Episode #480: Craig Wichner, Farmland LP – Cultivating Wealth with Sustainable Farmland Investing
Visitor: Craig Wichner is the Founder and Managing Associate of Farmland LP, a number one funding fund that generates returns by changing typical industrial farmland to regenerative sustainable farmland.
Date Recorded: 4/19/2023 | Run-Time: 1:00:38
Abstract: In immediately’s episode, Craig begins with an replace on his firm after which shares how larger inflation and the shifting macro atmosphere has affected farmland as an asset class, particularly after 2022 when actual belongings had been one of many few belongings that didn’t have damaging returns.
Then we dive into the financials of an acquisition they manufactured from a 4,000 acre, 150 yr previous farm in Northern California again in 2013 for just below $30 million. Craig walks by way of the funding and timeline to transform the farm to natural, the good thing about the conversion, and the way it helped the farm be re-appraised for simply over $75 million final yr.
Craig shares some nice slides in the course of the episode, so if you wish to watch on YouTube, click on beneath.
Take heed to Craig’s first look in December 2020 right here.
Sponsor: YCharts permits monetary advisors to make smarter funding choices and higher talk with purchasers. YCharts provides a set of intuitive instruments, together with quite a few visualizations, complete safety screeners, portfolio building, communication outputs, and market monitoring. To start out your free trial and be sure you point out “MEB ” for 20% off your subscription, click on right here. (New purchasers solely)
Hyperlinks from the Episode:
- 0:39 – Sponsor: YCharts
- 1:48 – Intro
- 2:56 – Welcome Craig to the present
- 4:00 – Episode #276: Craig Wichner, Farmland LP
- 4:09 – The expansion of Farmland LP since 2020
- 7:00 – Leverage ratios between multi-family actual property, workplace buildings, and farmland
- 8:00 – The farmland sector’s constructive correlation with inflation
- 14:10 – Why there’s a scarcity of natural farms
- 23:25 – Strolling by way of an actual case examine
- 26:52 – How Farmland LP calculates how a lot debt to make use of on a farm
- 28:10 – The valuation of dry land and water
- 36:00 – The supply of Farmland LP’s funding capital
- 37:00 – The mechanics of the upcoming launch of Fund III
- 44:30 – The position that automation performs in farming
- 48:40 – How Farmland LP acquired the very best ever ESG rating from the biggest agency
- 53:12 – Authorities-subsidized natural crop insurance coverage
- 55:15 – What the longer term seems like for Farmland LP
- 56:40 – Farmland LP’s upcoming investor occasions; be taught extra at farmlandlp.com; electronic mail ir@farmlandlp.com
Transcript:
Welcome Message:
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Disclaimer:
Med Faber’s the co-founder and chief funding officer at Cambria Funding Administration. Because of trade laws he won’t talk about any of Camber’s funds on this podcast. All opinions expressed by podcast members are solely their very own opinions and don’t replicate the opinion of Cambria Funding Administration or its associates. For extra info, go to cambriainvestments.com.
Meb:
At present’s episode is sponsored by my pals at YCharts. In the event you’re a monetary advisor, pay attention up. By now you already know YCharts helps you to see return knowledge, value charts and different info, however now they’re taking it to an entire nother degree by serving to you create customized studies and displays to boost conversations with purchasers and prospects. With its straightforward drag and drop design, the report builder means that you can customise over 30 visuals, making it nice for assembly with prospects and purchasers throughout quarter or year-end evaluations. You possibly can even add your individual visuals and your agency branding colours and brand. Their new replace permits for personalised storytelling, supplying you with the power to tug in save tables and charts, or add customized textual content packing containers that advisors love so as to add disclosures for our pals in compliance. Make your life simpler. Give YCharts a attempt to streamline your course of of creating displays. YCharts is providing new subscribers who’re listeners of the present a 20% low cost. Click on on the hyperlink within the present notes or go to go.ycharts.com/meb2023. That’s go.ycharts.com/meb2023, or simply click on on the hyperlink within the present notes.
