Episode #377: Garrott McClintock, AcreTrader, Live From The 2021 Farmland Investing Summit!

Episode #377: Garrott McClintock, AcreTrader, Live From The 2021 Farmland Investing Summit! 

 

Guest: Garrott McClintock is the Chief Operating Officer for AcreTrader. Garrott has deep roots in the Mississippi Delta, where he grew up as a fifth-generation family farmer. Previously, he was a partner at Oxbow Agriculture, where he co-managed over $200 million worth of farmland and over $40 million in annual revenues.

Date Recorded: 11/3/2021     |     Run-Time: 46:25

Summary: In today’s episode, we’re talking all things farmland live from the 2021 Farmland Investing Summit. We talk about the process of sourcing farms and building out the farmland-investing ecosystem. Then we talk about some of the macro tailwinds, the possible risks to the asset class, and the long-term vision of AcreTrader.

Be sure to stick around to hear about my own farm I purchased through AcreTrader in Nebraska!

Sponsor: The Idea Farm gives you access to over $100,000 worth of investing research, the kind usually read by only the world’s largest institutions, funds, and money managers. Join today and get access to quarterly CAPE ratios, an excel quant backtester and the entire research library. And best of all, there’s a 30-day free trial period.

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

Interested in sponsoring an episode? Email Justin at jb@cambriainvestments.com

Links from the Episode:

  • 0:39 – Intro
  • 1:25 – Welcome to our guest, Garrott McClintock
  • 3:54 – Garrott’s history in farmland and his role at AcreTrader
  • 8:50 – Is AcreTrader actually a land buying machine?
  • 9:44 – Key drivers for price appreciation in farmland
  • 12:13 – What creates interest and draws new investors to this space?
  • 15:14 – Frustration arbitrage and parallels between farms and real estate
  • 17:54 – Scenarios where farmland might not perform optimally
  • 22:34 – The top crops for steady appreciation and annual yield
  • 25:15 – What his favorite farms have been so far and why?
  • 26:59 – What success looks like and is there a finite capacity for AcreTrader?
  • 28:02 – Alternative yield sources
  • 30:03 – Farmers are getting older and the capital intensity of the industry
  • 31:42 – Ways technology could create headwinds and change farming
  • 35:12 – Question: What is their strategy to have the land farmed once purchased?
  • 36:35 – Question: Allowing hunting rights on their land during the colder months?
  • 37:46 – Question: Any plans to move the tech closer to the end user?
  • 40:30 – Question: Thoughts on long-term lockups and a potential marketplace?
  • 42:14 – Question: Forced long-term leases to assist farmers build their businesses?

 

Transcript of Episode 377:  

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.

Meb: What’s up y’all we have a special episode for you today. Our guest is a fifth-generation farmer and the chief operating officer of AcreTrader, a farmland real estate investment company offering individuals access to low minimum farm investments. In today’s show we’re talking all things farmland live from Bentonville, Arkansas at the 2021 Farmland Investing Summit. I recently talked with Garrott at the conference and the conversation was so fun, we decided to release it as an episode, we talk about the process of sourcing farms, building out the farmland investing ecosystem. We talk about some of the macro tailwinds, the possible risks to the asset class and the long-term vision of AcreTrader. Be sure to stick around to hear about my own farm I purchased through AcreTrader in Nebraska. Please enjoy this episode with AcreTrader’s Garrott McClintock.

Meb: Welcome to the Meb Faber show. That’s weird to say in Arkansas it’s the first live one we’ve done in years. First of all, I wanted to clear up a couple misconceptions. As a Los Angeles resident there’s been a lot of California talk already, the previous speaker made a comment that California is the fruit and nut capital of the country. That has nothing to do with farmland, that is actually true. Second is that there’s a misconception that crops need water. That’s also not true. If anyone has seen the movie “Idiocracy,” you know that crops can be grown with electrolytes and Brawndo. But it may result in a somewhat timely dystopian future that looks not too different from where we may sit over the past couple of decades in the political arena. Garrott, I don’t know what we’re going to talk about because farmland to this crowd isn’t an alternative investment. We’re going to have to talk about something else, not farmland, this feels like the most non-alternative investment like the most tangible real investment.

Garrott: We’re kind of preaching to the choir here. But I bet we can find a couple things to talk about. You know, one thing I’d actually love for you to set up the crowd with is your Talmud portfolio idea. And I’d also like to know how do you find that?

Meb: I like how Garrott’s just automatically commandeered the conversation. He’s like, “I’m not going to talk”. What Garrott’s referencing is if you look at asset allocation… Personally, I come from a farming background, not five generations, like you, but a couple, I’m actually going to be on the farm in Kansas next weekend, if anybody’s in Colby, if you’ve ever heard of that place, Brewster, Kansas. But if you look at all the assets in the world, so the global market portfolio, if you just bought every asset in the world, it’s roughly half businesses, so stocks, and roughly half bonds, and roughly about half U.S. and half foreign. That’s public assets, the biggest thing missing, it’s really hard to invest in single family housing around the world. So real estate in that capacity, but that’s changing. And then farmland. Farmland is like the big missing piece of that puzzle, all around the world, huge asset class, but historically, has been the province of either families or the big institutions like the church we just talked about. So farmland is also kind of my nightmare, and we’ll talk about that “why?” But you’re the COO?

