economic harm being created through the current agricultural system that we have today, but the government is actually subsidizing. So we’re providing crop insurance and all kinds of subsidies, demand subsidies such as ethanol for commodity corn demand subsidy. We’re paying money as a government to harm the ecosystem that is polluting the water, polluting the air, increasing our healthcare costs through additional cancers, all these things. And so this can be a powerful tool for calculating, basically looking at it on an economic basis.
Meb: What would you suggest to policymakers who listen to the show? So Congress, Senate, everyone else, what would be some policies that would help because we all know that incentives drive everything in our world. And so we had a great podcast with Joel Greenblatt talking about a lot of policy ideas, but that was more geared towards traditional investment management and finances of sort of the income and wealth gap. But applying to think about farmland and land and health and everything, you just mentioned, that sounds so sensible, what can the government do? What sort of policies do you think would be sensible or thoughtful that would move the needle in the right direction?
Craig: And relatively inexpensive, the simplest most straightforward thing, I was advocating four years ago, but events intervened in actually implementing it. But the simplest thing we can do is actually pay farmers for doing something as simple as putting cover crops on their land for the amount of carbon that they’re sequestering according to a model.
The carbon markets and the carbon programs are actually kind of broken. So the first thing to understand is that if your land is sequestering a ton of carbon in a year, you’ve done a good job in sequestering carbon on that land. But if the price of carbon is $20, if what they’ll pay you is $20, and, you know, rents are $250 an acre, or for us, $700 an acre. It doesn’t move the needle a whole lot. It’s nice, it’s helpful, but you can’t build a business model around that carbon sequestration.
But it’s worse than that because the way that the programs are designed today is that you actually have to test, you have to come up with a whole protocol for how you’re going to sequester carbon on that plan that has to be reviewed and approved by people, then you have to sell those carbon credits and then you have to verify it each year by testing your ground each year. If you have three different soil types, you have to do three different tests for $20 an acre.
Basically, it’s tough to pencil out on doing it. In fact, we’ve been doing this for 10 years and we have not gotten a single dime of carbon payments even though we’ve sequestered a tremendous amount of carbon. Now we’re doing things to change that, so we think it’ll change soon, but, you know, it really takes a lot of scale to make that happen.
But what the government can do is actually create a check the box program for…if you’re a certified organic farmer, you’re certified by the USDA, which runs the National Organic Standards Board, which authorizes all the certifiers. So you are essentially a government-approved farmer in terms of the organic certification.
And then if you’re doing a practice that is proven scientifically to sequester carbon in the ground such as putting a cover crop down, you should just be able to check the box on a form and get paid. I actually don’t care what the number is. I don’t care if it’s $1 a ton or $10 a ton, or $20 a ton. It really doesn’t matter, but start the money flowing in a very simple way to reward the people who are doing something that is providing a benefit, and sequestering carbon in the ground has all kinds of benefits.
So that’s the simplest thing that I think people could do. It’s really easy to implement. It’s already essentially regulated by the government and it would start to make a very big difference. And I’m a fan, actually. You don’t have to be certified organic, but that would keep the program much smaller since only 1% of U.S. farmland is certified organic today.
Meb: Wow. That’s it?
Craig: You know, about 6% of the U.S. food supply, the food budget is spent on organic food, but only 1% of U.S. farmland is certified organic.
Meb: Hmm. Wow. That’s surprising to me. I would have expected it to be far higher than that.
Craig: Yeah. It’s about an $80 billion gap of farmland just to meet the domestic demand.
Meb: This is a little wonky for listeners, and I think I already know the answer, but do opportunity zones play any role in what you guys are doing? I know farmland, it’s not as obvious of a use case than traditional real estate, but is that something you guys look at at all?
Craig: So I looked at it and I looked at all the maps that came out around that time and none of them overlapped with anywhere that we would want to buy farmland or did we own farmland in there. It was a little bit of a lottery for those groups. And if you won the lottery and basically had properties in the opportunity zones, then you made a lot of money right then because, well, kind of the hype and the interest in it.
But the opportunities that I looked at, the funds that popped up and the deals I looked at, you’re basically paying 100% of the possible gain that you could have just by participating in that. So overall the program wasn’t super compelling to us at all.
Meb: I saw a comment somewhere while we’re on the topic of organic still, that organic was a hedge against a weaker dollar. What does that mean?
Craig: So the U.S. has about 25% of the world’s supply of high-quality farmland and the international community actually loves high-quality food that’s produced from here. There’s great export markets for it. And on the flip side of it, at least the numbers are somewhere between 70% and 80% of China’s farmland, for example, is polluted. And the 300 million people in China’s middle class do not trust Chinese-grown food, do not want to eat Chinese-grown food, but have the money to buy imported goods.