Meb:
Hiya all people. We’re heading again all the way down to the farm immediately with returning visitors. Craig Wichner, founder and managing companion of Farmland LP, the biggest farmland supervisor targeted on natural farmland now managing over 1 / 4 billion {dollars} in belongings and 15,000 acres of farmland. At present’s episode Craig begins with an replace on his firm, after which shares how larger inflation and the shifting macro atmosphere has affected farmland as an asset class, particularly after 2022 when actual belongings had been one of many few ones that didn’t have damaging returns. Then we dive right into a case examine of an acquisition they manufactured from a 4,000 acre, 150-year-old farm in Northern California again in 2013 for just below $30 million. Craig walks by way of the funding and timeline to transform the farm to natural, the advantages of the conversion and the way it helped the farm be reappraised for simply over $75 million final yr.
Craig shares some nice slides in the course of the episode, so if you wish to watch it on YouTube, click on on the hyperlink within the present notes. And when you aren’t subscribed to our YouTube channel, what are you ready for? Nearly 15,000 buyers are subscribed, so hop on over. Please get pleasure from this episode with farmland LPs. Craig Wichner. Craig, welcome again to the present.
Craig:
Meb, nice to see you.
Meb:
You had been final right here in late 2020. I’m excited to get a catch-up. What’s occurring in your life, your world? The place do we discover you immediately? This lovely, for these not watching on YouTube, this lovely [inaudible 00:03:13] within the background. The place are you?
Craig:
Simply north of San Francisco close to Larkspur.
Meb:
Let’s get just a little replace briefly in your firm and agency, then we’ll speak about all issues farmland, macro after which again particularly to y’all’s farms. However give us the replace since 2020. Did I see you guys are actually on the fund three?
Craig:
We’re nearly to launch fund three. We really simply yesterday closed a 1100 acre property. That’ll be the primary property in fund three.
Meb:
Congrats. The place was the closing?
Craig:
Oregon within the Willamette Valley. Good natural blueberries, wine grapes, hazelnuts, lovely floor, lovely groundwater rights or water rights usually. Nice rising local weather.
Meb:
Yum. All proper, effectively catch us up on the corporate. We’ll publish the present be aware hyperlink listeners if you need the form of intro episode. However stroll us ahead since 2020, what have you ever guys been as much as?
Craig:
Nice. Effectively, we’re as much as round $250 million in belongings, about 15,000 acres, 16,000 acres of farmland. Now, for the individuals who don’t know, we purchase typical farmland, Farmland LP buys typical farmland and converts it to natural regeneratively managed farmland as an funding fund. And we actually simply deal with including worth to farmland. Enterprise has grown a bit as effectively. We have now about eight individuals in fund administration and 45 individuals in farmland administration, and we lease out two thirds of our acres and we farm a couple of third of the acres ourselves and our farmland is situated in Northern California, Oregon and Washington.
Meb:
Effectively, one of many massive issues that has definitely modified or accelerated, we may do plenty of totally different adjectives, since we final spoke is a, I imply multi-decade outlined regime that appears to have shifted, which is of one among declining rates of interest and bottoming to 1 the place swiftly rates of interest have shot up and inflation. Which is one thing that we haven’t seen in the USA or has been a priority for 40 years, actually. Inform me just a little bit about that. We speak about farmland market usually. You may give us an replace overview of the macro and the way it’s impacted curiosity and every part you guys are doing in your world.
Craig:
It looks like this extremely therefore time. One of many issues that I really like about farmland is that there’s $3.8 trillion price of farmland within the U.S. Identical financial worth as the entire workplace buildings within the U.S. or the entire residence buildings within the U.S. However once more, 40% of farmland is leased. Farmland actually is industrial actual property like these different asset courses. However there’s little or no debt on the farmland sector. And perhaps I’ll simply put up a fast slide for you guys for-
Meb:
Yeah, I’d like to see, you have got an amazing deck. If we are able to’t share broadly with the listeners, perhaps you’ll allow us to share among the slides in these present notes. However there was actually two large takeaways from our final episode that basically had been a shock to me, for somebody even who’s been a very long time Farmland participant investor. The primary was the statistic you simply dropped, which is absolutely the magnitude of the scale of Farmland. And you may see on the slide relative to, wow, this can be a nice slide. Relative to numerous varieties of industrial actual property workplace and we really simply did an episode on timber, so the timber trade too. All proper, we’ll hand it again to you.