Garrott: That’s right.

Meb: You know, it’s funny because I asked someone last night, I was like, “What does Garrott do?” And they said, “Garrott’s kind of the dad of AcreTrader,” I say, “Well, does that make Carter the mum? Like, what is this relationship?”

Garrott: It’s an ongoing debate.

Meb: Well, tell us, give us the Garrott story, the background, five generations land you here as the COO, I want to hear the full timeline.

Garrott: Sure. So I grew up on a farm in Tunica, Mississippi, we grew cotton, corn, soybeans, grain sorghum, wheat, and rice, not all at the same time, but during various times. And then we also had a pecan orchard. That was a pretty fun way to grow up. After that I went to college and worked for a small investment shop. But the way I found myself going back to farmland was I worked for a really large farm and a family who had a lot of AG businesses. And so I was helping run that organization. And when Carter called me up and he said, “Hey, I have this idea about investing in farmland, and it’s a different way to do it.” And it just checked a lot of boxes for me. So I hopped on a U-Haul and moved up to Northwest Arkansas, and here we are.

Meb: And what does the vision look like? So this would have been 2018, ’19?

Garrott: 2018, yeah.

Meb: On the timeline. Farmland was plateaued at that point in general right?

Garrott: Yeah.

Meb: Is that a good recollection? As opposed to today, which seems to be a large renewed interest. So back to the original question like what do you actually do here?

Garrott: When I started, I was identifying and underwriting forums. Now I work on how do we find really insanely brilliant people? And put them in the right spots so that we can grow effectively from what was 11 people a year ago to 50 plus people now and then hopefully 150 this time next year.

Meb: Because you guys last night had the screen with a bunch of Q&A trivia. I don’t know if you guys remember. So Q&A trivia, you Garrott you should know this, you’re COO. Does AcreTrader currently have more employees or farms?

Garrott: We definitely have more farms.

Meb: Okay. It’s close, though, right? It’s like…

Garrott: Yeah, we have close to 70 now.

Meb: Well, Carter said you guys are hiring at a breakneck speed. So if you’re looking for some positions, I think I could add some value.

Garrott: Chief evangelist? Actually, I will take that.

Meb: When I first talked to Carter on the podcast, I said, “Man, that’s a great idea.” He’s a very energetic, enthusiastic person. “There’s no chance this works. There’s no chance this scales. This is so hard.” But you guys have done a great job of it. Like one gentleman owns 20. Does anyone own more than 20 farms? You don’t have to raise your hand. You can tell us.

Garrott: The answer is yes.

Meb: I know someone who owns more than 20, it’s not me.

Garrott: Yeah.

Meb: All right. So you and I had a conversation last night, this could just be the Miller Lite talking. But you made a comment that stuck with me that was something along the lines of “You need to separate the land and the farm.” Is that something you said? Or did I just come up with that?

Garrott: No, that’s exactly right.

Meb: Because it sounds really smart. But I don’t know what it means.

Garrott: I think a lot of people when they think about farming, think about a farmer on a piece of land, he owns that land. And that’s the whole thing. They’re one and the same. But actually, a farmer and the land are separate. The actual operating business does not always own the land underneath. And in fact, there are a lot of farmers who optimize around, let’s say 20% of their land they would own and the rest they would rent out. And in fact, about 40% of all U.S. land is leased out to non-relatives. So it’s a large percentage

Meb: Walk us through kind of how you guys do it. I’m sure everyone here knows, but this is going to get blasted out to the ether and the internet at some point. So walk through how you guys have this relationship with finding land, buying it and the relationship with the farmers? Is it a one set scenario? Or do you guys do a few different models? How does it work?

Garrott: We have a few different models. But I think the core idea that I would stress is that we don’t have one customer, a lot of people think the investors are your only customer. But that’s frankly not true. We’re here to improve the industry. So the farmers themselves are equally as much our customers. And the brokers are also our customers. Honestly, we will have a really big and effective business and change the industry. If we have lots of different ways for other people who work with our business to make money because they’ll have a vested interest in our growth, just like we have a vested interest in their growth. And I think that’s a really important way to think about, okay, to set the stage essentially, how do we source farms? Well, we talk to a lot of farmers, we talked to over 5000 this year, and those are people who are coming to us, those numbers grow monthly.

The reason they’re coming to us is they want to grow their business, they want to be able to look out and in the next year, have more opportunity for them and their families than they have today. And so they come to us and they say, “Hey, look, my neighbor, Betty Sue wants to sell some land. I don’t have the cash right now, because I just bought a new tractor or I just bought a farm last year. So would you buy this, and would you lease it to me?” And those are the best possible relationships we could have? Because we are helping that person grow their business in their life, and that’ll come back to us and we want to be good partners for them too.

Meb: And I think you even describe AcreTrader as a land buying machine.

Garrott: No. So land buying machine. This is actually a kind of interesting concept that…

Meb: Wait, are you the land buying machine? Who’s the machine?

