Episode #319: Brandon Zick, Ceres Partners, “The Market Is $3 Trillion And Institutional Investors Own About 3% Of That”
Guest: Brandon Zick joined Ceres Partners in 2010. He is responsible for managing all investments at Ceres, including farmland and private equity strategies. In this role he supervises valuation analysis, acquisition due diligence, tenant management and acquisition negotiations. Prior to joining Ceres, Mr. Zick served as Vice President of Strategic Acquisitions at Morgan Stanley Investment Management where he performed due diligence, valuation analysis, deal negotiation and execution of strategic business transactions. Previously, he worked as a senior associate of investor relations at Morgan Stanley, and began his career as a finance associate at Lehman Brothers.
Date Recorded: 5/19/2021 | Run-Time: 59:30
Summary: In today’s episode, we’re talking all about farmland! Brandon begins with an update on the asset class, including the impact of both rising commodity prices and COVID. We spend some time on his firms’ investment process and how they evaluate potential deals. Then we walk through lots of factors affecting the space – lack of water, solar and other non-farm value options, and the tax uncertainty with a new administration.
As we wind down, we talk about Brandon’s private investing in ag-related businesses and what he’s seeing in that area.
Sponsor: Masterworks– Use Promo Code “MEB” to skip their 10,000 person wait list.
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Links from the Episode:
- 0:39 – Sponsor: Masterworks– Use Promo Code “MEB” to skip their 15,000 person wait list
- 1:57 – Intro
- 2:46 – Welcome back to our guest, Brandon Zick
- 3:38 – Episode #161: Brandon Zick, Ceres Partners, “In Row Crops You’re Generating A Lot Of Current Income”
- 5:52 – Recent changes in the farmland market
- 7:26 – COVID’s impact on the farmland industry
- 10:14 – Why individual investors are unlikely to move the market
- 15:46 – Generating alpha in this asset class
- 17:31 – Why a private equity structure isn’t a good fit
- 18:44 – How Ceres manages liquidity
- 20:51 – Ceres’ top-down approach for finding areas to invest in
- 22:38 – Identifying promising farmers and farms
- 24:51 – Challenges around water
- 29:06 – Non-farm value options
- 31:35 – Value-added expertise
- 32:26 – The Leading Harvest Farmland Management Standard
- 35:27 – Inflation protection
- 37:44 – Expanding Ceres’ footprint
- 41:24– Ceres’ lock-up period
- 43:55– Defining specialty crops
- 44:57– Adjusting the crop mix
- 48:28 – The importance of global trade
- 51:55 – Selling and redeploying capital
- 53:39 – Ceres’ private equity vehicle
- 56:47 – Increasing productivity and efficiency
- 58:44 – CeresPartners.com
Transcript of Episode 319:
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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Meb: What’s up my friends? We have another awesome show for you today. Our returning guest is the chief investment officer of Cirrus Partners, a specialist investment manager focused exclusively on food and agriculture. And today’s show we’re heading back down to the farm. Our guest begins with an update on this asset class, including the impact of both rapidly rising commodity prices and COVID. We spent some time on his firm’s investment process, how they evaluate potential farms and deals. We walk through lots of factors affecting the space, lack of water, solar yields, and the tax uncertainty that comes with the new administration. As we start to wind down, we talk about our guest’s private investing in ag-related startups and businesses and what he’s seeing in that area. Please enjoy this episode with Cirrus Partners’ Brandon Zick. Brandon, welcome back to the show.
Brandon: Yeah. Thanks for having me.
Meb: Where do we find you today?
Brandon: Today, I’m at our office here in South Bend, Indiana, enjoying some nice spring Midwestern weather.
Meb: You just got off the plane from Georgia. Is that right? You’re traveling the world again, open it up to check out some farms, what were you doing?
Brandon: Yeah, not a lot of client trips, but certainly still looking at farms. And we own properties in Georgia, so was meeting with tenants and looking at some improvement projects. In this type of asset class, you have to be on the farms regularly, so yeah, I was able to get down there and get back before it gets too hot and humid in the southeast.
Meb: Summer in the south can be a little bit unbearable. I’m at West Coast now and I go back and just wilt in the humidity, but I’ll be there this summer. I’ll be in Charleston and North Carolina, so listeners, drop me a line. Man, it’s been almost two years. We had you on the podcast on episode 161. Listeners, if you want to check it out back in 2019. And you guys just passed a big milestone. Congratulations, $1 billion.
Brandon: Thank you very much. We’ve been investing for just over 13 years, and yeah, crossing over $1 billion in assets at the end of the first quarter was a nice milestone for us.
Meb: Not to depress you, but I joked when we crossed $1 billion, I said, you know, I’m going to get a hat like the Dow 30,000 hat, or every time they pass a milestone on CNBC and I said, “However, we’re going to celebrate it every time we go up and below and back up again” because the public markets you get to see it every day. I’m like, “I’m sure we’re going to cross up and below 10 times for this metric,” so hopefully, you guys just keep going up into the right. That’s awesome, man. Congrats. You guys got started. Remind me, was this pre or post-financial crisis?
Brandon: So pre-financial crisis. Our founder, Perry Vieth, in 2005 started investing in farmland on his own, and then as friends and family and colleagues had more interest in the asset class, he launched Cirrus Farms, our fund, in December of 2007. And then I was the first employee that joined at the end of 2010 back when we had just under $30 million in assets. So we’ve had a tremendous amount of growth in the last I’ll call it 11 years.
Meb: That’s awesome. And listeners, you can check out the first episode. You want to hear a little more about Brandon’s background. You had a little bit of farm background, a little bit of traditional Wall Street before joining the crew. When did you join? You said 2013?
Brandon: No, at the end of 2010. Like you said, I had grown up on a family dairy farm in Pennsylvania and then spent nine years at Lehman Brothers and Morgan Stanley. So it’s a good mix of kind of farm and finance background and very similar just about everyone on our portfolio management team.