And so, for example, when we grow organic squash that gets turned into baby food, a lot of that actually gets shipped overseas to Asia. They want to feed their babies organic U.S-grown baby food. And if you think about it being a weak dollar, it becomes a very natural export product. So you’re able to basically sell your domestically produced goods overseas and get that foreign stronger currency creating a very nice hedge. And by the same token, the U.S. is a tremendous market for locally grown food.
So you really get kind of the best of all worlds. It really actually shined during this pandemic as well. Normally half of the U.S. food budget is spent at restaurants and half of the U.S. food budget is spent at home. During the pandemic, that shifted to about 70% at home.
And people really upped their consumption of organic food. Organic fruits and vegetables went up 20% to 40%. Frozen vegetables went up over 100%. Actually, the entire wholesale inventory got sold out very early on and all that was left was what was in the retailers’ frozen supply chain. And so that caused a big increase in the processors, so people who contract for these organic vegetables, and then freeze them, and then sell them and basically maxed out all the contracts.
On one farm, we went from 750 acres of farmland that was leased for vegetables in 2020 to 1,700 acres contracted out in 2021. And again, that’s going from $250 an acre to $700 an acre. In fact, any land that we lease out now will be at $800 an acre on that. It takes three years to get land certified organic. So we already have the land. It’s easy for us to kind of move around our crop rotation plan to respond to the markets. But if normal farmers want to do that, okay, we’ll see you in three years.
Meb: So it’s funny you say that because I have about a 20-pound bag of frozen vegetables in our deep freezer downstairs which I pulled out the other day and I asked my wife, I said, “What is this for?” “I don’t know what to make with that. I just bought it because, you know, I feel like hoarding, needed something in case.” I said, “Well, it’s just going to sit there forever.” So we maybe have some soup coming up. I don’t know.
So people listening to this, you know, there’s sort of still the big boys, and I’m trying to think who the biggest names in sort of corporate farming, you know, Nuveen, some of these groups that own like, you know, $10 billion worth. And feel free to mention any other names off the top of your head, but why wouldn’t these groups start to follow your model? And does that pose a risk at any point to what you guys are doing by, you know, pun intended, commoditizing it to where all of a sudden if some huge conglomerates coming in and buying up and saying, “We listen to ‘The MebFaber Show.’ Let’s do it. Let’s do what Craig’s doing,” is that a risk or is that a benefit? What are your thoughts?
Craig: Well, personally, I would actually love it because people should be doing more of these methods. Secondly, I used to be concerned about competition, but one that hasn’t showed up in the past 10 years and not in any kind of real, scalable, meaningful way. And also the market is just so dang big for this. It’s really like $80 billion would need to come into the sector to convert farmland, and that exceeds the $26 to $40 billion worth of farmland and institutionally owned farmland that’s there today. So it’s just completely unfeasible for the competition to come in.
There are also not a lot of farm management companies out there. I mean, we’re one of the top 15 largest farmland and managers in the U.S. with $175 million under management. If I manage department buildings or office buildings, we wouldn’t be a rounding error on the big boy list. But there are not a lot of people going back to the farm from a farm management perspective.
I mentioned Nuveen. That’s about $13 billion globally. There’s Hancock at about $2.8 billion. That’s their Bank of America as a chunk, you know, but it drops off pretty quick in terms of the size and scale. And from a business standpoint, most of the managers that are larger than us really focus on that stable cash flow. So they want to buy commodity corn land and lease it back to a farmer and generate that stable cash flow.
And our business model is based on adding value. So we’re going to buy land, we’re going to change its use. Our investors don’t expect cash flow for the first few years, but they do want to see nice gains that we generate from both asset appreciation and cash flow longer-term. So it’s harder for those guys to switch over to our model because their investors are really tied down to that near-term stable cash flow. But I really think that the numbers show that if your timeframe is greater than five years, you should be adding value to farmland. You should be switching its use over, not just keeping at this low commodity rate.
Meb: Yeah. I mean, we’ve talked about this for years in the podcast, but farmland in general is, in my opinion, one of the world’s best asset classes that’s non-correlated that no one can allocate to in traditional ways. I mean, you’ve talked about the real estate place. That’s like the most commoditized thing on the planet. You can buy 500 different REITs of all stripes and sizes. There are like, I think, one or two publicly traded farmland companies. And then even if you’re trying to allocate, you mentioned on the private side, there’s not even that many funds, you know? And so it’s a massive opportunity that I just don’t see why this wouldn’t persist for many years to come.
Craig: It’s also a very mispriced asset class. So the two buyers that you have, the two big pools of buyers that you have for farmland are the farmer next door who basically wants to expand their corn or wheat operation but keep it in that commodity range, or the big boys that want to buy either or already producing permanent crops and generate that nice steady stream of cash flow, or there are some subset of that, a small subset that want to do specific permanent crops. So they’re going out, they’re planting just vineyards, or just blueberries, or just hazelnuts, things like that.