Garrott: So I’ve heard good farmers refer to their farm itself as a land buying machine. So if you think about how do people make money in farming, they make small amounts of money through operating. But ultimately, their operation then fuels their buying of land. They can source land, buy, they can fix it up for less expensively, because they’re not hiring someone else to do it. And they are ultimately receiving a lot of returns from the land itself. Farmers want to buy land too. And honestly, that’s one of the ways we can be good partners to them as well. If that person who bought from their neighbor, Betty Sue, or helped us buy from their neighbor, Betty Sue wants to buy at the end of our holding period, that’s an ideal situation for us. We want to help them grow their business that way too.

Meb: That’s an interesting insight to me too, because as you think about other assets, so real assets like real estate, businesses like stocks and you think of the income or earnings component, but also the capital appreciation, what do you see as the big driver as we look to the future? There’s historical and then future. Is it majority land appreciation price? Is it the yield, which can fluctuate based on the timing? I’m the world’s worst commodity timer. I don’t know if there’s ever a good commodity timer, but I managed to sell all of our wheat like literally the day before we just went bananas nuts. So what is it? How does it break down?

Garrott: As we look at farmland, I think the appreciation component isn’t a really compelling component. But frankly, the one of the reasons it’s great is because you have appreciation and yield. I mean, I know that you talk about that all the time. That’s one of the things you really love. But as we see the U.S. lose three acres a minute, we believe that this asset that continues to dwindle will become more valuable, especially assets that are well picked, and in good areas.

Meb: Like an olive farm? I just got in my email inbox this morning. Is anybody else talking about that today? Can we talk about it now? I don’t want to spoil anyone’s…

Garrott: Yeah, no, there’re going to be some people talking about it today. But that’s a really cool story. So the preview is that the guy who brought us that property we met and we were telling him how we wanted to grow with farmers. And basically he said, “This has the opportunity to change the industry, and how I think about growing my own business.” We had that conversation let’s see, probably six months ago, and today is the culmination of all that effort.

Meb: Wait, what’s going to change the industry, sorry, I missed it.

Garrott: What changes the industry is that he can have equity in the deal. He is going to co-invest and ultimately be incentivized for performance alongside our investors. He’s a permanent crop farmer. So ultimately, he brings the deal to us. He structures it, he runs it. And it’s almost like a GPLP structure for those permanent crops. And so he is incentivized to perform, he also invests his own money, and he has the ability to on a track-by-track basis, go out and build equity in a way that he couldn’t before.

Meb: That’s, I think, thoughtful, because we talk a lot about skin in the game. The average mutual fund manager has $0 invested in their own fund, and there’s a great Charlie Munger quote, you know, it’s like, “Show me the incentives. I’ll show you the outcome.” I got to stop quoting Charlie, because he’s starting to say some things recently that’s going to get him cancelled, I think pretty quickly, but he’s like, 99, so it’s probably okay. Everyone here is probably a farmland bull. I can’t imagine anyone coming to this conference and be like, you know, “I just hate farmland. It’s the worst.” But I’m sure there’s a…I mean, what, are you checking Spotify? What are you doing right now?

Garrott: You got notes, am I not allowed to have notes?

Meb: It seems like all the macro signs are lining up in the positive. So how much of the conversation for you guys with Jack on Twitter, talking about hyperinflation. You tell me. Where’s the interest coming from? Is it people interested in inflation protection, is it the people saying, “Stocks are crazy expensive,” which they are? “I got to move bonds or nothing. Give me something else.” What’s the driving force for you guys right now?

Garrott: Man, I think the driving force is all over. So it’s some people who kind of have a barbell strategy they call us and they say, you know, “I have done exceptionally well in technology. And this is an incredible way to diversify for me and have a more solid asset.” There are people who are concerned about the markets and where they are, and you know, where they’re going. There are people who just want to own real assets. There are people who are interested in the non-correlated aspect of farmland itself. So they’re coming to us for a variety of ways. And you know, some of them are just like, “Bill Gates owns a bunch of farmland, that seems smart. I guess I’ll do that too.”

Meb: Not for long.

Garrott: Well, we’ll see. Are you in on something that I don’t know?

Meb: Well, I don’t know, a divorce usually doesn’t cause you to buy more assets on either side. But going back to the original part of the conversation where you mentioned Talmud, if those who weren’t around 2000 years ago, there was a quote in there that said, “Let every man invest a third in business, a third in land, and a third keep in reserve. And so we’ve modeled out like the modern equivalent, which is a third in global stocks, a third in bonds, like instruments, and a third in real assets. So real estate, farmland, etc. And that’s a near impossible portfolio to beat by the way, if you compare it to any public equivalent, I challenge you, there’s not a lot that can be beat that portfolio for risk and return scenarios. And particularly in a world of potential rising and increasing inflation. I had a $20 turkey sandwich the other day, so not saying it’s transitory or permanent.

Garrott: I think you hit upon a really interesting point there, which is, it’s not easy to buy farmland. And that was kind of the reason for building AcreTrader. When Carter started is he was looking out over the landscape, and he’s already told the story on your podcast, I’ll make it short. But essentially, he was like, “You can do this.” And that goes back to what the vision for our company is, which is buying and selling land needs to be common, transparent, and easy. The only way that common becomes real is if it is transparent and easy. And ultimately, that’s our mission more than just merely securitizing farms on the Internet. It’s how do we make this asset class available for lots of people and thereby provide more opportunity for farmers at the same time?