Craig:
Effectively, that’s nice. The following half about it’s the leverage ratios. So multi-family is round 51%. LTV workplace buildings are round 78% LTV in your complete sector, $3.2 trillion price of workplace buildings, 78% of that’s debt. And that’s why you see actually great adjustments occur when you have got rates of interest go up or have any credit score points. Farmland, there’s solely 13% LTV on your complete sector, so actually tremendously little debt and about half of that debt is simply working traces. It’s not even the land being leveraged, however I embody that within the quantity simply as a worst case comparability. And solely 2% of farmland is institutionally owned. It actually is that this, it’s not correlated with the debt markets. It’s been laborious historically to get into as an institutional investor and even as a person investor.
I do know you’re personally an proprietor in Farmland, which is nice, and it does really positively correlate with inflation. Really, I’ll go to the subsequent slide right here only for background. And the quick story on that is that over the a long time since 1970 farmland returns have crushed inflation by 6.2% per yr. And the mechanism of that’s really simply, it’s actually easy and straightforward when you perceive it, which is that rents on farmland, 40% of farmland is rented, as I stated. And the lease charges are mainly pushed by the worth of the crops that develop on that land. And in order you improve the worth of the crops, it will increase returns to the farmers and the landowners. And that ends in improve in asset worth as effectively over time. And so very merely, as meals costs will increase, which is the definition of core inflation, meals costs go up, the farmers’ income per acre goes up, they’re rising the identical quantity of meals and just a little bit extra annually with productiveness will increase and that will increase the returns per acre on the farmland and will increase the asset worth as effectively.
That basically has pushed these nice returns plus productiveness will increase over time. And that’s actually the core of our technique, which is to extend the worth of the crops grown on that land, not depending on inflation, however really we’ve demonstrated that we purchase farmland that generates rents of $300 an acre, take it by way of a three-year natural conversion course of and get rents of $750 an acre on that land.
Meb:
The analogy to industrial actual property is so relatable I really feel like for many individuals as a result of most individuals have grown up clearly with actual property, even when it’s only a private expertise, but it surely’s just a little extra tangible I really feel like for many. For these of us who’ve grown up both on a farm or subsequent to a farm, it’s a really comparable psychological idea, the industrial actual property rents versus farmland. What’s the easy takeaway, by the way in which, why we’re on this chart, of why actual property has such the next LT V is it’s just because it’s institutionalized and securitized that debt is such a serious a part of the transaction versus farmland which has simply traditionally been owned outright. What’s the explanation?
Craig:
The banking system could be very acquainted with industrial actual property as an asset class. Multi-family workplace buildings, the banking system is absolutely designed round that. In farming, in agriculture, you had some debt will increase in mainly the ’70s and then you definitely had a farm disaster of debt disaster in late ’70s, early ’80s. And banks had been mainly foreclosing on farmland that was not fashionable with farmers and you’ll mainly have farmers boycotting the auctions that they might have. And so lenders didn’t wish to lend into the area, farmers didn’t need something to do with the banks as effectively. And a part of that was precipitated, really … What drove it’s in 1971 the U.S. modified its agricultural coverage to inform everybody to mainly plant fence publish to fence publish and get massive or get out. Previous to that, previous to 1971, the coverage had been rather more round conservation.
About 10% of the farmland was at all times not farmed and in conservation reserve packages. 1971 rolls round and due to some political points with Russia, the united states on the time, the coverage turned, let’s overproduce corn and drive down the worth. You had lots of people taking over debt to plant extra corn after which the worth declines precipitated issues with solvency for them with all of the debt.
Meb:
And I believe with anybody who’s been burned by debt too, you get some PTSD or actually any type of market atmosphere that burns you as soon as. You could have a really vivid reminiscence of that. I think about a part of that’s a part of the story too for farmers, the place the mother and father and grandparents down the generations had been like, “No matter you do, don’t take out a bunch of debt on these farms.”
Craig:
The youngsters who develop up in that atmosphere are those who’re working, the banks now working these organizations. Meb, when you do an funding and then you definitely determine you don’t like a sector, you simply don’t spend money on that sector anymore. In the event you’re a farmer, you’re a farmer, you’re not going to choose up and go work in a manufacturing unit. Yeah, so the people who find themselves on the land, that’s why you solely have 13% debt on your complete sector. And it’s actually the ethos of the sector at this level. The federal government really has two GSEs, authorities sponsored enterprises targeted on lending to farmers. You get actually advantageous charges. There’s Farmer Mac, which is like Fannie Mae and Freddie Mac, which lends to establishments.