And that’s great from an expertise standpoint, but the opportunities that that creates for us is we get to look at the market and say like, “The land that you see behind me, 6,000 acres in Walla Walla, it’s growing… When we bought it, it was growing all wheat. It had had some other potatoes and corn in there. Now it’s growing a little bit greater variety of crops, but it’s ideally suited to grow to…” I’ll talk about water in a second, “but it’s ideally suited to grow wine grapes, apples, cherries, organic blueberries, and organic vegetables.” That’s its highest and best use, but there’s not one farmer next door or one institutional investor who has expertise in all that or has the ability to actually, in essence, develop the farmland to what its full potential is.
But it’s right within our wheelhouse because we can either do it ourselves or bring in the right partners to do each individual one of those, but growing those crops in their ideal location. And we can also talk about water whenever you want to do that.
Meb: Yeah, let’s hear it. I’m curious.
Craig: The really interesting thing is that when we’re buying farmland, we talk about sunshine, dirt, and water. So sunshine is growing climate, dirt is buying high-quality soils, and water is both physical access to water and legal ownership of that water. And the interesting thing about water rights, in particular, is that they are a property right just like buying a piece of land is, and the water often transfers with that land.
So when you’re buying farmland, you’re typically also buying a water right along with it. But people misprice the value of that water. And so, for example, land that we bought in California, we bought the land for $7,000 an acre and we basically felt like we were buying the dirt and getting the water for free. At five and a half years later, that property had doubled in value primarily because people were starting to see the value of that water.
Valuing water is really super interesting. We use a number of different methods, but one of them is basically looking at the land. Okay. What’s the value of the crop that can grow as dry land? What’s the value of the crop that you can grow if you add water to it? And the property behind us that we bought, on dry land wheat ground, you get one wheat crop every two years. The value of that ground is $900 an acre. If you add water to it and that land is capable of growing just normal commodity vegetables, commodity corn, that land is worth $12,000 an acre. And if that land is ideally suited to grow wine grapes, or apples, or organic blueberries, that land is worth $20,000 to $25,000 an acre.
Now, what’s the value of the water? You take the water. Wetlands are worth 900 bucks an acre. It’s in some ways a moving target, but it is an essential component in our view to buying farmland. It’s an essential component for investing in this asset class. To me, it’s the best way of basically investing in water as an asset class and you can drive returns in so many ways. And it’s often mispriced.
Meb: I love the perspective, definitely a couple ideas that I’ve never thought about today with the dollar hedge, with the water kicker. What’s the next 10 years look like for you guys? I imagine listeners to this; we have a lot of family offices and institutions that are looking around the world and saying, “What in the world am I doing in 1% yielding U.S. bonds? And I’m rounding up or certainly in the rest of the world, zero and negative.”
Farmland should look mighty attractive, but what’s the next 10 years look like for you guys? Is it you want to expand acres under management? Do you not want to expand? Do you want to, you know, move into different geographies? What’s the plan?
Craig: In general, we’ve spent the last 10 years really building the foundation and growing the business. We’re operating in three geographies and, you know, we can really expand from $175 million worth of farmland to a billion dollars worth of farmland just in our existing footprint where we are today.
And we can also add new geographies, again, a minimum of $50 million into new geographies. We do like the U.S. as a strong base of operations for not only geopolitical perspectives, but also we have amazing markets, amazing farmers, amazing distribution infrastructure, and a great property rights, and very favorable climate change trends too in certain geographies.
Meb: Yeah. Your Oregon wine country, that might be the new Napa here in about 10, 20 years, if it’s not already.
Craig: The Walla Walla ABA that we’re in, they call it the Napa of the North, grows incredible cab sauv actually and other varietals.
Meb: One of the things that… I spent a lot of time investing in private companies and I consistently see pitches for vertical farms. Is that something that is a risk, an opportunity? Is it overhyped? Is it specialized? What’s the kind of overview of what’s going on there?
Craig: From an economics standpoint, it’s not farmland. From a business model standpoint, yes. You know, vertical farms can be really quite good at growing leafy greens and serving local markets where the transportation costs from the salad belt in the coastal California, basically shipping stuff across to the East Coast or to other geographies, you know, it can make a lot of sense to grow those things locally.
But the economics are vastly different. I buy irrigated farmland in beautiful growing environments for $10,000 an acre. Okay? And there’s no depreciation on that. That’s an asset that’s just going to continue to produce and continue to grow in value.