Meb: I think the big opportunity you guys is to start advertising on TikTok and frame it as like fantasy league but for farmlands and investing, build your fantasy portfolio. Following up on that, and I’m not joking about this, but I’m going to prompt some product development questions. I hate operating our farm. It is like my nightmare for the podcast listeners who’ve heard the story like one time a combine caught fire and burned down the entire wheat crop. Just like shit like that just happens. So I hate doing it. So that’s why I love you guys. But…

Garrott: How involved are you? Are you on the tractors on a regular basis?

Meb: We’re like manual, like I got the hoe. No, I’m not that involved. I mean, whatever. Look, let’s be honest, like the tractor is nicer than any piece of equipment I have in my house. Like that thing is like a space shuttle.

Garrott: Yeah, a friend of mine say’s there’s a reason there are leather seats in tractors.

Meb: It can’t be that far away from any humans being involved at all. It’s just drones and robots right? So I’m not that involved. But part of that is because I don’t want to be, it’s hard. The similar asset class I equate this to is being like a landlord. What a nightmare. When we were renters, we had black mold, and termites, and things break. There’s like, I can’t think of anything worse. Fantastic. And that’s why it returns. It is like this theme that we talked about, which is the best investing is almost always this frustration arbitrage. So you find something that people hate doing but has great returns. Therein lies one of the reasons to have great returns. So how come? I can’t just say, “Look, guys AcreTrader, I’m going to give you guys 100 grand a month,” I’m not but someone here. “And just put it on autopilot on each farm.” I just want to…or only non-row crops, or I only want organic farms, but like “You guys just handle it.” How far away are we from that? Specifically, like what month?

Garrott: I think we would like to build something like that eventually. But the reason we started the way we did is because we wanted to build something different. And we have to build the structure first. So bringing enough different types of farms to the market our market before you can create an aggregated strategy. I think there will be that hopefully sometime in the not distant future. But I wouldn’t want to commit to that.

Meb: The November 2022 I mean, Carter said that you guys are going to have 150 people, they got to do something. So secondaries, you could do it as structured as funds, I imagine right?

Garrott: That’s right. And frankly, a lot of those people are engineers, and technologists, and PhDs, who are looking at farms and helping us analyze them better. I mean, we’ve got eight or nine folks who are purely committed to understanding how does farmland work? How do we do analysis on it in a different way and provide that analysis to our users and different folks around the world?

Meb: And by the way, y’all feel free to raise your hand and ask questions as we go along. This is meant to be casual so we’re kind of skipping and running through this pretty quick so if y’all see anything you want to chat about just holler. Let’s talk about the downside all this like “Farmland’s amazing” talk, like that’s no fun. What’s the scenario where farmland stinks it up, where it sucks, where like I get no return on my investments, people are starting to get angry with you guys getting some hate mail?

Garrott: Sure, so I’ll ask you first what’s the downside in the stock market? We think 40% drawdown something like that.

Meb: Ninety.

Garrott: Ninety? All right. In farmland…

Meb: It has happened before, Great Depression was over 80%, almost every country around the world. We’re talking about relapse real returns too, this is a surprise to a lot of people they think they’ve saved money. Ask people what they do. They’re save money. I guess everyone in here almost puts it in the bank or in T bills. You say what’s the biggest drawdown in T-bills and most people say 0% to 5%. It’s 50% because on real returns after inflation that’s a terrible asset. So stocks, 80% to 90%. It’s the second most expensive they’ve ever been market cap weighed in the U.S. so Debbie Downer up here and wah-wah-wah. That’s a queue up. Well, farmland?

Garrott: Yeah, I mean, look I don’t know the future. But it would seem unfathomable to me to think about 50% draw-down in farmland. It’s a real asset that people want to use and it produces an income. And there’re examples in your fair state of Nebraska where some land has gone down because of aquifer problems. And, frankly, there are still positive returns after the land went down in value because you still have that rent coming.

Meb: But I feel like my dad’s been talking about that aquifer problem since I was a kid. Is that like as just mythical aquifer?

Garrott: Well, there are a lot of them all over the U.S. Yeah, that one though, Lala is particularly an issue.

Meb: My dad also famously said to me at one point as a kid, I remember this clearly. He said, “One day Meb…” He’s like, “When I was a kid, farmers drove Cadillac’s, that’ll happen again one day,” and this was during one of the farmland, you know, dark winters. When was it that farmland really got upside down? That was a lot of lever, was that ’80s?

Garrott: That was ’80s. Yeah.

Meb: But that’s not really the scenario today, it’s not as levered as it was, right?

Garrott: That’s right, the banks are far more conservative in their lending practices than they were back then.

Meb: So is that the scenario where farmland is just like a scenario where prices go up, yields come down, too far ahead of itself. Is it where you have a deflated? Like, I’m just trying to think of what is this scenario where it just…

Garrott: Yeah, I guess if there’s, man…

Meb: Another Coronavirus, that wipes out half the people?

Garrott: If you’re asking me to pitch against myself…

Meb: … half of the people? Well, I mean, I just like, you know, to think about all the possible outcomes. I mean, it could be a big opportunity, you know, things get whacked you, so you… I would love to buy stocks down P from here, down €.

