Episode #480: Craig Wichner, Farmland LP – Cultivating Wealth with Sustainable Farmland Investing

Episode #480: Craig Wichner, Farmland LP – Cultivating Wealth with Sustainable Farmland Investing

 

Guest: Craig Wichner is the Founder and Managing Partner of Farmland LP, a leading investment fund that generates returns by converting conventional commercial farmland to regenerative sustainable farmland.

Date Recorded: 4/19/2023     |     Run-Time: 1:00:38

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Summary: In today’s episode, Craig starts with an update on his company and then shares how higher inflation and the shifting macro environment has affected farmland as an asset class, especially after 2022 when real assets were one of the few assets that didn’t have negative returns.

Then we dive into the financials of an acquisition they made of a 4,000 acre, 150 year old farm in Northern California back in 2013 for just under $30 million. Craig walks through the investment and timeline to convert the farm to organic, the benefit of the conversion, and how it helped the farm be re-appraised for just over $75 million last year.

Craig shares some great slides during the episode, so if you want to watch on YouTube, click below.

Listen to Craig’s first appearance in December 2020 here.

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Sponsor: YCharts enables financial advisors to make smarter investment decisions and better communicate with clients. YCharts offers a suite of intuitive tools, including numerous visualizations, comprehensive security screeners, portfolio construction, communication outputs, and market monitoring. To start your free trial and be sure to mention “MEB ” for 20% off your subscription, click here. (New clients only)

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Links from the Episode:

• 0:39 – Sponsor: YCharts
• 1:48 – Intro
• 2:56 – Welcome Craig to the show
• 4:00 – Episode #276: Craig Wichner, Farmland LP
• 4:09 – The growth of Farmland LP since 2020
• 7:00 – Leverage ratios between multi-family real estate, office buildings, and farmland
• 8:00 – The farmland sector’s positive correlation with inflation
• 14:10 – Why there is a shortage of organic farms
• 23:25 – Walking through a real case study
• 26:52 – How Farmland LP calculates how much debt to employ on a farm
• 28:10 – The valuation of dry land and water
• 36:00 – The source of Farmland LP’s investment capital
• 37:00 – The mechanics of the upcoming launch of Fund III
• 44:30 – The role that automation plays in farming
• 48:40 – How Farmland LP received the highest ever ESG score from the largest firm
• 53:12 – Government-subsidized organic crop insurance
• 55:15 – What the future looks like for Farmland LP
• 56:40 – Farmland LP’s upcoming investor events; learn more at farmlandlp.com; email ir@farmlandlp.com

 

Transcript:

Welcome Message:

Welcome to the Med 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:

Med Faber’s the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations he will not discuss any of Camber’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:

Today’s episode is sponsored by my friends at YCharts. If you’re a financial advisor, listen up. By now you know YCharts lets you see return data, price charts and other information, but now they’re taking it to a whole nother level by helping you create custom reports and presentations to enhance conversations with clients and prospects. With its easy drag and drop design, the report builder allows you to customize over 30 visuals, making it great for meeting with prospects and clients during quarter or year-end reviews. You can even upload your own visuals and your firm branding colors and logo. Their new update allows for personalized storytelling, giving you the ability to pull in save tables and charts, or add custom text boxes that advisors love to add disclosures for our friends in compliance. Make your life easier. Give YCharts a try and streamline your process of making presentations. YCharts is offering new subscribers who are listeners of the show a 20% discount. Click on the link in the show notes or visit go.ycharts.com/meb2023. That’s go.ycharts.com/meb2023, or just click on the link in the show notes.

 

Meb:

Hello everybody. We’re heading back down to the farm today with returning guests. Craig Wichner, founder and managing partner of Farmland LP, the largest farmland manager focused on organic farmland now managing over a quarter billion dollars in assets and 15,000 acres of farmland. Today’s episode Craig starts with an update on his company, and then shares how higher inflation and the shifting macro environment has affected farmland as an asset class, especially after 2022 when real assets were one of the few ones that didn’t have negative returns. Then we dive into a case study of an acquisition they made of a 4,000 acre, 150-year-old farm in Northern California back in 2013 for just under $30 million. Craig walks through the investment and timeline to convert the farm to organic, the benefits of the conversion and how it helped the farm be reappraised for just over $75 million last year.

Craig shares some great slides during the episode, so if you want to watch it on YouTube, click on the link in the show notes. And if you aren’t subscribed to our YouTube channel, what are you waiting for? Almost 15,000 investors are subscribed, so hop on over. Please enjoy this episode with farmland LPs. Craig Wichner. Craig, welcome back to the show.

Craig:

Meb, great to see you.

Meb:

You were last here in late 2020. I’m excited to get a catch-up. What’s going on in your life, your world? Where do we find you today? This beautiful, for those not watching on YouTube, this beautiful [inaudible 00:03:13] in the background. Where are you?

Craig:

Just north of San Francisco near Larkspur.

Meb:

Let’s get a little update briefly on your company and firm, then we’ll talk about all things farmland, macro and then back specifically to y’all’s farms. But give us the update since 2020. Did I see you guys are now on the fund three?

Craig:

We’re just about to launch fund three. We actually just yesterday closed a 1100 acre property. That’ll be the first property in fund three.

Meb:

Congrats. Where was the closing?