Meb: Walk me through what’s been going on last couple of years. I feel like last time we had you on, we were kind of in the midst of a period of farmland and kind of cruising sideways for a few years. The good news with farmland, often cruising sideways means you still have positive returns, usually, in any given year versus when you have the fallow period in stocks, you’re like 50% drawdowns, you know, bear market, but things are perking up, corn, wheat prices been getting a little jiggy lately. Walk us through what’s been going on last couple of years, sort of macro scene.
Brandon: Lots changed since the last time we spoke. I think last time we met I was kind of describing a perfect storm of events that were probably not good for U.S. agriculture and farmland would be included in that, things like a very strong U.S. dollar, a sustained period of lower commodity prices, which usually would come from not necessarily overproduction but just strong production everywhere in the world for a number of years, and then that black swan event that was a trade war with China. Ag values during those years were pretty flat to slightly down. Farmland returns, when you account for rent, were still positive during that period and really shows why it’s the diversifier in a portfolio. Today, we have grain prices, so corn and soybeans that are 40% to 50%, futures market above where they were back then, even higher above where they were a year ago and really a lot of tailwinds in the marketplace. And a lot of that came from just some supply disruption, and this is a commodity market where you, globally on a stocks basis, you only have six to eight weeks of supply, so if there’s any type of disruption somewhere, that can really upset global trade and prices pretty quickly.
Meb: How the whole COVID pandemic, which I guess is still certainly having its effect, particularly in the emerging markets, how has that impacted what’s been going on over the past year or two? Has it been a major impact on production or is it more on just kind of the supply chain of post-production? Is it crop dependent? What’s the takeaway?
Brandon: Yeah, that’s a good question, and it’s very, I would say crop-specific, but our focus is on row crops, primarily grains because our footprint is more concentrated in the Midwest and the lake states. And we had a lot of questions from investors last spring. What was going on with farmland, were acres not going to be planted? Could farmers access seed and fertilizer and equipment? And for us, it was really a non-event from the production side. On the demand side, if you were selling into food service, that was probably more difficult, but most farmers aren’t selling direct into that. And a lot of crops, there’s a lot of fungibility. They can plant something else if they want to. So COVID was really a non-event. When it came to things like inputs, so equipment and things like that were readily available. Labor in the row crop space, a lot of it is automated or mechanized, so it wasn’t a big issue, but if you were in permanent crop or even some specialty row crop regions where there’s a lot of labor involved in harvest or pruning, I think COVID did have a great impact because of the need to shut down lack of immigration and guest workers that were coming in. So I think it was more impacted there than what we saw. Right now, there has been a little bit of a shift. Some of the things that during COVID were easy to obtain like equipment, now it’s just like trying to buy a new car. The technology associated with the equipment is scarce. It makes it more difficult for farmers to access certain types of technology now and equipment just because of the shortage.
Meb: People talk about farmland. It’s kind of like talking about hedge funds. You can make broad generalizations, but it’s specific not just to geography but crop and time of year and geography, not just in the U.S. but global factors too. You know what’s going on in Ukraine or Russia or South America, you know, on and on has these impacts and it’s easy to make generalizations, but as you mentioned, you can adjust, you can start growing something else. You can choose not to grow, and we’ll get into all those sort of ideas. One of the bigger, I feel like reveals, I thought it was a reveal, but then I went back and listened to our old podcast and we were talking about it on the last podcast, so you certainly were an insider on the know on this topic, but recently had come out that Bill Gates was the biggest farmland owner in the U.S. We actually talked about him in the last podcast. Now caveat, asterisks, he may not be the biggest farmland owner post-divorce, we’ll see who keeps all the farmland. Maybe it’ll be Melinda, but someone is going to own it. Have you seen an actual Gates impact or tailwind, whether it’s the Gates crew specifically or other institutions saying, “Hey, he sees something. We need to really think about investing in this space.” What’s been the impact on that?
Brandon: It’s kind of interesting because in other asset classes when you see big investors moving in in size attempts to move the market, but in farmland, if you kind of take a step back and say, “Well, who owns farmland in the U.S.?” It’s not the big agricultural multinationals, it’s not investors, investors including groups like the Gates Foundation and the Mormon Church, and then all of the funds both public and private that have been buying. The best estimate we have for what institutional owners own is about 3%, and we think that’s at the high-end. Your owner-operators, the family farms like that I grew up on own about 40%, and the rest of this actively farmed land is owned by usually non-farming heirs, so they could be an absentee landlord, they could be an active landlord, but they’re not actively farming. Two or three generations before their family probably was, but they’ve gone to college, got jobs, and didn’t come back to the farm, but they still own it. So there’s a robust rental market. So having a big institutional investor come in and buy a billion dollars of land doesn’t really move the market.
And one thing that’s really unique is that a lot of these larger investors, they only want to invest in institutional size properties, and there are only so many of them in the U.S. In some cases, they’re already institutionally owned. So we don’t participate in this market, but there’s a lot of trading that just goes on between institutions to the extent that some of the more private equity style funds have their terminus or their end date and they need to sell properties. It’s most likely that they’re going to get bought by other investment funds that come in and whether or not they make gains, well, that’s to be determined, I guess. But our strategy has always been a little bit different but I don’t think one big investor can really move the market because the market is so large. It’s a $3 trillion market and investors are just a very small piece of it. What’s more meaningful, overall, land prices will be…moves in commodity prices, tax policy, things like that that actually move the needle for all landowners, not just investors.
Meb: A lot of what you mentioned. I mean, I certainly fit in the category that you mentioned where generational farm operators then the younger generation for the most part often is not farming anymore. They may still own some or manage it, but typically, you’ve seen, and this is personal extrapolation, but it feels obviously like a trend that it’s a lot more being managed by institutional farmers, not necessarily the younger generation. Anyway, I ended up selling a little bit of mine. I talked about it on the podcast and got to start looking to deploy. So give me the pitch for you guys. Should we invest in Cirrus? Make investment? First of all, what are you all’s minimums? Do I got to pluck down $10 million now that you guys are a billion-dollar shop? How does this work?