Garrott: You know, honestly, I think the downside scenario is much less likely to be macro and much more likely to be micro. So you think about different areas within the country that are going to have fundamental problems with an aquifer, or with water rights. There’re just a lot of different areas that may have trouble or people know, and are investing in areas that aren’t well, in 50 years, we’re going to have to drill another well, and it’s going to go down 100 more meters or 1000 more meters than today. And then that becomes not profitable.

Meb: So much more farm geography region specific, which is why you’ve got to buy more than one farm.

Garrott: That’s right.

Meb: To buy lots.

Garrott: What would you invest in?

Meb: Does someone at AcreTrader want to tell me? No, it was. I think it was…my father grew up if anyone you get a gold star in a town called Holstein, Nebraska makes Bentonville look like New York City. Now we got one here. So he drove through on the accident got lost. I mean, it’s like 100 people or something. My favorite quote from my dad is he said when they moved into town from the farm, my grandfather, they had indoor plumbing for the first time and he refused to use it because he thought it was barbaric. He was like, “Why you would have a crap in your own house? It’s disgusting.” Which, you know, it’s hard to argue with. So I felt a bit of emotion towards buying a farm in Nebraska. So it was a traditional row crop, but I like the idea of diversification. I tried to get in on the Australia deal but that sold out in like 15 seconds. So it was like a sneaker drop from Nike or something like the way you guys do it. It’s kind of smart actually get people a lot of FOMO involved, but the olive farm, if everyone doesn’t buy by the time we’re done with today… That’s interesting to me. Where’s that? Do you know? Where’s that?

Garrott: It’s Tehama County.

Meb: Where’s that? Well, I know it’s California. But where in California? Okay. Oh, north of Sacramento. Up near the Delta. That’s right. We’re having this conversation. Olives are interesting to me.

Garrott: I agree. They’re really…there’s a very small footprint in the U.S. But the people who are growing on this farmer are really talented. And they’re actually growing for olive oil, which is fairly unusual in the U.S. they have really great partners in the…

Meb: What’s it mainly used for in the U.S.? If not olives?

Garrott: Table olives, pizzas.

Meb: I had a lot of those last night at the…what’s it called? The Pie in the Oven.

Garrott: Oven & Tap.

Meb: Oven & Tap, great recommendation. Great spot. All right, so Nebraska, for me, it felt close to home. But I like these, so when the last speaker was talking, it’s interesting because there’s sort of the market cap or acreage weighted farmland index, if you were to do it. So it would be corn, soy, wheat. What are the other top five, seven?

Garrott: Yeah, so 85% of the land in the U.S. is corn, soy, and wheat. I haven’t done the work on this. But I can point to some papers. And I think actually, you put them up on Carter’s last episode. But the frontier for thinking about row crops versus permanent crops is about 70/30. So you want to have 70% in row crops for that kind of steady appreciation and annual yield. And then permanent crops are a little bit more volatile, because you’re more directly exposed to the operations of the farm, but they also have the opportunity to bring you some large returns in the good years.

Meb: And I don’t know how much this translates. But when you look to the stock market, if you look at market cap weighted, which is the biggest companies and stocks, so something like the S&P or a total market index, it’s a good way to buy everything. So if you were to replicate this, it does well over time, but it doesn’t do as well as alternative weighting methodologies because that one tends to be unrelated to price, excuse me, unrelated to value. It’s specifically a price-based index. And so I’d be curious, there’s probably just not that much data going back that far. But to think of how would you build an optimal portfolio that’s uncorrelated, as opposed to production, acreage, weighted? Blueberries, cannabis, olives, but it would have wheat and soy in there?

Garrott: Yeah, I think they would have a lot of wheat and soy. So I mean, I think the diversification question is more about where in the country is it than what kind of crops. So if you think about a farm in Louisiana, versus a farm in Iowa, the types of crops that you can grow there are totally different because the climates different. So you can grow sugarcane in Florida, you can’t grow sugar cane in Iowa. But at the same time, the weed and pest pressure in Louisiana is much higher than the weed and pest pressure in Iowa. I mean, even across an individual county, you can have different weather patterns happen and so you can be diversified that way. One of the things that is really great about AcreTrader, Jake was talking about putting big money to work and how difficult that can be, but we do medium size assets for the asset class. That enables us to provide diversification in a very different way than some of these funds can. And frankly, it’s a much bigger market if you just think about all right, the nature of things in general, there are much more smaller things and there are bigger things. And that’s the same case for size of tracts for farmland.

Meb: You got to pick one I’m holding your feet to the fire, you got 75 Children, what’s been your favorite farm so far? You can name two if you want, and why.

Garrott: Okay, well, it’s kind of easy because it’s right down the street from my parent’s house. We have a farm in Tunica, Mississippi, where I grew up. It’s just kind of fun to be able to see that out there. Know that right in your backyard, there is evidence that AcreTrader is making a difference and has really built something.

Meb: What’s the crop?