Craig:

Oregon in the Willamette Valley. Nice organic blueberries, wine grapes, hazelnuts, beautiful ground, beautiful groundwater rights or water rights in general. Great growing climate.

Meb:

Yum. All right, well catch us up on the company. We’ll post the show note link listeners if you want the kind of intro episode. But walk us forward since 2020, what have you guys been up to?

Craig:

Great. Well, we’re up to around $250 million in assets, about 15,000 acres, 16,000 acres of farmland. Now, for the people who don’t know, we buy conventional farmland, Farmland LP buys conventional farmland and converts it to organic regeneratively managed farmland as an investment fund. And we really just focus on adding value to farmland. Business has grown a bit as well. We have about eight people in fund management and 45 people in farmland management, and we lease out two thirds of our acres and we farm about a third of the acres ourselves and our farmland is located in Northern California, Oregon and Washington.

Meb:

Well, one of the big things that has certainly changed or accelerated, we could do a lot of different adjectives, since we last spoke is a, I mean multi-decade defined regime that seems to have shifted, which is of one of declining interest rates and bottoming to one where all of a sudden interest rates have shot up and inflation. Which is something that we haven’t seen in the United States or has been a concern for 40 years, really. Tell me a little bit about that. We talk about farmland market in general. You can give us an update overview of the macro and how it’s impacted interest and everything you guys are doing in your world.

Craig:

It seems like this incredibly hence time. One of the things that I love about farmland is that there’s $3.8 trillion worth of farmland in the U.S. Same economic value as all of the office buildings in the U.S. or all of the apartment buildings in the U.S. But again, 40% of farmland is leased. Farmland really is commercial real estate like those other asset classes. But there’s very little debt on the farmland sector. And maybe I’ll just put up a quick slide for you guys for-

Meb:

Yeah, I’d love to see, you have a great deck. If we can’t share broadly with the listeners, maybe you’ll let us share some of the slides in these show notes. But there was really two massive takeaways from our last episode that really were a surprise to me, for someone even who’s been a long time Farmland participant investor. The first was the statistic you just dropped, which is the absolute magnitude of the size of Farmland. And you can see on the slide relative to, wow, this is a great slide. Relative to various types of commercial real estate office and we actually just did an episode on timber, so the timber industry too. All right, we’ll hand it back to you.

Craig:

Well, that’s great. The next part about it is the leverage ratios. So multi-family is around 51%. LTV office buildings are around 78% LTV in the entire sector, $3.2 trillion worth of office buildings, 78% of that is debt. And that’s why you see really tremendous changes happen when you have interest rates go up or have any credit issues. Farmland, there’s only 13% LTV on the entire sector, so really tremendously little debt and about half of that debt is just operating lines. It’s not even the land being leveraged, but I include that in the number just as a worst case comparison. And only 2% of farmland is institutionally owned. It really is this, it’s not correlated with the debt markets. It’s been hard traditionally to get into as an institutional investor or even as an individual investor.

I know you’re personally an owner in Farmland, which is great, and it does actually positively correlate with inflation. Actually, I’ll go to the next slide here just for background. And the short story on this is that over the decades since 1970 farmland returns have beaten inflation by 6.2% per year. And the mechanism of that is actually just, it’s really simple and easy once you understand it, which is that rents on farmland, 40% of farmland is rented, as I said. And the rent rates are basically driven by the value of the crops that grow on that land. And so as you increase the value of the crops, it increases returns to the farmers and the landowners. And that results in increase in asset value as well over time. And so very simply, as food prices increases, which is the definition of core inflation, food prices go up, the farmers’ revenue per acre is going up, they’re growing the same amount of food and a little bit more each year with productivity increases and that increases the returns per acre on the farmland and increases the asset value as well.

That really has driven these great returns plus productivity increases over time. And that’s really the core of our strategy, which is to increase the value of the crops grown on that land, not dependent on inflation, but actually we’ve demonstrated that we buy farmland that generates rents of $300 an acre, take it through a three-year organic conversion process and get rents of $750 an acre on that land.

Meb:

The analogy to commercial real estate is so relatable I feel like for many people because most people have grown up obviously with real estate, even if it’s just a personal experience, but it’s a little more tangible I feel like for most. For those of us who have grown up either on a farm or next to a farm, it’s a very similar mental concept, the commercial real estate rents versus farmland. What is the simple takeaway, by the way, why we’re on this chart, of why real estate has such a higher LT V is it’s simply because it’s institutionalized and securitized that debt is such a major part of the transaction versus farmland which has just historically been owned outright. What’s the reason?

Craig:

The banking system is very familiar with commercial real estate as an asset class. Multi-family office buildings, the banking system is really designed around that. In farming, in agriculture, you had some debt increases in basically the ’70s and then you had a farm crisis of debt crisis in late ’70s, early ’80s. And banks were basically foreclosing on farmland that was not popular with farmers and you would basically have farmers boycotting the auctions that they would have. And so lenders didn’t want to lend into the space, farmers didn’t want anything to do with the banks as well. And part of that was caused, actually … What drove it is in 1971 the U.S. changed its agricultural policy to tell everyone to basically plant fence post to fence post and get big or get out. Prior to that, prior to 1971, the policy had been much more around conservation.