After which there’s the farm credit score system. We simply really within the property that we acquired, we simply took over a mortgage from the farm credit score system and that’s all arrange as cooperative. They really offer you a rebate in your loans. Our web curiosity on that mortgage is 3.99% on there after that rebate. So there’s good lending alternatives, however we do like having low leverage on the farmland, typically none. Really often we like to purchase it a 100% fairness after which do enhancements with leverage if it’s not too long ago priced.
Meb:
Bought it. Okay. It is sensible, I believe for most individuals once they give it some thought, that farmland intuitively, when you had been to consider inflation or larger inflation durations, why farmland would do effectively, I really feel like that’s considerably of an apparent takeaway. The 2 issues that I stated had been actually massive surprises to me from the final podcast. One was what we simply talked about. Second was that the position of, you talked about organics and also you dropped on the final podcast that only one% of U.S. farmland is natural. Is that’s nonetheless the case? That appeared like a surprisingly low quantity to me.
Craig:
Effectively, nice information, is as much as 1.2%.
Meb:
Oh child, it’s up 20%. That’s a greater strategy to say it, 20% improve. That’s loopy.
Craig:
It’s a surprisingly low quantity. Over 6% of the U.S. meals finances is spent on natural meals. The extra margins are nice, so 50 to 200% value premiums are there. And there’s great shopper demand. The CEO of Costco, 10% of all natural meals within the U.S. is offered by way of Costco, so it’s an incredible channel, however their CEO says that they will’t get sufficient organics to remain in enterprise day after day. So it’s actually a provide restricted market. If there was extra natural meals, you’d have a bigger market, however you want that licensed natural land in an effort to develop natural meals in an effort to serve that market. And it’s that three yr transition to natural that basically holds individuals again, holds farmers again from changing.
Meb:
My brother’s doing it proper now in Western Kansas, when you’re watching this on YouTube, this may even be me do the farm he’s doing. And he says it’s not straightforward and it takes some time.
Craig:
Three years to get licensed. And one of many massive challenges is definitely you may’t simply mono crop, like probably the most operationally environment friendly method of managing farmland is to farm one crop yr after yr after yr, proper? And solely rotate when you must. In the event you’re maximizing soil well being and doing regenerative agriculture, then you definitely want mainly 4 crops grown annually and you might want to rotate these fields over time.
Meb:
Is that a part of a requirement for the natural label or is that extra on the regenerative facet or how’s that work?
Craig:
That’s extra on the regenerative facet, however as a result of we do this, it makes it very straightforward for us to get licensed natural. Generally in crops you might want to rotate your crops. In the event you attempt to develop corn three, 4, 5 years in a row, you’re going to have all types of soil pests, all types of above floor pests. You’re going to have an amazing quantity of weeds and you actually need to interrupt that cycle. And so what most farmers within the Midwest do, is that they maximize the time they will do the corn by doing genetically engineered crops and making use of a number of pesticides and herbicides on the land after which rotating. The rotation that they do is simply often one yr to soybeans, which have an entire totally different set of pests after which rotate again, provides just a little little bit of soil nitrogen as effectively, after which rotate again into corn.
That’s the first rotation, but it surely’s very depending on genetically modified crops and many pesticides and herbicides. If you wish to go away from that, use extra pure methods, then you definitely want these a minimum of three, however typically 4 crops annually after which rotating over time. That’s very difficult for a farmer. And if you concentrate on the common commodity farmer within the U.S. has about $8.5 million price of land and gear and so they make simply $250,000 a yr. But when they take three years and convert that by way of to natural, that’s $750,000 that they’re not going to need to ship their children to varsity or fund their retirement or varied issues like that. So that basically is a giant barrier.
Meb:
Taking a look at this chart, I really like when issues are quite simple for me on the investing facet, and to me, 6% natural meals market share, 6.3, 1.2% natural crop land, there’s a ramification there to be earned and it’s getting wider, by the way in which. And if there’s value premiums, 50 200% value premiums natural, why are extra individuals not benefiting from this? What’s the hindrance?