Garrott: Well, we have rice on it, and soybeans,

Meb: I got to a good college buddy who has a gin distillery start up in outside like Oxford, Mississippi, it’s called Wonderbird. It’s made out of rice. It’s the only one in the country that’s made out of rice. I was going to go down there. I was like, “Oh, Arkansas, Mississippi, neighbors.” It’s like eight hours away or something.

Garrott: Seven hours away.

Meb: So I don’t think I’m going to do that tomorrow. All right, what’s your second favorite?

Garrott: Oh, man.

Meb: If you had to invest in one what would it be?

Garrott: You know? Yeah, you’re asking me to pick them all.

Meb: Think about it for a minute. Think about it.

Garrott: I’ll tell you one of the cool…a cool memory from doing a farm is we have Jesse Bentley here and he does our con deals or has done several con deals with us. And putting together the one at the end of the year, last year, was incredible. It was such an amazing experience to see our team come together, his team come together, work really hard to put everything, the package together. And then it went live around Christmas and around New Year’s and it was one of the largest ones we had done to date and subscribed in a number of hours. And it just kind of like that to cap off a really awesome year of growth was…

Meb: What was it?

Garrott: It was coupons.

Meb: Coupons.

Garrott: And in an opportunity zone. Yeah.

Meb: Oh, in opportunity zone. There’s another fun idea for you guys, just do opportunity zone only, particularly with taxes not going down. That seems like a really giant opportunity. When do you guys run into capacity? Let’s say Carter hires all these people? But let’s say you have unlimited demand. When do you guys run into capacity as far as like when you get too big, $2 billion, $10 billion, $100 billion?

Garrott: Oh, man, a lot…

Meb: A $100 billion?

Garrott: What we think about success is how do we change the industry? How do we make it bigger? How do we provide more access? I don’t try to think about the number. And I think there are lots of different opportunities we haven’t addressed yet. They were talking about, could we go into more countries? Could we move tangentially and look at other near asset classes like timber? We have requests from those all the time from our investors. But we just want to make sure we do that appropriately, and that we’re bringing the right opportunities to the table at the right time, and that there’s enough diligence and expertise on our team to be able to explain that well to investors.

Meb: Let’s go back to the downside. As you look at diligence in these farms, I assume the number one thing that kicks it out is price. I could be wrong, but I don’t know. And I asked you when we were talking over beers, I said like, “Have you ever diligence-d a farm and you had to turn it down, because it turned out like there’s a meth lab on there or something?” And you just laughed. But I noticed you didn’t answer the question. You didn’t say no. What did…tell me some diligence stories? Like what are some of the main memorable funny, just typical reasons that these get kicked out? Because I imagine like, what’s the percentage you guys end up doing, 99%?

Garrott: We kick out probably somewhere between 95% and 99%. For some reason, early on, we were getting a lot of calls from goat farmers, goat farmers really like a good trigger. And so that, you know the return profile, there was not really what we were looking for. So those…

Meb: Well hold on just a second. It’s because you guys haven’t embraced the social media world. There’s a goat farm I saw the other day where you could hire goats to be on your Zoom. And I’m not sure what they actually do. But they make $70,000 a year. But this is an interesting segue. I didn’t think we’d go here. But how often are you guys doing sort of alternative sources of yield, wind, solar? We have people all the time these people are like, “Hey, let’s do some drilling on your land.” Does that ever happen?

Garrott: Yes. So we have a couple wind turbines on few farms, we think we will be very likely to do some solar opportunities in the future. We’ve been approached by a few folks, but that’s kind of the beautiful thing about land. It’s the ultimate optionality. If for some reason it becomes profitable to grow melons for a renewable energy source, somebody can go out and do that. The land is just the option to go and grow something that is most profitable for the farmer and the landowner.

Meb: I mean, which is cool about having the farmer there because they’re incentivized to do what’s best, right? They’re not just you know, showing up and riding around on the tractor, are we’re getting questions while we’re at it, by the way?

Garrott: Yeah, so the question just so we get in the mic is about the age of farmers how farmers are getting older, and specifically landowners are getting older. So American farmland owners are about 65 years old right now. And so there are some just actuarial table facts there that there is going to be turnover in our lifetime. It’s honestly one of the reasons we’re… You know, I talked about this farmer thing earlier, it’s one of the reasons we’re really excited about it. There are fewer people in rural America, but farmers can grow more because of technology. Part of the problem, though, is that farming is a very capital-intensive business. For a tractor, a new tractor is about somewhere between 400,000 and half a million dollars, a harvesting between 600,000 and a million dollars, it takes a lot to be able to grow these farms. And so the land as a very capital-intensive asset, is something that the farmers can take off their books.

And when you think about a new farmer coming in, he’s got to be able to usually buy a used tractor and other tools to be able to start farming. Well, if he doesn’t have to buy that land that helps him or her get started farming and be able to grow their operation. In our diligence, though, we do specifically look for areas that have strong farming communities, it’s really important that while we want to help out farmers, we also have a responsibility to our investors to understand, are there enough tenants to be able to support this farm and to be able to rent this over the long term? You know, everyone talks about the proverbial hit by a bus. If we have a really fantastic farmer, but he’s the only one in the neighborhood and gets hit by the proverbial bus, then we have an asset that is harder to get leased. So that’s a big part of our due diligence as well.