Brandon: Well, I won’t stop you from investing $10 million but we are open to accredited investors, $250,000 is the minimum investment. There are fee breaks along the way for different size investors. But when someone invests in Cirrus, we’re an evergreen structure. We take new investors monthly. So when someone invests, they’re investing in the existing portfolio. So we’ve put together over these last 13 years about 150,000 acres across 10 states. We focus on high-quality land, primarily, like I said, in the Corn Belt and in the lake states, because we have a big focus on water and sustainability and not water rights per se but more actually being where there’s a water resource, and we think there’s some long-term value to that. But when someone comes in, they’re invested immediately in existing portfolio, and then we use their capital to continue to buy farms in our pipeline.
Our strategy is a lot different than other institutional investors. If you look at what’s out there today, when someone wants to invest in farmland, it’s really more of a barbell structure. You have the really large institutions that are going to do fundraisers of $500 million or $1 billion and then they’re going to go out and look for some of those farms I talked about, the big institutional size farms that you can deploy anywhere from $30 million to $50 million or $100 million per transaction. You tend to find most of those farms in regions like the Mississippi Delta or the Southeast where the history of ownership would be plantations as opposed to family farms, or maybe out west where the history of ownership were ranches, and in the areas like permanent crops, if you decided to take I5 all the way up north, you’re going to go buy a lot of permanent crops. Many of those are institutionally owned, and those are just the types of crops, whether it’s pistachios, almonds, table grapes, eventually wine grapes as you get farther north that you can spend anywhere from $50,000 to $200,000 an acre for a fully improved farm. So you can deploy capital really quickly. And then the other end of the barbell would be buying just an individual farm. And you can do that on your own or now there are other platforms that you can invest kind of a partial interest in one specific farm.
Our strategy has always been built around aggregating properties over time, so actually doing an institutional roll-up starting with maybe one or two smaller farms or one medium-sized farm, but then aggregating more properties around there over time. You can usually buy those bolt-on acquisitions at a discount, but some of the parts is worth more than each individual piece. And over time with this open-ended strategy or evergreen strategy, you can continue to do that. And kind of our acquisition strategy year after year is really built on we’d like to buy large farms and make large investments, but the bolt-on acquisitions are typically the easiest to do. They’re the highest returning, and when you have an existing portfolio, it’s very scalable. So we think that doing that institutional roll-up is how you’ll generate alpha in this asset class. Because as a reminder, there’s no cheap beta. There’s no index that someone can invest in and pay very little fees and actually have exposure to the asset class. You actually have to buy a farm or pick a manager, and you might end up with some very expensive beta. We think that this institutional roll-up strategy is where you generate alpha out of those other two regions.
Meb: That’s a really extremely important point where, you know, so much of investing today has been turned into a “commodity,” meaning, you know, you can get exposure to broad U.S. stocks and bonds for essentially zero-fee or pretty close to it. But somebody wants to allocate, and I get these emails every day, $100,000, $1 million, $10 million, whatever to farmland. You can’t just go buy a farmland ETF for a lot of reasons. And so, how do you balance this challenge of somewhat illiquidity of this asset class and inflows, outflows into the fund but also with a price-conscious sensitivity. I know you guys show up to a lot of auctions, place a lot of bids, don’t win all of them. How do you balance that sort of supply-demand challenge on your own as a fund manager of selecting good properties and kind of playing the “Moneyball” game where only investing in them if it fit your criteria but having money to put to work?
Brandon: I think back when Perry started our strategy and the fund, he was advised by a lot of people just do a private equity structure, do a raise and then invest it during a 3 to 4 or 5-year investment window and then at the end of 10 or 12 years, sell everything and distribute. And that really doesn’t fit this asset class because I mentioned this the last time we spoke in farmland as opposed to other real estate the tenant actually cares who the landlord is. In commercial real estate, you probably don’t care for your office who you write the rent check to if it was KKR or Brookfield or someone else. They’re going to take your rent every month or they might even try to raise it. In farmland, the farmer does care who the landlord is because most buyers of that land will be other active farmers. So even if you’ve been farming a property for 20 or 30 years, if another farmer buys that land, then you’re off the land. They’re going to farm it themselves.
So it actually does matter. And using this kind of bolt-on acquisition strategy gives us a lot of flexibility that we don’t have to, over the course of two to three years, deploy all of our capital. We don’t have that vintage risk. And we’ve always been more capital constrained than opportunity constrained because of the way we’ve built the strategy. So we try to manage liquidity really simply. We want people that are making a strategic asset allocation not just opportunistic. We have a great pipeline of private deals we look at. We do go to public auctions. They’re very prevalent in the Midwest and they’re not a sign of distress. That’s the only open outcry system that exists. Our success rate at those auctions is very low.
Traditionally, it’s been maybe one out of every 13 or 14 farms. With strong commodity prices today, that would more likely be one out of every 20 or 25 auctions that we go to we’d be successful in buying something. And typically, that’s just the valuation exercise. Doing this roll-up strategy allows you to have more flexibility in the portfolio. It’s not just for $1 billion, $10 million, $100 million farms or $20 million, $50 million farms. We do have limited liquidity and a limited buyer pool for who could purchase that. We have farms that range in value from $0.5 million to $40 million properties. So if we ever needed to generate liquidity, there’s a number of different markets you could go to, kind of the neighboring farmer is the logical buyer for a lot of properties up to a certain size, and then many of these other farms that we’ve aggregated over time and now have a $20 million or $30 million asset in one piece. That’d be very valuable not just to other institutional investors for funds but also family offices pension funds, other groups that look to invest.
So that’s been our strategy. I think it really fits the asset class well, but everything with us starts with the farmer. So if we don’t have identified farmers that we want to work with, we’re not interested in land in an area. So that always helps us not only from a valuation standpoint, but working really closely with these farmers and being on the ground with them really helps us in the underwriting process and it allows us to much more easily say no if there’s something we just don’t want for one reason or another.
Meb: What tends to be the red flags on the farmer or farm side that you say, “Oh, just this is a clear no. This is a clear cross-out. This is too risky, or this is something…or just makes us nervous?”