About 10% of the farmland was always not farmed and in conservation reserve programs. 1971 rolls around and because of some political issues with Russia, the USSR at the time, the policy became, let’s overproduce corn and drive down the price. You had a lot of people taking on debt to plant more corn and then the price declines caused problems with solvency for them with all the debt.

Meb:

And I think with anyone who’s been burned by debt too, you get some PTSD or really any sort of market environment that burns you once. You have a very vivid memory of that. I imagine part of that is part of the story too for farmers, where the parents and grandparents down the generations were like, “Whatever you do, don’t take out a bunch of debt on these farms.”

Craig:

The kids who grow up in that environment are the ones who are running, the banks now running these organizations. Meb, if you do an investment and then you decide you don’t like a sector, you just don’t invest in that sector anymore. If you’re a farmer, you’re a farmer, you’re not going to pick up and go work in a factory. Yeah, so the people who are on the land, that’s why you only have 13% debt on the entire sector. And it’s really the ethos of the sector at this point. The government actually has two GSEs, government sponsored enterprises focused on lending to farmers. You get really advantageous rates. There’s Farmer Mac, which is like Fannie Mae and Freddie Mac, which lends to institutions.

And then there’s the farm credit system. We just actually in the property that we acquired, we just took over a loan from the farm credit system and that’s all set up as cooperative. They actually give you a rebate on your loans. Our net interest on that loan is 3.99% on there after that rebate. So there’s good lending opportunities, but we do like having low leverage on the farmland, sometimes none. Actually usually we like to buy it a 100% equity and then do improvements with leverage if it’s recently priced.

Meb:

Got it. Okay. It makes sense, I think for most people when they think about it, that farmland intuitively, if you were to think about inflation or higher inflation periods, why farmland would do well, I feel like that is somewhat of an obvious takeaway. The two things that I said were really big surprises to me from the last podcast. One was what we just talked about. Second was that the role of, you mentioned organics and you dropped on the last podcast that only 1% of U.S. farmland is organic. Is that’s still the case? That seemed like a shockingly low number to me.

Craig:

Well, great news, is up to 1.2%.

Meb:

Oh baby, it’s up 20%. That’s a better way to say it, 20% increase. That’s crazy.

Craig:

It’s a surprisingly low number. Over 6% of the U.S. food budget is spent on organic food. The additional margins are great, so 50 to 200% price premiums are there. And there’s tremendous consumer demand. The CEO of Costco, 10% of all organic food in the U.S. is sold through Costco, so it’s an amazing channel, but their CEO says that they can’t get enough organics to stay in business day after day. So it’s really a supply limited market. If there was more organic food, you’d have a larger market, but you need that certified organic land in order to grow organic food in order to serve that market. And it’s that three year transition to organic that really holds people back, holds farmers back from converting.

Meb:

My brother’s doing it right now in Western Kansas, if you’re watching this on YouTube, this might even be me do the farm he is doing. And he says it’s not easy and it takes a while.

Craig:

Three years to get certified. And one of the big challenges is actually you can’t just mono crop, like the most operationally efficient way of managing farmland is to farm one crop year after year after year, right? And only rotate when you have to. If you’re looking at maximizing soil health and doing regenerative agriculture, then you need basically four crops grown each year and you need to rotate those fields over time.

Meb:

Is that part of a requirement for the organic label or is that more on the regenerative side or how’s that work?

Craig:

That’s more on the regenerative side, but because we do that, it makes it very easy for us to get certified organic. In general in crops you need to rotate your crops. If you try to grow corn three, four, five years in a row, you’re going to have all kinds of soil pests, all kinds of above ground pests. You’re going to have a tremendous amount of weeds and you really need to break that cycle. And so what most farmers in the Midwest do, is they maximize the time they can do the corn by doing genetically engineered crops and applying lots of pesticides and herbicides on the land and then rotating. The rotation that they do is just usually one year to soybeans, which have a whole different set of pests and then rotate back, adds a little bit of soil nitrogen as well, and then rotate back into corn.

That’s the primary rotation, but it’s very dependent on genetically modified crops and lots of pesticides and herbicides. If you want to go away from that, use more natural systems, then you need these at least three, but generally four crops each year and then rotating over time. That’s very challenging for a farmer. And if you think about the average commodity farmer in the U.S. has about $8.5 million worth of land and equipment and they make just $250,000 a year. But if they take three years and convert that through to organic, that’s $750,000 that they’re not going to have to send their kids to college or fund their retirement or various things like that. So that really is a big barrier.

Meb:

Looking at this chart, I love when things are very simple for me on the investing side, and to me, 6% organic food market share, 6.3, 1.2% organic crop land, there’s a spread there to be earned and it’s getting wider, by the way. And if there’s price premiums, 50 200% price premiums organic, why are more people not taking advantage of this? What’s the hindrance?

Craig:

Part of the issue is that farmers themselves, 98% of farmland is owned by the farmers and 2% is institutional. The big barrier to the existing farmers is that three year conversion period. It’s how do they fund in essence that transition to organic. There’s a lot of expertise issues, like you actually need to know how to do this. It’s much harder to grow four different crops each year and find different markets to sell them to and have the equipment to do that as well. Scale becomes very, very important to handle that. On the institutional side, we’re at 250 million. We’re one of the 14 largest farmland managers in the U.S. which is a shocking number if you’re used to other forms of commercial real estate. But we’re the largest focused on organic and regenerative agriculture. I’d actually love for there to be more competition in this space.