Meb: I wonder how much…technology is obviously… We saw some of the slides about the automated and I do a bunch of startup investing and see just startup after startup in the AG tech world. Technology’s obviously like a huge tailwind in the short term. I wonder at some point, like if you just magically doubled yields, what the impact would be on farmland as a sector, if that’s a problem, if technology, just thinking differently is actually a potential headwind at some point that you just have massive supply, when the AI singularity comes.

Garrott: It could be but I think we have a lot of tailwinds, too. If you think about what’s needed in terms of protein production, I heard one of the CEO of Nuveen, say 30% of the world’s population is beneath 1500 calories a day, assume that will be 3%. The amount of calories we’re going to have to produce to feed those people is immense. And further, a lot of these people are going to be moving from grains to protein-based diets. We hear often from different folks in the industry and people we talk to, “Well, what about alternative meats? Are you concerned about that?” The world’s a really big place. That is a trend we have going on in the U.S. but the whole world has not taken up that trend quite yet,

Meb: Have you tried the impossible nuggets? They’re actually really good. I don’t think they’re healthy for you. I’m a shareholder, so slightly biased. Here’s the solution to the problem. Elon just tweeted this. He said he’d solved world hunger. So you should say, “Look, Elon, get on AcreTrader cap table. We’ll be transparent about it. And we’ll just make this happen.”

Garrott: Yeah, I like where this is going. You mentioned something that made me think about technology and how that works in our business. I mentioned hiring a lot of folks who are doing data science and analysis. And I think one important point is that buying farmland and thinking about farming is both an art and a science. We can add tools to help out our team. But ultimately, our team is a bunch of farmers themselves. We have like dirt on the floor of our office because people are tracking in mud on their boots, having debates about what kind of chicken coops are best to build. These folks are people who really understand the asset. And what we want to do is be able to provide more information and better information to them. And often I hear oh, there’re going to be AI algorithms, figuring out what farms are best to buy. And I think we’re a very, very long way away from that.

Meb: Well, there’s a lot going on. I mean, I saw a startup recently that’s basically trying to like Shopify for farms where it allows the farmer to sell direct to consumers. So in some of the ways like pecans you’re talking about some of the areas the olives that might be an entirely new high margin distribution opportunity that doesn’t exist because like so many people love this concept of not having to go to Walmart to buy their…sorry, I just offended everyone, rather like get direct from the farmer these ideas, but that’s an interesting other source of revenue for the farmers.

Garrott: Yeah, that’s right. I mean, value added products are immensely helpful. It’s like your buddy who’s a farmer who’s got the rice gin.

Meb: Their whole shtick is like local, so they source everything from local Mississippi rice. I forget the name of the farm.

Garrott: There’s a company called Delta Blues Rice that’s in Mississippi and part of what they are doing is they are packaging their own rice and selling it retail. And I mean, I think it’s brilliant. It’s a way to think about selling for $50 a bushel instead of $5, that those margins can make your business totally different, or a totally different profile than other businesses around you.

Meb: Questions? All right, right here.

Audience: As this grows and expands, what is your strategy for getting people to farm the land, considering a lot of us would not want to do that?

Garrott: Oh, of course. Well, I mean, I think one of the things that we continue to do is we pre-identify the farmers ahead of time. So of course, most of them are not farmers, we do actually have quite a few farmers on our cap tables, which is fun. There’s a guy in another farm in Mississippi who was down the road, and he’d wanted to buy a farm earlier in the year and couldn’t find one and then saw that we were buying one in his area. And he was like, “Oh, yeah, I’m going to put X dollars in that.” But we always try to find people, and this kind of what I was saying earlier, we try to find good farming communities that have lots of farmers, and also pre-identify the farmers, before we buy the land, who we would want to lease the properties.

Meb: But that’s a great secondary idea where I share Jacob’s pain. AcreTrader, that’s a phenomenal idea. You guys should say, “All right, anyone who’s invested on the platform or farmer, we should do a crowdfunding round, we can get you on the cap table, get a bunch of incentivized shareholders inclusive capitalism.” I was going to make you commit to it publicly. But I can’t see where Carter is.

Garrott: Yeah, but I mean, we also have some investors in our business here in…

Meb: They don’t mind the dilution. They don’t mind the dilution. This is going out to like a million listeners. So someone else had a question?

Audience: Hey there, again. As wildlife management and harvesting grows, hunting and fishing, it’s a very lucrative industry with lots of expenses. And it comes at a time when lots of farms aren’t giving profits during those colder months. Is that something AcreTrader is going to look into essentially, somewhat disruptive, Mossy Oak style of model, and again, on that side of it. So really, the question is, do you give out the high-end rights? Are you looking to do that? And is that something you’re looking to help expand on the assets given out?

Meb: AcreTrader gold, so if you own more than 10 farms, you’re allowed to hunt, and fish any of the properties. It’s like a country club membership, we’ve come up with like $10 million of new revenue line items, I feel like we should definitely get free happy hour.

Garrott: Perfect. Do you want to be an advisor?

Meb: Yeah, no. I don’t.

Garrott: We’ll put you on that one. Yes, we do lease out hunting rights on the farms, where appropriate, we get calls all the time about that, “Oh, I saw you bought a farm near me. Can I hunt on that?” We try to work with people where appropriate, but there are a lot of requests.