Brandon: To use more, I guess, Wall Street jargon, you can do it top-down and bottom-up. And we think top-down. We’re really concerned with what are kind of the bigger macro issues that we don’t like. So water scarcity or depletion is something that we’re really concerned about. I’ve heard plenty of people say, “Yeah, we’re concerned about that, but we have good water here in Nebraska or California or something.” And I don’t know. I scratch my head a little bit. We do have good water in places around the Great Lakes because we have the largest freshwater aquifer in the world and we have something called rain while crops are growing, which is really valuable and really important. That’s actually the cheapest form of irrigation you can have. So if you look at our footprint, it’s 10 states, really almost everything east of the Mississippi focused around the Great Lakes and then a few other farms in areas where there are either strong aquifers or a lot of surface water and the Mississippi Delta to the southeast.
So that’s kind of our start. Top-down, we want to be in a place that has the highest quality soils, the best water resources, and because we do use a rental model with farmers, it has to be a really competitive rental environment. So when you move into other regions, some of them in the delta in the Southeast, you have a higher percentage of institutional investment, which I think actually drives lower returns, and then you also have larger farmers, so they’re less motivated to pick up that incremental acre or incremental farm, whereas, in the Midwest, you have a much higher percentage of farmers, total, more family farms that if they have a son or daughter that wants to come back and they need to grow. So that actually creates a very robust and vibrant rental market, which is good for a landlord. We start with that and identify areas where we’d like to be, but then it really is bottom-up. We need to identify a tenant we want to work with.
Today, we have 126 farmers we work with and they farm our 150,000 acres. They own over 250,000 acres themselves but they rent over 650,000 acres from other people, and most of them are folks like your family that used to farm the land and now they rent it out to a neighboring farmer. That’s really important because that creates a long-term proprietary deal pipeline for us. When we’re underwriting a specific farm, it all starts with does our tenant want to actually farm it? And if they already have been farming it, that’s great. We can get all the yield and fertility information and water information we need from them. If it’s a new farm to them and they’re not interested in farming it, then why would we want to own it? There’s a reason, and it could be things like the soil type dictates that it would need irrigation but irrigation isn’t available, or it’s something that needs drainage but you don’t have the ability to drain it.
If you can do Capex to improve a farm, which we really like to do that value add, we model all that pre-purchase. And typically, if we get to the point that we’re presenting something to our investment committee, if we don’t buy it, it’s simply because the valuation got away from us. And we target a higher return than most. We’re looking for a 5% cash on cash return on the land itself, and then a 10% cash on cash return on any value add projects we do. And that’s a high hurdle when the market, which again, isn’t investible, but the index would tell you that 3% is what the average going rate is for institutional investors. So if we’re targeting 200 basis points above that at a minimum, then that means we have our work cut out for us. And we’re lucky that a lot of other institutions play in our sandbox when it comes to doing this institutional roll-up.
Meb: You mentioned the importance of water. You guys have a white paper we can link to on the website talking about just the challenges of water. I remember my old man talking about this when I was a kid in Nebraska about the aquifer there. How is that space evolving? Is it a real risk as far as certain areas of the country? Is it something that technology can solve? Is it become a problem for entire areas or is it geography specific?
Brandon: So globally, agriculture uses a lot of water. Clean, fresh water is becoming more and more scarce. So I think it’s a global problem. Technology can solve some of it. Desalinization is a big thing and will become very important in certain areas that already is and other areas where people are investing in it already. We believe that water is an issue. There are a number of funds that have been raised to invest in water rights, and I think there’s definitely some money to be made there because whether it’s users who have a higher and better use than row crop agriculture, whether it’s almonds and pistachios and grapes, or eventually industrial uses, and then the highest and best use would be municipal use. I think there will be the ability to do water transfers in certain areas like California. So that is part of some people’s strategy.
Our view is that we’re an ag-focused strategy. Everything starts with does it cash flow as a farm under those metrics I had talked about? And we believe that being in areas of plentiful water will have value add longer-term and a lot of embedded value. Some of that will come from it becomes uneconomic to grow a lot of the row crops specifically that are grown in California and Arizona, New Mexico, and Texas now. It’s going to become uneconomic because of either water scarcity or the costs associated with that water, or the opportunity cost of not selling it to a higher and better user. We’re already seeing potato growers from out west looking for land in the Midwest or acres to farm because water is cheaper and now freight is also really expensive, so that geography matters there too because everything moves west to east.
So I think water longer term, it’s going to be really important. There will be a number of ways it could manifest itself in terms of value, and our view is that we would rather be in a region that has the resource than just the paper water right. If you want to buy paper water rights, you can buy Australian water rights right now in your brokerage account. So we don’t think you have to buy land in California or elsewhere to try to perfect the right. We’d rather be in an area…Again, if you’re an ag-focused investor, be in an area that has water because nothing is growing without it. Technology is not going to solve that problem anytime soon.
Meb: You mentioned and alluded to a couple alternative sources of income or yield, however you want to describe it. The main blocking and tackling is growing the crop but there’s lots of other ways to monetize land. The most obvious probably being solar or mineral oil. Talk to us a little bit about do you guys do any of that? You have a ton of land. Does any of that get represented by other CRP programs? And of those, which ones are the main ones?
Brandon: As I mentioned, when we underwrite farms, everything comes from the farm brand and capitalizing that to come up with the value of the land. So when we buy a farm, it has to cash flow in agriculture, but we’re really active managers, so we don’t outsource. Our portfolio management team kind of does everything cradle to grave on every property. We don’t outsource any of the ongoing management, and that helps us to find if there’s a higher invest use for every property. For me, it was really illuminating growing up on a family farm in Northeastern Pennsylvania. No one knew what Marcellus Shale was back then, but we certainly do now, and it’s been a game-changer for land that would be considered kind of marginal from an ag good dairyland, which means marginal from an ag standpoint but very, very valuable from a mineral rights standpoint.