Craig:
A part of the problem is that farmers themselves, 98% of farmland is owned by the farmers and a couple of% is institutional. The massive barrier to the prevailing farmers is that three yr conversion interval. It’s how do they fund in essence that transition to natural. There’s plenty of experience points, such as you really must understand how to do that. It’s a lot more durable to develop 4 totally different crops annually and discover totally different markets to promote them to and have the gear to do this as effectively. Scale turns into very, crucial to deal with that. On the institutional facet, we’re at 250 million. We’re one of many 14 largest farmland managers within the U.S. which is a surprising quantity when you’re used to different types of industrial actual property. However we’re the biggest targeted on natural and regenerative agriculture. I’d really love for there to be extra competitors on this area.
I believe that there’s an amazing alternative on this, however once I go searching on the different institutional buyers, two issues maintain them again. One continues to be a normal bias in opposition to natural, like the overall bias in opposition to natural agriculture. Which to some extent goes away on the floor. However the farm managers beneath that also actually, actually imagine that. They actually inform me that natural doesn’t work, though it’s a $60 billion a yr enterprise, in order that’s not true. After which the second factor is that they’re speaking to their buyers about shopping for an asset that generates regular money movement from day one. They speak in regards to the money movement that they generate from day one, and you may’t take it by way of a price add course of when you offered the on getting money movement from day one. We inform our buyers they’re not going to get money movement for 3 years.
We’re going to take it by way of the natural conversion course of after which we’re going to get the stepped up rents from $300 an acre to $750 an acre, or it could be 4 or 5 years if we’re changing a part of the land over to natural blueberries or wine grapes or different crops like that. Extra what are known as everlasting crops. And when the buyers are available in with that good long run time prize and that 5 years or extra time horizon, and so they know upfront they’re not going to get money movement proper at first. Then it makes plenty of sense, but it surely additionally shrinks the pool of buyers.
Meb:
As we’re speaking about this natural transformation, is it a giant value? I’m considering of obstacles and it simply appears so apparent to me. Is it one thing that, is there a giant payment to pay for this to get licensed? Is there plenty of documentation? I imply, you and I had been joking earlier than this started and I used to be lamenting how problematic coping with simply authorities allowing was for simply renovating our workplace. It’s been occurring for six months, it ought to have taken one week, perhaps. We didn’t even do something, so we cleaned up the area. However I imply, my God, simply coping with the federal government. Is that this a giant barrier or is it really, when you discover ways to do it pretty templated and easy and as costly, what’s the method for somebody who’s by no means been by way of it?
Craig:
It may be so simple as simply primarily not farming the land for 3 years after which farming natural crops. It’s extra difficult in that while you’re switching from probably monocropping corn to 4 numerous crops, you have got 4 occasions the complexity that you simply had earlier than. Our farm administration workforce will get the land licensed natural. We map out a 10-year crop rotation plan on the land, and by shopping for a minimum of $50 million price of farmland in a single tight geographic space, we now have sufficient that we are able to say, “Okay, nice. Effectively, we now have 600 acres of land accessible for tomatoes yearly for the subsequent 10 years. It’s simply going to rotate across the farm.” A part of the land can go in pasture, for instance, half to natural greens, half to grains, after which again into pasture. However yearly the identical ratios of land are there. And so we’ll exit and we’ll discover the perfect sheep and cattle tenants for the pasture, the perfect natural tomato farmers or natural candy corn farmers for the vegetable rotations, inexperienced beans and the perfect grain farmers as effectively. After which lease that out as primarily multi-tenant industrial actual property.
Meb:
Sounds altogether too wise. Let’s speak just a little bit about you guys final couple years. You may both do it by way of case research, you can simply speak about broad phrases, what you guys have been in search of, what you’ve been shopping for, any market developments you wish to speak about, have costs. I imply I’ve seen your returns and I understand how the funds work, however any overview you need you may kick it off and we are able to undergo any which method you need.
Craig:
In all probability the easiest way to reply your query is an instance of a farm that we’ve taken right through the conversion course of and actually created much more range on that. And there’s a brand new slide up right here if individuals wish to have a look at that on YouTube. However one of many properties that we purchased was a 4,000 acre farm about 55 miles east of San Francisco. And we purchased it for round $30 million. I used to be not too long ago appraised for just a little over $77 million, and the conversion course of was fairly fascinating. Once we purchased it, it was nice farmland, among the oldest water rights in California, really pre-1914 water rights. Our water rights are senior to the state of California. We are able to speak in regards to the worth of water, Meb as a result of I believe that’s among the best causes to purchase farmland, is definitely to get what I believe is probably the most miss priced asset class round which is water.