Meb: Acre B&B, and reserve that domain if you guys don’t have it.

Garrott: That’s right. If you want to hunt on some of our properties, make sure you talk to Ben after this, not me.

Meb: I saw another question, who had it? Was it Rank? Yeah.

Audience: On the technology side, earlier, they shared an example of some things that didn’t work out partially because the people working on it were too far away from the farm activity and what the end users actually wanted. Are you seeing anything that’s going to move the technology development closer to the end-user and beyond farm utilization?

Garrott: So yes, I think there are a few groups who are very purposeful about incorporating farmers into their development, and really making sure that how they think about the product is part of the development path. I think it’s a really interesting question too, because frequently, unless you’re talking to your customer, and this is in any business, you don’t really understand their problems, you make assumptions. There are some really incredible management systems that record what happens on a field and a farm on a day-to-day basis. And that’s very, very useful for permanent crops. And for certain states that have regulations that require you to record that information. They were doing that by pen and paper.

The assumption was that everyone needed that. Well, in other places in the country, you don’t have to keep track of that information. And most people just know it off the top of their head, because they’re doing six passes across the field in one year. But because these people assumed this product was needed, instead of talking to folks, they went out and said, “Hey, you need this right?” But then they realized they weren’t moving someone from paper to digital, they were trying to get people from not doing something to doing something in a format that they weren’t used to.

So I think there are a lot of new tech that is really trying to improve what people do, not require a lot of change from folks and think about how they can really help farmers. Also, I would mention that farmers and farms in general, are somewhat risk averse to taking on new things. And part of the reason is because unlike many of us who have opportunities every day to get a new customer, they have one opportunity a year to change how their revenue profiles look. So they have one crop season on that particular field. We can approach all of you on a daily basis through the Internet and say, “Hey, have you looked at our new farm?” Meb got an email, “Have you looked at our olive farm?”

But these farmers on an annual basis have to decide, “Am I going to make this change? And will it help me? Or am I increasing my odds of failure?” And so I think that’s a really important thing to think about both for farmers but also for AcreTrader, the nice thing for us is, we’re just bringing them new land to do what they do well, but just more of it. We don’t ask them to change too much.

Host: We have time for about two more questions.

Audience: Meb, I know you’ve talked about this in the podcast as far as being able to have some longer holders in funds, because that’s obviously an issue in the public markets. AcreTrader kind of forces you to say, “Hey, this is illiquid.” So any thoughts around the idea of maybe something more like a permanent funds? I mean, longer duration of knowing right now 5 to 10, or 10 to 15? What if someone doesn’t want to necessarily exit? Thoughts on that? Have you found long term capital like that?

Garrott: I think it’s a really good question. We try to be careful with that. Because it’s really hard to go out to people and say, ” Will you give me your money forever?” You need to have some entry and exit mechanism.

Meb: If only you had a marketplace.

Garrott: Yeah, if only. We’re thinking about it, evaluating it. I think that’s something we would really like to see.

Meb: Because I told someone last night, I said, because I’m a cheap bastard. I said, “Instead of marketplace, can I just be the low bid?” Anytime someone really wants out just be like, “Just call Meb.” He’ll take it down 50% in AV anytime. The comment, I think is really thoughtful because a lot of people perceive illiquidity as something bad and you used to hear a lot in the academic literature illiquidity premium. But I see illiquidity in a world of Robin Hood, Wall Street bets, as a future, not a bug, and to be a great investor and to compound… If you look at a lot of the best investments in history, the 10, the 100 baggers, but also simply just compounding, it takes a while. It’s not quarters, and years, even more now, minutes and days. So I see it as a future, not a bug. And I think it’s a great thing to have reasonable sort of lockup or extended periods, because it forces people, people always say they have a long-term horizon. And then they behave on a short-term horizon for a lot of reasons. And that’s where people get in trouble and get upside down. So I love that idea.

Host: One more (question).

Audience: Yeah. So on that long- and short-term horizon conversation, so a lot of these farmers are leasing. And so they may have incentives to up yields at the expense of soil health or water quality. Are there long-term investments that you guys are enforcing on these farms to make sure that the soil health is good in say 5, 10 years as opposed to just this year?

Garrott: That’s a great question. One of the ways that we try to think about that is by structuring our leases accordingly. You mentioned Charlie Munger and aligning incentives. We try to have long term leases where appropriate, because we want to give the farmer the opportunity to plan his business for more than one year. I think when you see people mining the soil of nutrients, it’s frequently because they are short term incentivized. If we say, “Hey, you’ve got a five-year term.” And you know, when that five-year term comes up, we hope that we continue to have a long-term relationship with you,” there’s a much greater likelihood that we don’t see that type of behavior, because we’re in it together.

Meb: Is labor becoming an issue is with unemployment at like 4% now? I see the print today was even better than expected.

Garrott: I have not been hiring farm labor in a while. So I’m probably not the best one to say that, but I think labor on the farm is…it’s a challenge, but it’s an addressable one.

Meb: Well, we’re hiring so if anyone wants to come to Los Angeles, Manhattan Beach, we’re trying to build some rolls.

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 to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.

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