And within Cirrus, we own land in 10 states. Historically, that non-farm income we would generate would come from areas like harvesting timber in a select way on non-tillable land, kind of diminimous oil and gas royalties, but we did have the rights. We’ve had wind turbines. We have 13 wind turbines and billboards and cell phone towers that were just kind of free options when we bought properties. But solar has actually become very meaningful over the last three to four years. And if you had asked me seven or eight years ago, solar in our portfolio in that geography I mentioned where we get a lot of rain, we have snowpack. It doesn’t seem to make a lot of sense, but what’s more important for those projects is not just the amount of days of sunlight but also how close they are to end-users and to the distribution and transmission systems.
So we actually have about 20% of our portfolio today under solar options, the first of which was exercised during the first quarter. We expect at least one or two more could be exercised in 2021. And typically, these options are three to five years in length. We started this three and a half years ago, so some of them are coming up to their sunset period, no pun intended. We expect this to be really meaningful because the rent on a farm that goes to solar will be 3X to 4X, what it would be as just a farm rent. And it’s something that we think that’s the beginning of some of these non-farm value options.
Other big ones today that people are talking a lot about are when it comes to an infrastructure bill, anything close to sand and gravel and limestone resources, not a lot of conversations with large companies that want to buy farms for those resources. Wetlands mitigation is another big one that we’ve sold a farm for wetlands mitigation in the past and to the extent that the Biden administration is more stringent than the Trump administration in terms of identifying wetlands. We actually think that doing more mitigation on some of these high population areas where we own farms will be very valuable.
And other things as simple as commercial development, housing development. We own a lot of land, Illinois-Indiana line. And there are a lot of people leaving Illinois because of taxes and politics but still want to work in the Chicago region, so we have a few farms right there, large properties that are under residential development options and between distribution centres and data centres. We’re kind of open to all these non-farm options because when we buy the property, we’re not banking on one of those happening. We’re happy to own it as a farm for as long as we want to own it, 10, 20, 30 years, but if one of these other options comes along, we’re more than willing to sell the farm and then reinvest at a higher cap rate somewhere else in another property.
Meb: It seems like a lot of that sort of ancillary income or ideas is kind of gravy compared to the main business. How much work is done post-purchase? I know you guys talk about in your PowerPoint sort of value-added expertise, and this may fit under this umbrella question or may not. So this may be two separate questions, but you guys also talk a fair amount about sustainability and getting certified as…I think that’s the right word, maybe it’s regenerative, but I think it’s sustainable. Are those part of the same discussion of those two totally different topics? And if so, I’d love to hear you talk about both.
Brandon: They are part of the same conversation. When we buy a farm, the goal when you’re doing value add is to, in most cases, just increase yield or decrease risk or both. So our typical value add would be adding irrigation to add water to soils that need it when it’s not raining, drainage tile, which again helps remove water from the farm when you have heavier soils that retain a lot of water so that you can plant and harvest and take care of that crop in a more timely manner. We also like to add grain storage when we have large areas of land and we have a tenant that would like to have more efficiency at harvest but then also be able to market their grain throughout the growing season rather than be a price-taker from a buyer at harvest time. And that helps add value overall.
Sustainability is kind of a big broad umbrella. We’re part of a group of institutional farmland investors called Leading Harvest. They set up a Leading Harvest initiative to really go through and standardize what would be considered sustainable farmland management practices. A lot of these are really low-hanging fruit, things that most of our farmers were already doing. It’s more of just a documentation process, something as simple as converting an irrigation system that maybe 20 years ago they were all running on diesel generators and motors and now they run on electric, which is more efficient, it’s cleaner, and from the farmer’s standpoint, it’s actually much better because it’s much more easily controlled remotely from their iPhone or their iPad. So rather than having someone drive around all morning to start up 100 irrigation pivots, they can click a few buttons on their phone and do it remotely. So a lot of the sustainability aspects of what we’re doing and what other great owners of farmland are doing and great farmers have already been doing it previously. It’s really part and parcel. We’re just adding value on the farms.
Meb: You guys have certainly done this over the years, and you can correct me, but it looks like almost 10% per year return as far as income and appreciation, and that’s net of fees, which is pretty awesome. But man, even going back financial crisis, it looks like no down years, and I think almost no asset class on the planet or adviser could probably make those claims. As far as the end investor, are most of the conversations you’re having…? Is it individuals? Is it family offices? Is it endowments? Is it a combination? How has the conversation changed over the years? Because I imagine there was that sort of not bad but just not unbelievable period of maybe four or five years where farmland investing had just crushed it and then just did its thing. Is 2020, really 2021 seeing a renewed interest? And then tell me about which of those demographics are the ones that are ringing bells off his phone.
Brandon: When we started, it was much more of a friends and family high net worth strategy because it was a much smaller vehicle at the time. Now with over $1 billion and we’ve had some great institutional investors, pension funds, endowments foundations, very large family offices investing with us in some cases for almost 10 years. So it’s been great for them. They’ve been great partners of ours, and now we’re seeing renewed interest from everyone. It’s individuals, family offices, foundations and endowments. Because you have to remember what attracts people to this asset class in the first place is those investment characteristics, a high amount of income that gets generated is diversified and non-correlated with other asset classes. So as you mentioned during the financial crisis, farmland wasn’t really impacted because the drivers of turn in farmland are farming economics, not credit or just overall broad markets because there’s no cheap way or easy way for investors to access the asset class, at least historically, and that’s what creates a lot of this diversification non-correlation.
And now I think one of the things in addition to income that people are really focusing on is the inflation protection that comes from farmland. If you look at, just kind of broadly speaking, farmland returns over the last 50 years, the Chicago Fed, the Seventh District actually has great data about farmland appreciation. And it’s almost 60 years of data, and it shows that on average during that time land itself has appreciated just under 6% a year. That doesn’t include the income that’s generated. And that passive land appreciation, if you look at what is it composed of, it’s really two things. It’s gains in productivity because land does become more productive every year because of new technology. So you can grow more bushels, whether it’s technology on efficient use of fertilizers, whether it’s seed technology itself, or equipment technology that helps farmers to do things in a more timely manner. So that’s about half of that appreciation comes from technological gains in yield, and then the other half comes from inflation. So it’s not just cap rate depression or something that’s driven asset values. It’s those two things. And so I think that’s what investors are focused on today are those two aspects, income and inflation protection, and I think they’re right to be doing that given just the global central banking policies that seem to have been put in place.