I think that there’s a tremendous opportunity in this, but when I look around at the other institutional investors, two things hold them back. One is still a general bias against organic, like the general bias against organic agriculture. Which to some extent is going away on the surface. But the farm managers underneath that still really, really believe that. They literally tell me that organic doesn’t work, even though it’s a $60 billion a year business, so that’s not true. And then the second thing is that they’re talking to their investors about buying an asset that generates steady cash flow from day one. They talk about the cash flow that they generate from day one, and you can’t take it through a value add process if you sold the on getting cash flow from day one. We tell our investors they’re not going to get cash flow for three years.

We’re going to take it through the organic conversion process and then we’re going to get the stepped up rents from $300 an acre to $750 an acre, or it might be four or five years if we’re converting part of the land over to organic blueberries or wine grapes or other crops like that. More what are called permanent crops. And when the investors come in with that nice longer term time prize and that five years or more time horizon, and they know upfront they’re not going to get cash flow right in the beginning. Then it makes a lot of sense, but it also shrinks the pool of investors.

Meb:

As we’re talking about this organic transformation, is it a big cost? I’m thinking of barriers and it just seems so obvious to me. Is it something that, is there a big fee to pay for this to get certified? Is there a lot of documentation? I mean, you and I were joking before this began and I was lamenting how problematic dealing with just government permitting was for just renovating our office. It’s been going on for six months, it should have taken one week, maybe. We didn’t even do anything, so we cleaned up the space. But I mean, my God, just dealing with the government. Is this a big barrier or is it actually, once you learn how to do it fairly templated and simple and as expensive, what’s the process for someone who’s never been through it?

Craig:

It can be as simple as just essentially not farming the land for three years and then farming organic crops. It is more complicated in that when you’re switching from potentially monocropping corn to four diverse crops, you have four times the complexity that you had before. Our farm management team gets the land certified organic. We map out a 10-year crop rotation plan on the land, and by buying at least $50 million worth of farmland in one tight geographic area, we have enough that we can say, “Okay, great. Well, we have 600 acres of land available for tomatoes every year for the next 10 years. It’s just going to rotate around the farm.” Part of the land can go in pasture, for example, part to organic vegetables, part to grains, and then back into pasture. But every year the same ratios of land are there. And so we’ll go out and we’ll find the best sheep and cattle tenants for the pasture, the best organic tomato farmers or organic sweet corn farmers for the vegetable rotations, green beans and the best grain farmers as well. And then lease that out as essentially multi-tenant commercial real estate.

Meb:

Sounds altogether too sensible. Let’s talk a little bit about you guys last couple years. You could either do it through case studies, you could just talk about broad terms, what you guys have been looking for, what you’ve been buying, any market trends you want to talk about, have prices. I mean I’ve seen your returns and I know how the funds work, but any overview you want you can kick it off and we can go through any which way you want.

Craig:

Probably the best way to answer your question is an example of a farm that we’ve taken all the way through the conversion process and really created a lot more diversity on that. And there’s a new slide up here if people want to look at that on YouTube. But one of the properties that we bought was a 4,000 acre farm about 55 miles east of San Francisco. And we bought it for around $30 million. I was recently appraised for a little over $77 million, and the conversion process was pretty interesting. When we bought it, it was great farmland, some of the oldest water rights in California, actually pre-1914 water rights. Our water rights are senior to the state of California. We can talk about the value of water, Meb because I think that’s one of the best reasons to buy farmland, is actually to get what I think is the most miss priced asset class around which is water.

But just looking at farmland for this case study is, we bought this property, had two tenant farmers on the land each farming about 2,000 acres, and they had been farming it for around 50 years. And both of them were using the exact same crop rotation on the land, about two-thirds alfalfa, 25% corn and the rest of it, about 5% tomatoes on that land, just rotating around through a five-year crop rotation. And the revenue was under $350 an acre for that. When we bought it, we took it through an organic conversion process. One of the farmers wanted nothing to do with converting to organic. He was a 91-year-old guy who had made a ton of money in selling land for property development and just enjoyed farming 10,000 acres. And he said, “You guys want this 2,000 acres back, we’re done. Just let us know when you want it.”

And the other group we actually worked with to help actually do the work on the land as we were converting it to organic. And fast-forward to today, where in the past there were no organic acres, we now have over 2,900 acres certified organic and in permanent crops. Went from three conventional crops to 12 crops today. And went from two farmer tenants to seven farmer tenants on that land. And increased the revenue per acre for us from just under $350 an acre to over $800 per acre. Really significant increase in the performance of the land, and it works. And actually these numbers reflect only one of the things that we’ve done is we identified some of the ground that was just ideal for organic blueberries on that ground, so about 600 acres.

We went out, we established a partnership with Driscolls, we have expertise in blueberries, so we actually planted them ourselves, and we’re just partway through the maturation process of those blueberries. Our net last year, net profit was over $1,100 per acre on those blueberries that’ll grow to around $10,000 per acre maturity. The numbers that I’m quoting over $800 per acre will actually increase quite substantially as that matures.