If I’m setting up a vertical farm, some of the CEOs are my friends, and I know what they’re doing. I love the technology behind it as well. They’re spending between $1.25 million and $2.5 million per acre for their facilities to build out their facilities. And then they have very high operating costs. So they have pumping costs for the water. We know about pumping costs. We spend about $500,000 a year on electricity to run our pumps for our water, but they have also tremendous costs associated with pumping the water, running the lights, controlling the environments, and they have to deal with pest issues and micro issues.
We have healthy soil and ecosystems that we can create. They have to do it on a factory basis, either creating essentially almost sterile facilities or by using very specialized growing lights that effectively pests don’t live in. They actually can’t see in that environment.
So there are some good solutions for it. I think it’s a great niche solution, but I don’t put it in the category of farmland. It’s a way of growing food, but it doesn’t have any of the benefits to me of buying land, generating appreciation and cash flow from that very low-risk asset.
Meb: You guys ever pop up any sort of secondary yield opportunities, I’m thinking in my head, of either like solar or wind, any other things that increase the yield, or is it pure farm focus?
Craig: So we have done solar. We like solar a lot. But usually what we’re doing is we’re offsetting our electrical use with solar. Actually, up in Washington, our electricity costs are incredibly low because it’s basically all hydro from there. So solar doesn’t provide us with an offset even though we have a great environment for solar.
In California, there’s a large opportunity to just take essentially a couple of acres out of crop production and replace our electrical pumping costs with that. So basically replace an OPEX expense with a CAPEX one. And that’s a good trade-off. So we’re looking at that right now.
Meb: This has been a tour de force of farming. This has been a lot of fun. Anything we didn’t cover today? We’ve bounced around on so many great topics. Anything I’m glossing over that you think is super important?
Craig: There is a strong drive for people to invest in with their principles in mind on kind of the ESG drive. You see a lot of assets going into that. And I want investors to have high standards on that. I think it is fundamentally important. Where we put our capital really does affect how the world’s look like in 10, 20, 30 years from now.
And if you’re saving for retirement or creating an endowment for your kids, then don’t you want to have a great world to retire into and live in after that? I’m saying this, but our business is really fundamentally based on farmland being a good investment, a great asset class and us being good managers on that side. If I want people to know something, they should know that that other stuff is also important to us. And you don’t have to have a trade-off. You can actually have a great investment and make the world a better place at the same time.
Meb: Yeah. I mean, I make the argument that farmland could easily be on par with real estate as an allocation in either individual or institution’s portfolio. I mean, and I’m talking like 25%. I guarantee you, if I did a poll on Twitter, the people that invest in farmland, I’m guessing its sub 5% of people do. Maybe even less than that. We’ll have to do it. I’ll post it to Twitter, see what the response is.
What’s been your most memorable investment of your career, good, bad, anything in between? Do you ever buy some farmland with a bunch of dead bodies on it? Any memorable stock investments? What comes to mind?
Craig: The best financial return I got was actually in college. And so I’m 51 now. So if you roll back in time to ’89, I think it was, ’89 or so, the price that economy…we had a recession and the price of oil just crashed to about a dollar a barrel.
And the drillers at that time, like Apache, they thought they were going bankrupt. They were just selling for pennies on the dollar for what they should have been. And that was an example of a huge mismatch. Like the world basically valued a barrel of oil production today at a certain value and gave almost no value to the long-term store of value that oil under the ground.
And so I was able to buy, for the amount of money I had at that time, a bunch of stock on the drillers and that just did amazingly well. But basically, you know, for my whole life, I’ve really looked at what’s the true intrinsic value of something irrespective of the individual market dynamics. And, you know, there are times that you can buy things that other people are just mispricing and it can pay off over the long haul.
Meb: Sounds very Warren Buffett of you. I smile as you talk about the energy stocks, because, you know, they are currently at about 2% of the S&P 500 as a sector and peaked at one point darn near 30. And that is just a massive drubbing in the oil space although at one point this year you did have oil trade at negative on the futures markets, which 2020 never ceases to surprise. Buffett’s got…his son’s a big farmer, right? They do a whole lot in farming and also abroad as well.
Craig: That’s right. His son wants to farm, not manage the company.
Meb: Great. Smart guy. Craig, this has been a blast. Where do people find out more information? Where do they go to find out what you guys are doing? What’s the best spot?
Craig: We have a great website at farmlandlp.com and like also additional information at investor.farmlandlp.com.
Meb: Awesome. Craig, thanks so much for joining us today.
Craig: My pleasure. Great talking with you. I appreciate all the content that you’ve been putting out for the years. It’s just enjoyable listening to you and talking to all of these great people and sharing the wisdom. Thanks.
Meb: Look forward to stomping some grapes with you next year.
Craig: Looking forward to having you there.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us an email at email@example.com. We love to read the reviews. Please review us on iTunes and subscribe the show anywhere good podcasts are found. My current favorite is Breaker. Thanks for listening, friends, and good investing.