Meb: It all seems so obvious. And you guys have hit the inflection point of going from really almost like a family office, couple person shop to a sustainable organization that has been there, done that. You know, there’s certain, like, waypoints, 3 years, 5 years, 10 years. Let’s talk about a good problem to have, which is you guys are at size now. At what point do you start to hit capacity and what do you do where…? Look, man, I have a huge audience all over the world. I’m just kidding. But let’s say that you got a flood of investors and you started getting subscriptions, $10 million, $100 million checks per month. How would you go about doing that? Do you have certain geographies you would expand into? Is it sort of blue ocean where there’s just a ton of opportunity where you are? Would you start calling up your friends in the Ukraine and Argentina? Like, what would be the pathway, or would you simply say, “Look, tough darts. We’re going to close for now?”
Brandon: Our strategy has always been built around specific geography, a real value add, and value-focused strategy. And like I said earlier, it starts with the tenants. It starts with kind of that big picture where do we want to be? So while we’re in 10 states now, we have been looking at kind of neighboring states to places we already own, so the difference between Arkansas and Louisiana or Mississippi when you’re talking about one side of the river or the other is pretty diminimous. So I do think our footprint will expand. It’s not going to come because of a massive amount of inflows. You know, it would be larger today within some neighboring states just if some of the farms we had made offers on had been accepted or if we could have bought something in our valuation target. As an overall strategy, there’s almost no capacity over time because as I mentioned, the market is $3 trillion and institutional investors own about 3% of that.
There’s only about 1% of farmland that turns over every year. Almost all of that is a state-driven or tax-driven or liquidity-driven by these non-farming owners because farmers typically aren’t selling. Usually, if they are and they’re doing a sale-leaseback, you’re probably paying too much or they’re renting it for too little. It’s kind of how we view it. But there is a governor on how much we, as a manager, can deploy in a year. So we’ve averaged anywhere from $50 million to $120 million a year in deployment. Last year, we did just over $80 million in new purchases. This year prices are really strong, so we maintain that buy discipline. We’ve invested about $15 million year-to-date. I want to keep some dry powder available because we believe at the end of this year there’s going to be a tremendous opportunity to buy land. Because again, there are a lot of reasons people felt. Uncertainty about tax policy, we believe is one of them.
And at the end of 2012, when grain prices were sky high, everything was peaches and cream for people who owned farmland. You would say, “Well, who would want to sell then?” But at the end of 2012, there were some tax policy changes, which were pretty meaningful for landowners. One was an increase in capital gains taxes. The second was the Obamacare investment tax, and then there was discussion about the estate tax exemption for each spouse to reduce to $1 million, which did not happen. But that type of uncertainty created a lot of deal flow for us, and these were farms that we had already known about. We had diligence in the past and we could move quickly because now we had a motivated seller.
And we started the fourth quarter of 2012 with $125 million in assets, and we purchased $44 million in new farms just in the fourth quarter, which is still our largest quarter to date. And that was all tax policy-driven. There was a lot of noise about what’s going to change for long-term capital gains, estate tax, potential… step up in basis. There are a lot of things that will directly impact owners of farmland who are non-farmers and their choice will be to sell, in most cases, we believe. So we want to be very opportunistic to find the best deals in the fourth quarter. So we think we’ll deploy a good amount of capital this year, but if someone knocked on our door and said, “We want to allocate $1 billion to you,” we can’t do it because our strategy is built on generating alpha. Right now, there are certainly some investors that just want beta. They just want access to the asset class, but we don’t think it’s really appropriate for us to be doing that. That’s not our DNA as a value investor.
Meb: So $10 billion, no problem. Okay. Got it. What’s the lockup for you guys? If I were to send you a check, wire you some money this quarter, how do I get it out? What’s the runway for that?
Brandon: Our lockup is one year, and then our notice date is September 30th. So if you gave us a check tomorrow, essentially you’d have one year and get into May or June of next year, and then our notice date is September 30, so it’s essentially a 15-month lockup. And for very, very large investors, that lockup might be a little bit different because, you know, we don’t want to be trading in and out. In fact, we’ve rarely had many redemptions. We do allow investors to take income out every year. When they subscribe, they can tell us they want income taken out annually or semi-annually. So a lot of the pension funds and endowments foundations do that, and some individuals do that to. We don’t lock people up for very long. In most cases, like I said, our portfolio is very liquid. If we ever had to sell properties, we certainly could, but our view has always been we want people that are making that more strategic asset allocation to have exposure to this space.
We think that farmland, depending on whatever bucket you want to put it in, and whether it’s real assets, natural resources, whatever it may be, we could think farmland is probably the cleanest way to hit on those investment objectives that are in that bucket. When you think of being a diversifier in a portfolio and non-correlated, you know, provides investment characteristics that timber and energy do not because we don’t have that overall correlation with the market and with profitability or just economic certainty, strong markets, we don’t have that. We’re much more driven by what is the underlying economics of agriculture and commodity prices and not just spot prices, which can be really volatile, but long-term futures prices are really kind of how farmland is priced over time. And that’s why, as you mentioned, there are very few down years for farmland, whereas for commodities themselves or CTA strategies, you can have huge up and down years, more volatile than the equity markets. So it really comes down to identifying land at the right price, and if you have the right entry point, I think it’s a very stable long-term asset.
Meb: Do you guys kind of expect the crop mix to stay the same? I mean, as a former dairy guy, I’m kind of confused. You don’t have any dairy farms in here. You had a couple of crops I’ve never heard of, but it looks like it’s about a third corn, a third soy, a third specialty in other…Do you expect it to look about like that in the future?
Brandon: As a former dairy guy, I can guarantee you we’ll never have any cows in the portfolio. Any other dairy farmer would probably tell you the same or former dairy farmer, but we’d love that specialty crop bucket. So those would be crops that are not traded on the Board of Trade. Not something you can hedge. It is typically crops you are growing direct for an end-user. So we grow green beans, green giants, peas…onions, and celery and carrots that’ll go to Campbell and other fresh market places. Sweetcorn goes for both canning and fresh market, and then crops like seed corn and seed soybeans that next year are actually grown for groups like Monsanto or DuPont Pioneer to sell as seed to the farmers the next year.