Meb:

You guys use a little bit of debt, I know, we talked about it in the beginning. How do you see that? Are there any sort of fence posts or broad points of reference you use for how much debt you’ll employ on a farm or an operation or a purchase? How do you think about it?

Craig:

It’s pretty sensitive to debt prices. Up until a few years ago we were very comfortable with debt. Typically, we would like to see 30% plus or minus 10% on debt is a reasonable LTV number as the prices increased. And because of some of the debt that was available in the space with the government sponsored enterprises, you were able to get it at a discount to already cheap free money rates. Now the debt markets are just not functional. As the rates were going up, we shifted over to a 100% equity for buying the properties and then using debt to do the improvements. But now we’re pretty much looking at just a 100% equity for the whole thing. In the case we were able to assume this debt at 3.99%. So that’s unacceptable, and it’s only just a little over 20% of the asset.

Meb:

We’ve had you on the podcast before, we’ve had a number of farmers on the podcast, and I think if you were to do the word cloud or look at the words that get used most, water’s up there. Maybe dig a little more, tell us a little deeper about why this is so important? How do you protect yourself against mistakes here or getting in trouble with a property that either may not have the right water rights or that in the future when it comes to global warming or changing geopolitics and borders, how you protect yourself?

Craig:

And we have a big screen basically on which areas are going to be neutrally or positively impacted by climate change, which ones are going to be negatively impacted? And through this, the opportunity to buy water has been just really eye-opening for us. We actually value the dirt and the water separately, and when you do that, we often feel like we’re buying the dirt and getting the water for free.

Meb:

I was going to say, what’s the traditional breakdown if you were to actually … Is it 90% land value, 10% water mentally? I know there’s probably not an exact breakdown, but is there a construct you think about it?

Craig:

That’s actually pretty good, and it’s actually just wacky, truly the water prices are really just broken. But I’ll give you some examples to anchor this. In Oregon, for example, 10, 12, about 15 years ago or so, the dry land prices were as low as $2,500 an acre, and the water rights were another $2,500 an acre. So the irrigated land might sell for $5,000. Okay, but you fast-forward to today. The dry land prices are around 10,000 an acre and irrigated land is around $12,500 an acre. The land prices have increased, but the value of the water rights hasn’t increased during that time.

That’s a place that we can look at very, very good data, the value of that water right, either on a cash flow basis or on an asset value basis. Because really water is a property, just like owning a piece of real estate, just associated with farmland, blended and blurred together with farmland. Water is something that really has tremendous value. Australia has set up a water market, the United States has not. If that happens it will be a massive change.

Meb:

You guys currently are California, Oregon, Washington, is that right?

Craig:

That’s correct.

Meb:

Going back to how investors think about this, where it slots in. We’ve long talked about real assets and real assets are not homogenous. You have real estate, which is obviously very different, commercial real estate. Even within commercial real estate you have data centers, you have single family housing, you have office space, university, medical, on and on and on. You have farmland and things like that. But even again, within farmland you have corn and wheat in the Midwest versus blueberries in the northwest versus cannabis in California versus wine grapes. It’s also a very diverse asset class. That have been said, we tend to lump real assets together for similar characteristics. But 2022 is a good example. Where many types of real assets did very poorly farmland was probably to my knowledge, one of the only few long only assets that had great performance. Is that a fair comment? I’m trying to think of even what else may have endured last year. Stocks and bonds obviously did terrible, but farmland put up a solid year. Is that accurate?

Craig:

That is accurate actually. On average, farmland is up about 10% and just one year over year, so ’21 to ’22 and some areas like the Midwest are up. I’m looking at Iowa for example, at up 19.7% and then some areas on the West Coast around eight, nine, 10% as well. Farmland really is interesting in that 53% of U.S. farmland grows two commodity crops, corn and soy. And most of that farmland is in the Midwest. And so when you think about farmland prices, the dominant price is that Midwestern farmland, but there’s 300 different crops growing on the West Coast and it provides 50% or more of fruits, nuts and vegetables for example in the U.S. so very, very, very large markets that are diversified. One of the interesting things about the Midwest farmland is that it’s very liquid. So the auction markets that they have in the Midwest and all the farmland is sold based on CSR points, corn suitability rating points, so how much corn can you grow per acre is what it’s priced on.

And so it effectively becomes almost this commodity priced asset with a liquid market through the auction system that can change very rapidly. And there has been a lot of capital going into that space. But it results in imbalances, because the farmland, for example on the West Coast doesn’t have that same liquid markets. If you’re an outside investor, a non-professional investor, it’s harder to find property and harder to find an operator for those assets. And so that’s why these markets have gone up less than the Midwest. and it results in imbalances because if you actually do some math and you say, “Hey, how much corn can I grow per acre in Iowa versus our farm in Washington?” And one thing that people don’t know is that farmland where we are in Washington actually produces the most amount of corn per acre in any county in the U.S. Partially because-

Meb:

That’s surprising to me.

Craig:

It’s a great growing climate, but partially because it’s irrigated so we can provide just the right amount of water that’s needed, whereas the Iowa farmland is more rain fed and a little bit subject to the variability, so we can make it rain exactly where we want it to. It’s very high productive farmland, but the price of that farmland, Iowa farmland has been selling for $20,000 an acre used to be a high price. Now they’ve had farmland sales at $30,000 an acre. The farmland where we are in Washington, for example, is closer to $15,000 an acre. Produces the same amount of corn per acre. if you wanted to produce corn, Doesn’t it make more sense to buy, for example in Washington than in Iowa? Yes, but it is a very regionalized market. And it is affected by the liquidity of these markets as well. Then it’s a really interesting sector and it’s very not correlated. It’s correlated with money printing and not correlated with the debt markets. And that’s I think a good general place to be macroeconomically.