However simply farmland for this case examine is, we purchased this property, had two tenant farmers on the land every farming about 2,000 acres, and so they had been farming it for round 50 years. And each of them had been utilizing the very same crop rotation on the land, about two-thirds alfalfa, 25% corn and the remainder of it, about 5% tomatoes on that land, simply rotating round by way of a five-year crop rotation. And the income was underneath $350 an acre for that. Once we purchased it, we took it by way of an natural conversion course of. One of many farmers needed nothing to do with changing to natural. He was a 91-year-old man who had made a ton of cash in promoting land for property improvement and simply loved farming 10,000 acres. And he stated, “You guys need this 2,000 acres again, we’re performed. Simply tell us while you need it.”
And the opposite group we really labored with to assist really do the work on the land as we had been changing it to natural. And fast-forward to immediately, the place prior to now there have been no natural acres, we now have over 2,900 acres licensed natural and in everlasting crops. Went from three typical crops to 12 crops immediately. And went from two farmer tenants to seven farmer tenants on that land. And elevated the income per acre for us from just below $350 an acre to over $800 per acre. Actually vital improve within the efficiency of the land, and it really works. And truly these numbers replicate solely one of many issues that we’ve performed is we recognized among the floor that was simply ideally suited for natural blueberries on that floor, so about 600 acres.
We went out, we established a partnership with Driscolls, we now have experience in blueberries, so we really planted them ourselves, and we’re simply partway by way of the maturation strategy of these blueberries. Our web final yr, web revenue was over $1,100 per acre on these blueberries that’ll develop to round $10,000 per acre maturity. The numbers that I’m quoting over $800 per acre will really improve fairly considerably as that matures.
Meb:
You guys use just a little little bit of debt, I do know, we talked about it at first. How do you see that? Are there any type of fence posts or broad factors of reference you utilize for a way a lot debt you’ll make use of on a farm or an operation or a purchase order? How do you concentrate on it?
Craig:
It’s fairly delicate to debt costs. Up till just a few years in the past we had been very snug with debt. Usually, we wish to see 30% plus or minus 10% on debt is an inexpensive LTV quantity as the costs elevated. And due to among the debt that was accessible within the area with the federal government sponsored enterprises, you had been capable of get it at a reduction to already low cost free cash charges. Now the debt markets are simply not practical. Because the charges had been going up, we shifted over to a 100% fairness for getting the properties after which utilizing debt to do the enhancements. However now we’re just about only a 100% fairness for the entire thing. Within the case we had been capable of assume this debt at 3.99%. In order that’s unacceptable, and it’s solely just a bit over 20% of the asset.
Meb:
We’ve had you on the podcast earlier than, we’ve had quite a lot of farmers on the podcast, and I believe when you had been to do the phrase cloud or have a look at the phrases that get used most, water’s up there. Possibly dig just a little extra, inform us just a little deeper about why that is so essential? How do you shield your self in opposition to errors right here or getting in hassle with a property that both might not have the proper water rights or that sooner or later on the subject of world warming or altering geopolitics and borders, the way you shield your self?
Craig:
And we now have a giant display mainly on which areas are going to be neutrally or positively impacted by local weather change, which of them are going to be negatively impacted? And thru this, the chance to purchase water has been simply actually eye-opening for us. We really worth the dust and the water individually, and while you do this, we frequently really feel like we’re shopping for the dust and getting the water totally free.
Meb:
I used to be going to say, what’s the standard breakdown when you had been to really … Is it 90% land worth, 10% water mentally? I do know there’s in all probability not an actual breakdown, however is there a assemble you concentrate on it?
Craig:
That’s really fairly good, and it’s really simply wacky, really the water costs are actually simply damaged. However I’ll offer you some examples to anchor this. In Oregon, for instance, 10, 12, about 15 years in the past or so, the dry land costs had been as little as $2,500 an acre, and the water rights had been one other $2,500 an acre. So the irrigated land may promote for $5,000. Okay, however you fast-forward to immediately. The dry land costs are round 10,000 an acre and irrigated land is round $12,500 an acre. The land costs have elevated, however the worth of the water rights hasn’t elevated throughout that point.