But when you have these specialty crops, they need to be on usually irrigated high-quality ground that’s well-draining, and they need to be close to the processing plants for those. But they also require a different rotation. It’s not just corn and soybeans every year. If you’re growing watermelons, you have to rotate out for two or three years with something else. So corn and soybeans are a great rotational crop. They help control weeds and pest pressure and allows you to come back in with that specialty crop a few years later. So I think our crop mix will continue to change. I think that specialty bucket will keep growing, but corn and soybeans will always be a big component of the mix because those are great crops to grow on the type of land that we have.
Meb: Does it worry you the concentration risk of those two crops?
Brandon: Well, those are two of the largest grain crops grown anywhere in the world, and if there were five or six years’ worth of corn and soybeans sitting in storage somewhere, then I think, yeah, you would have more risk of that, but like I said earlier, there’s about 6 to 8 weeks of supply of those crops. They are the feed grains. If people want to eat meat or drink milk or do anything that requires feed grains, those are really the two sources. And then wheat is another one, Milo, they just tend to be lower revenue and so farmers would prefer not to plant those unless they can double crop in a given year. So that doesn’t give me a lot of concern, and like I said earlier, there’s a lot of flexibility. If you have a lot of grapes, that’s your crop, and if you want to switch it out to another variety, there is a switching cost. There’s cost involved in that and then time, so two or three years for it to start producing.
So in permanent crops, you have a lot less optionality. In row crops, you can rotate year-to-year. So if there was something that came out of whack that soybeans were more profitable than corn, I think in a given year, the soybeans would be a larger percent of the portfolio than they are today and vice versa, and the same, otherwise, if you have land that’s really capable of growing corn and soybeans or specialty crops, but if some of your neighbors are large dairy farms, you might be planting alfalfa or some other crap that they’re going to be the end user and the buyer of. So when you have row crops, you usually have a lot of optionality, and that’s really what we like. We’re typically underwriting just the commercial commodity crops, and then part of our value add also is if we have a tenant that’s going to grow specialty crops, then that totally changes the return profile of the farm because those specialty crops are high revenue to the farmer, which also means much higher rent to the landowner.
Meb: Do you guys do any sort of annual shareholder meeting on the farm with some bands and beers and barbecue? I’m looking for some ancillary benefits to be an investor. How do you guys communicate? Is it mainly email or am I allowed to come hang out on the watermelon farm?
Brandon: We do quarterly letters to our investors. We encourage all investors pre-subscription and during their diligence to come visit us, come see our farms, whether it’s in the Midwest or elsewhere. We love having our farmers have the opportunity to talk to potential investors about what they’re doing and what we’re doing, but then also we are located here in South Bend, Indiana. We tend to have more visitors not in the winter but usually in the fall and sometimes it tends to be combined with Notre Dame football. So we do like to give people the chance to see a harvest, enjoy a tailgater and maybe a football game. So it’s not a quid pro quo, but it’s definitely a nice benefit of being able to look at farms and have something else going on at the same time.
Meb: As we think about risks and things macro or anything that really keeps you up at night, anything else that kind of is on your brain or you think about consistently? There’s so many. Just kind of you can pick and choose any of these topics, everything from a trend away from meat consumption, if that’s even a thing, to alternative sources of protein like Impossible or Beyond Meats. We didn’t really talk that much about China and their influence in what’s going on in the world. Any topics that are particularly near and dear to your heart?
Brandon: When we spoke two years ago, I said, “Well, this trade war is something we’re really concerned with” because the U.S. exports about 40% of its crops, so we rely on global trade. China is not our biggest trading partner by far, but they’re a meaningful one. And we’re seeing now a lot of what’s going on in the corn markets is being driven by China. They’re actually the second-largest grower of corn, but no one really knows it because they don’t export any of it. U.S. is the largest grower and the largest exporter. Argentina is the second-largest exporter. And China had a very poor crop in terms of production last year. Argentina did as well and they’d limited exports for, I think, almost six weeks, so trying to purchase corn from the U.S. at rates that had never been seen before. And that along with USDA kind of resetting what yields were for a few years ago back to what we view as more reality that created a big jump in corn prices.
So it is a global market. We like global trade. We don’t want things that disrupt that happening overall. And then the U.S., you saw over the last few years, during that trade war, it impacted farmers. The USDA and the government kind of stepped in to help out farmers. We, as a landowner, didn’t see any direct benefit of that, but we think that was probably good for the overall market. We’re probably seeing some of that kind of on the back end now, some of that money as competition when we were trying to buy land because farmers received a lot of payments.
The things that keep me up at night would really come down to…It’s really an underwriting exercise. If you pay too much for any real estate, it doesn’t matter what it is, you’re always going to be worried about what’s going on. So that’s why we use income and those cap rates as our real governors on acquisition. We want to have good farmers. We don’t like tenant turnover. So underwriting a realistic rent with a strong farmer helps you kind of make sure you have a great entry point at each farm purchase. So those are things that give me a lot of comfort. And then all those non-farm things that I talked about that are great options. If you underwrite those upfront, and then may have to happen, that I think is a risky strategy.
And I’ll emphasize again, our portfolio, the strategy has been different than other institutions, just doing the institutional roll-up. It’s our belief that in every asset class, people want to do that, but it’s just been done in most already. Farmland, that hasn’t happened. So the idea of allocating a lot of money at once I don’t think is a great strategy in this asset class. You have to go to who are the large landowners, and it’s probably a few other institutional owners and then really large farmers that own a lot of ground. If you’re doing a big sale-leaseback strategy, I think you’re unlikely to generate the returns that you’re underwriting because you’re probably overpaying for land. So I think we’ve always focused on the underwriting side, and then that gives you a lot of comfort over the long-term.