Meb:

And as the world goes haywire and you can watch stocks and bonds go up 10% in a day, you can say, “here’s my farm, I can’t do anything with it,” which I think is a feature, not a bug. Talk to us a little bit about how you guys put together these funds. So for investors, is it still accredited only, what’s the minimums?

Craig:

It is accredited only, it’s 506(c) which allows us to talk publicly about what we do, and that’s a new jobs act structure. It’s unlimited amount of capital that we can raise in general, but it does mean that every investor who comes in has to be verified, third-party accredited on that. 50K minimum, We want people to be able to participate.

Meb:

Oh man, that’s accessible, that’s great.

Craig:

We try to make it as accessible as possible. And we do have institutional investors, large wealth management firms have their clients invest with us and high net-worth individuals and family offices as well.

Meb:

When I get around is selling some of my farmland, I will invest some proceeds with you guys. I like what you’re doing. Whenever that may be, one day. Talk to us a little bit about, all right, so fund three for example versus the prior funds. What is the goal on the composition of that? Is it going to be five different geographies? Is it going to be one specific geography, types of crops? How do people get the money out? What are the mechanics of the fund for someone who may invest today? Can they withdraw on 20? I’m trying to do the math. What are we, 2020, 2033. I can’t even say it sometime in the future.

Craig:

2023 is right now. We’ll actually launch that fund this quarter on there. We just acquired this anchor 1,100 acre property, otherwise we would have launched fund three already, but that’s a nice anchor property for us. Our strategy is based on buying at least $50 million worth of farmland and one tight geographic area. So we can have an onsite farm manager and really manage that as you’d manage a 400-unit apartment building. And that makes it really easy for us to buy the 100-unit apartment building next door or the 1,000-unit apartment building next door without really expanding our headcount on that. We have three major hubs, Northern California, Oregon and the Willamette Valley and Washington. Those are great growing regions. The new fund will raise somewhere between 250 and $500 million and by farmland generally in those geographies. Plus we’ll add one more geography.

At this point it’s probably going to emphasize Oregon and Washington just we like the pricing dynamics where they are right now. We think there’s a lot of opportunity in those areas. And the investment generally, it’s officially a 10-year fund with one year optional extensions. We tell the investors not to expect cash flow during the first three years and then as it’s available, we’ll distribute that cash flow, then they’ll have an opportunity to exit at the end or they can stay in as long as they want. So, I view these as kind of 30 plus year assets, farmlands just this great asset class. And so we’ve designed it so that yes, our job is to increase the cash flow and provide liquidity to investors as quickly as possible. But also not force them out, not force them to have a taxable loss and then just try to look for another property.

Meb:

I imagine some people are thinking about this generationally where if given their choice, they would probably just roll or continue with the properties. Not indefinitely, but certainly for the foreseeable future.

Craig:

That’s how I think about it. For me, I do want to give the investors liquidity as quickly as possible, but I also want to be kept on my toes and not give them a reason to want to exit. These are great assets and we do think about it multi-generation.

Meb:

What events over the past few years has caused the most interest? If you could correlate it? I wonder if Silicon Valley Bank, in my mind there’s certain things that’ll just drive money elsewhere. Silicon Valley Bank is the type of thing. It’s like, all right, well A, I got to figure out if I have too much money in one bank. B, is it a bank that may disappear under the ether? B, should I be getting a better return on my money than 0%, or something like COVID, or something like inflation really ramping up? Last few years, I mean obviously 60/40 getting smashed last year while farmland outperformed it by what, 20 percentage points, some just astonishing number. Is there anything in particular where your phone starts ringing off the hook or you starting to get emails, other than the Med Faber Show? Anything else that’s like, oh, people are actually waking up to this concept?

Craig:

Well, you do have very smart investors that are not thinking inside the box, and you’ve just done a phenomenal job on really articulating some of the complex trends that are happening in great strategies for moving forward. But really during the COVID period, I got the sense that people were really looking, they were concerned about the global economy. The government had just printed a tremendous amount of money, increased money supply 30% or more, and they wanted to put their money someplace safe. And so that was a general theme for people. And that did have a good effect on people coming to Farmland LP.

Meb:

Yeah, I’m always thinking about where investors come from, their motivations. And in your area it’s interesting because there’s people that probably come to you from A, “I don’t have farmland exposure aspect.” There’s people that are looking at it from a pure diversification or return perspective. There’s other people that are probably looking at it from honestly a regenerative organic stewardship. They’re like, “Hey, I want to invest, but I want to invest somewhere where it’s thoughtful versus faceless or do no evil, said differently.” And then I imagine it’s also a mix of individuals, family office, all types. Do you think it’s just a little bit of everything? What’s your experience been over the past number of years? You going to get all, I imagine it’s a little harder for the average financial advisor. I mean, unless they’re placing say, “Hey clients, bunch of you guys invest.” Because you don’t have a public vehicle, which for that channel makes it a little harder for someone at UBS or Morgan Stanley or something. There’s a little bit of everything and motivation’s varied as well.