Meb: Given kind of where we are with real estate, and I say this on the residential side from experience, I could see this easily happening in farmland if you get a little bit of the cycle. Do you guys ever just like someone rings you up on the phone and be like, “Hey,” knock on the door, knock on the barn and say, “We’ll pay you” and just some exorbitant price for a piece of land? Does that happen? Is that cyclical? Is that something that you’re starting to get more in-bounds now to where you’re like, “Well, damn, we kind of have to sell this because this is crazy?”
Brandon: We have sold properties since inception. We don’t like to churn or flip properties, but if someone offers you a non-farm price or above-farm price that holding it for 10 years isn’t going to get you to that type of value, we need to sell it and then just redeploy that capital in a higher returning farm. So we have done that. I mentioned we have a few farms in those solar options. Some are lease and some are sale options. They’re all for values well above farm value, so we’d be happy to hit the bid on those. We have a very large farm in the Great Lakes Region. The state it sits and their economic development group themselves have an option on it because they’re trying to bring in industrial production on a farm we own, that we bought as a farm but it’s at the corner of two interstate highways with rail access and a very robust industrial presence in that area. So we’re more than willing to do that. You do see in the U.S., arable land or tillable land disappears every year. I think over the last 50 years, the USDA has a statistic that almost 17% of arable land has disappeared, and usually, that’s to development, and I don’t even think that includes land that’s lost because of lack of water, desertification, things like that. We believe that having this asset is really important, and if we actually own the dirt, you have a lot of optionality around minerals and other options over time.
Meb: So in addition to traditional farming, you guys do a fair amount of, and correct me if I’m wrong, a little bit of venture investing in the ag space but also greenhouse indoor farming. Can you talk about those topics too?
Brandon: We have a separate vehicle. So our farmland fund is very focused on land and improvements on land, but we do have a private equity vehicle that invests in different types of technology and agriculture and agribusinesses, and they’re around the themes that we were talking about. So we do have a greenhouse that is here in South Bend, Indiana. It’s co-located next to an ethanol plant and it’s growing leafy greens and microgreens, automated systems where, from a food safety and food security standpoint, the first human hand to touch that lettuce will be the consumer taking out of the package at home. It’s distributed today in a number of retail kind of grocers and others, and we expect to scale that over time. It’s in an area with great distribution, and we have some good partners both on the retail and production side in doing that.
But we think that it just doesn’t make sense for some of these crops that are grown in California use a tremendous amount of water are hand-harvested, exposed to things like birds and dust and other things and then sit on a truck for a week to 10 days before they make it to the consumer. Consumers are going to demand not only a better product but safer product with traceability, so we think that indoor growing of lettuce is going to continue to grow. We’ve already seen that in the tomato, cucumber, pepper space, even strawberries. There’s been a tremendous amount of indoor growing and greenhouses built.
Our view is that greenhouses are, as far as leafy greens go, a much better way to grow crops than vertical farms, and there’s a debate around all that, but we ran the numbers and we think ultimately this will be a commodity. Low-cost producer wins and greenhouses are cheaper than vertical for a number of reasons. But then there are other things we’ve invested into. One of them relates back to your water question. We have a fantastic investment in a water filtration company that was actually built around filtering cow manure into portable water that could be sent back to the cows in water deficient regions. And I’m happy to say that I did drink some of that water that earlier that day was cow manure, but it also has a lot of other uses in distillery industry, the brewer industry, anyone that creates wastewater, this company, Digested Organics, has done a great job of partnering with people to solve these water issues. And I think as water becomes more scarce, it’s going to be more valuable to be able to clean and purify water and be able to pull out some of those things that actually could also be a value-added product like organic fertilizer and things like that. So I think technology is going to continue to be and it always has been a big component of the agricultural space, but it’s just going to come in many different forms over the next decade or so.
Meb: I’ve seen a ton, over the past eight years, of ag-focused startups, and you would think in many ways that that would be dominated by the big institutions in my mind, but I’ve seen so many, and there’s so many different parts of that ecosystem that could be still disrupted and improved. And it’s fun to watch. I don’t know how humans are going to be involved 10 years from now. It’s going to be a bunch of automated drones and tractors and whatnot. We’ll see.
Brandon: Well, some of that will come from just the fact that good farmers are hard to find, and that’s why we think in that underwriting process of tenants on our farms, we’re looking for that top core tile farmer who also wants to continue to grow. It’s hard for them to find good labor to partner with too, so the use of technology is going to continue. It’s going to be really important from things as simple as GPS and remote controls equipment to machine learning and other things in that sense where farmers not only are going to look at crops. An easy one now you see a lot of soil moisture sensors in the ground so that they can tell the irrigation systems when they should be irrigating, and there’s even prescriptions of should they be irrigating before it gets too dry? How much do they need to put on? And this all leads to that increase in productivity or increase in yield.
It’s slowed down compared to what it used to be, and to feed a growing global population, you have to have increases in productivity. And if you’re an active landowner, as these increases in productivity happen, you should be benefiting from them. If you’re a passive or absentee landlord, the farmer or the operator is probably going to keep most of those benefits. And that’s why our entire farmland strategy has been built on very active management because the market is inefficient in terms of buying land, improving land, renting land. There are a lot of inefficiencies, so being a very active manager in that market should lead to the kind of above benchmark returns.
Meb: I love it. Well, listeners, you guys know that I’m a big farmland supporter, investor. Brandon, you’re one of my favorite people to chat with, and it’s more exciting to talk to you now because we can say the booming farmland space. A couple of years ago, it was kind of, you know, farmland is kind of cool but now it’s kind of fun to talk about because it’s doing so well. Where do people find out more information? They want to read your quarterly reports, wiring some money, come hang out on the farm. Where do they go?
Brandon: If they want to learn more about the strategy, they can go to our website, which is cirruspartners.com. We have a lot of information on there and the people that they would need to contact. We love talking about it. As you said, it’s an exciting industry we think that’s going to continue to evolve and there are going to be more people involved in it, at least on the investment side over the next decade.
Meb: Looking forward to getting to catch up with you soon in the real world. Brandon, thanks so much for joining us today.
Brandon: Thanks, Meb. Appreciate it.
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 feedback at feedback@themebfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.