Craig:

I think so. But Bill Gates coming out as one of the largest farmland owners, I think also had an impact on people. And if you do the math around that, he put around 5% of his assets in farmland. And that’s a good anchor number for people. You should have diversified commercial real estate exposure, real assets exposure, and around 5% in farmland is just a good enough for Bill Gates. And I do think that there’s just increased concern about how leveraged in a general sense, not with a capital L, not with a capital debt standpoint, but how leveraged the financial markets are and how leveraged people’s portfolios are just to stocks and bonds.

Meb:

One of the questions I wanted to ask was, what is … I toured one of the largest greenhouses in the world about a week ago. It’s mainly tomatoes and cannabis, but it’s one of the most technologically advanced buildings I’ve been in, I think ever. And you start to see the role of robotics really accelerate on the farm. I mean, I joke on here all the time that one of the most advanced pieces of machinery for my childhood was riding around on a tractor, which many years ago had GPS and a TV and everything, air conditioning. But today it’s like next level and it seems to be accelerating. What are your thoughts there? I mean, I imagine one of the ways that you guys could even farm eight different types of crops is the ability to efficiently work those different types of, it’s different to cut some wheat than it is to harvest some strawberries on and on. What’s the role that automation’s playing and how quickly is that like adoption curve happening here in 2023?

Craig:

There’s a tremendous amount of technology that’s being advanced on the farm. And it’s tractors, cutting heads, automated harvesting equipment for permanent crops as well, not just wheat and corn that you might normally think about. But for example, if you look at blueberry harvesting. One blueberry harvester with four people on it can harvest as much as 125 hand harvesters. And really most blueberry fields out there are set up for hand harvesting. You have to basically do everything different with your plants and your plantings and your rows and your varietal selection, et cetera to be able to do the machine harvest. But you get fresh market quality blueberries with four people instead of 125 people. So you really get dramatic cost savings, quality increases as well.

Talking about the vertical farming, we could do vertical farming on our land. We have a lot of great land. We have water, sunshine, labor, et cetera. But when I do the math, and AppHarvest is probably a good example, to do a 60 acre greenhouse would cost them around $2.5 million per acre for that greenhouse. And for that same amount of money that it costs them to build a 60 acre greenhouse, I could buy 10,000 acres of irrigated farmland. Greenhouses are depreciating assets. Their operating costs are high, typically around twice the cost per pound of food than farmland grown stuff. But really in 10 years the question is, “Well, would you rather own a 10-year old 60 acre greenhouse or 10,000 acres of irrigated farmland?”

Just from an investment standpoint, I’m a big fan. I still think there’s tremendous value on the farmland side. If I thought that there was a lot of opportunity in the controlled environment sector, we’d be investing there as well. But it’s really narrow selection of crops. Things that have a quick turnover and high dollar value per square foot are the things that make sense. So think tomatoes, strawberries, cannabis, et cetera.

Meb:

Yeah. What is the hip rating and why are you guys number one?

Craig:

Oh, because we’re awesome. One of the things, I’ll pop that up on the screen if people want to look at that. And maybe I’ll give you just a quick bit of the backstory. We’re very science oriented in what we do, because we buy farmland and converter to organic regeneratively managed farmland, the USDA was actually … And do it at scale. The USDA was actually very interested in what the ecological value was of what we did. They actually gave us a $250,000 grant and we brought in two consulting firms to look at what we did and quantify it for us. And so these two firms looked at every tractor pass, every crop that went on the ground, every input that went in, and on $50 million worth of farmland those guys showed not only did we deliver a 70% net economic gain to the investor, but we also delivered 46% net gain to the ecosystem in the form of soil, carbon sequestered, cleaned water, clean air, et cetera, biodiversity.

And if you dig into the numbers a little bit, what it showed is that if that land had been managed conventionally, it would have caused $8.5 million worth of ecosystem service harm. And the way that we managed it created $12.5 million worth of ecosystem service benefit. So, a real double bottom line return both to the investors and to the ecosystem. Partially because of that scientific report that we did we brought in the largest ESG ratings firm to give us a score on our system. We do a bunch of different ratings, but we brought these guys in and this group does the ratings for MSCI. If you see an ESG ratings on MSCI, these are the backend guys behind it.

They went in, we went through a three-month process with them. They score you on multiple different measures and give you an ultimate score out of a 100 points. If you get 50 or below, you’re doing bad for the world. If you get 50 or above, you’re doing good for the world. The average agricultural firm in their system has a score of 17, so not doing well for the world. And we received the highest score that they’ve ever given to any one of their 10,000 corporations. We got a score of 82 on that. And we beat insurance companies and tech companies and biotech companies and all kinds of companies on that. And there’s a 12-page report that’s available on this. But for us it’s very important not only to get certified organic, which is a federal regulated standard. But also have these third party scores that are delivered. You can’t get a 100 on stuff. Some fake industry scoring is just like, “Oh, you’re all sustainable.” “Well, oh great, I guess we can go home. We’re all done.”

But it’s actually really important, just like you never say, “Oh, we’re done in terms of delivering profits on the sustainability side,” there’s always another step you can take. There’s always things you can improve on and that’s why we like things like this hip score.

Meb:

Is there any carbon credit angle to this at any point, or I’m always thinking of alternative yield. Obviously, farmland is a pretty straightforward return stream, whether it’s through the crops as well as appreciation of the land. Are there other alternative yield sources you guys ever look at for these properties? Is carbon one of them?

Craig:

We sequester about half a ton to a ton of carbon per year on each of our 15,000 acres. It’s a great, essentially byproduct of focusing on healthy soil biology and good land practices. Cover cropping for example is one of the best ways to increase, so soil carbon, and it’s only done on about 3% of farmland acres in the U.S. Farmland is the second-largest carbon sink available after the oceans. There’s really a tremendous opportunity to sequester carbon there. The issue has been, it’s complicated to actually aggregate the carbon. Every different soil type, every different geography, every different crop rotation has a different protocol that needs to be developed in order to quantify the amount of carbon, at least according to the way that the carbon markets are structured today.

And the benefit, if carbon prices are $20 per ton, they might be higher than that now, but let’s use $20 a ton. If we’re sequestering half a ton to a ton of carbon per year, that’s 10 to $20 additional income per year on that, which is fine. If you’re generating $300 an acre conventional rent and you can get an extra 10 or 20 bucks, well, okay, that’s nice. But if I can convert it to organic and get $750 an acre rent, that 10 to $20 doesn’t change my behavior.

Meb:

Yeah, and focusing on the big return, the big muscle movement, the big return driver, it makes a lot more sense than the rounding errors. As we just had Ramit Sethi on the podcast said, “Focus on $50,000 problems instead of $5 problems.” Now he’s talking about lattes and other things, but I think it applies. I often get seduced in a similar manner in our business of getting distracted by shiny ideas when the main focus is right in front of my face, so easy to do. Craig, we talked about a lot. What did we miss? Anything that we haven’t touched on today that you think is important or meaningful that we glossed over?

Craig:

The magical thing about farmland. And when I started, we didn’t have this, crop insurance, so organic crop insurance. Basically the commodity sector has had this wonderful benefit for crop insurance, government funded crop insurance. The government subsidizes crop insurance by 40 to 60%, and they make sure that the farmer, the government has the vested interest in making sure that food is produced every year. And so, one of the key ways they do that is to provide crop insurance for people. And that makes sure that these farmers can stay in business decade after decade, no matter the weather cycles. If you don’t grow food one year, you’ve got a real societal issue. This is the reason why the government will basically make sure that all the farmers succeed.

Well, it takes 10 years the way the crop insurance is set up. It takes 10 years’ worth of growing a particular type of crop in a particular county in order for it to be eligible for crop insurance. Well, we’re now 25 years into organic certification. We’ve got a ton of crop diversity that is now available for crop insurance from the government. And so we’re able to get crop insurance for higher profit margin crops that really remove the risk. You get 80% crop insurance on your crops. We grow 40 different crops across our farms, so we get a lot of inherent diversification and with that crop insurance on it. It really creates this pretty magical asset class. You don’t have rent insurance for your apartment buildings or office building insurance on your office buildings, but we have government funded crop insurance on this. It’s a pretty matched asset class, only 2% institutionally owned, and that creates some really wonderful dynamics for investors to still get into the space.

Meb:

Hear, hear. Well, what’s the future look like for you guys? I mean, last time we talked, I mean, I think the answer I imagine is just plant and grow, right? Expand a bit and keep on doing what you’re doing. But is there anything else on your brain that you’re thinking about as we look out to 2024, 2025?

Craig:

We’ve spent the past number of years really building out our farm management company. We have this 45-person farm management company that really is just amazing. Everything is done at cost, it’s not a profit center for us. We do it at cost. So as we scale up those costs basically get amortized over more acres. I think we’re at a very nice stage to expand these regions that we’re in without increasing headcount on that and really benefiting from the economies of scale. And we’ll just continue to be focused and execute on buying high quality farmland with great water rights into the future. Longer term we’ll create these, we’ll do something fun around once the assets are all fully cash flowing so that it’s easier for everyone to participate in, but we can talk about that in a year or two.

Meb:

Now that we’re out of COVID you do any more real-world meetups? You hold any events on the farm? Where can people find out more about you guys? What’s the best places?

Craig:

Yeah, so our website @farmlandlp.com is a great place to get in contact with us. We’re actually having an investor event at our California farm that has the blueberries at the beginning of June. And then in the fall we have investor event up in Oregon where we harvest wine grapes. We really like to get the investors out to the farms.

Meb:

Yeah, man, that should be an easy sell. It’s like the Buffet, the Berkshire meeting ticket. As long as you’re an investor, you get entree, you got to stomp some grapes, you got to get your feet wet.

Craig:

Pretty much. It’s pretty amazing to get back out on the farm and really actually see sustainable regenerative agriculture happen at scale. And people say our blueberries are the best tasting blueberries that people have ever had, and it’s a lot of fun.

Meb:

Cool. Well, Craig, it’s been a lot of fun as usual, joining you, catching an update. Thanks so much for joining us today.

Craig:

Great talking to you, Meb as always.

Meb:

Listeners, if you enjoyed this episode, check out the link in the show notes for our first episode of Craig that was released at the end of 2020. Podcast listeners will post show notes to today’s conversation 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.