That’s a spot that we are able to have a look at very, superb knowledge, the worth of that water proper, both on a money movement foundation or on an asset worth foundation. As a result of actually water is a property, identical to proudly owning a chunk of actual property, simply related to farmland, blended and blurred along with farmland. Water is one thing that basically has great worth. Australia has arrange a water market, the USA has not. If that occurs it will likely be an enormous change.
Meb:
You guys at the moment are California, Oregon, Washington, is that proper?
Craig:
That’s right.
Meb:
Going again to how buyers take into consideration this, the place it slots in. We’ve lengthy talked about actual belongings and actual belongings aren’t homogenous. You could have actual property, which is clearly very totally different, industrial actual property. Even inside industrial actual property you have got knowledge facilities, you have got single household housing, you have got workplace area, college, medical, on and on and on. You could have farmland and issues like that. However even once more, inside farmland you have got corn and wheat within the Midwest versus blueberries within the northwest versus hashish in California versus wine grapes. It’s additionally a really numerous asset class. Which were stated, we are inclined to lump actual belongings collectively for comparable traits. However 2022 is an efficient instance. The place many varieties of actual belongings did very poorly farmland was in all probability to my data, one of many solely few lengthy solely belongings that had nice efficiency. Is {that a} honest remark? I’m making an attempt to consider even what else might have endured final yr. Shares and bonds clearly did horrible, however farmland put up a stable yr. Is that correct?
Craig:
That’s correct really. On common, farmland is up about 10% and only one yr over yr, so ’21 to ’22 and a few areas just like the Midwest are up. I’m Iowa for instance, at up 19.7% after which some areas on the West Coast round eight, 9, 10% as effectively. Farmland actually is fascinating in that 53% of U.S. farmland grows two commodity crops, corn and soy. And most of that farmland is within the Midwest. And so when you concentrate on farmland costs, the dominant value is that Midwestern farmland, however there’s 300 totally different crops rising on the West Coast and it offers 50% or extra of fruits, nuts and greens for instance within the U.S. so very, very, very massive markets which might be diversified. One of many fascinating issues in regards to the Midwest farmland is that it’s very liquid. So the public sale markets that they’ve within the Midwest and all of the farmland is offered primarily based on CSR factors, corn suitability score factors, so how a lot corn are you able to develop per acre is what it’s priced on.
And so it successfully turns into virtually this commodity priced asset with a liquid market by way of the public sale system that may change very quickly. And there was plenty of capital going into that area. However it ends in imbalances, as a result of the farmland, for instance on the West Coast doesn’t have that very same liquid markets. In the event you’re an out of doors investor, a non-professional investor, it’s more durable to search out property and more durable to search out an operator for these belongings. And in order that’s why these markets have gone up lower than the Midwest. and it ends in imbalances as a result of when you really do some math and also you say, “Hey, how a lot corn can I develop per acre in Iowa versus our farm in Washington?” And one factor that individuals don’t know is that farmland the place we’re in Washington really produces probably the most quantity of corn per acre in any county within the U.S. Partially because-
Meb:
That’s shocking to me.
Craig:
It’s an amazing rising local weather, however partially as a result of it’s irrigated so we are able to present simply the correct quantity of water that’s wanted, whereas the Iowa farmland is extra rain fed and just a little bit topic to the variability, so we are able to make it rain precisely the place we wish it to. It’s very excessive productive farmland, however the value of that farmland, Iowa farmland has been promoting for $20,000 an acre was a excessive value. Now they’ve had farmland gross sales at $30,000 an acre. The farmland the place we’re in Washington, for instance, is nearer to $15,000 an acre. Produces the identical quantity of corn per acre. when you needed to supply corn, Doesn’t it make extra sense to purchase, for instance in Washington than in Iowa? Sure, however it’s a very regionalized market. And it’s affected by the liquidity of those markets as effectively. Then it’s a extremely fascinating sector and it’s very not correlated. It’s correlated with cash printing and never correlated with the debt markets. And that’s I believe an excellent normal place to be macroeconomically.
Meb:
And because the world goes haywire and you may watch shares and bonds go up 10% in a day, you may say, “right here’s my farm, I can’t do something with it,” which I believe is a characteristic, not a bug. Discuss to us just a little bit about the way you guys put collectively these funds. So for buyers, is it nonetheless accredited solely, what’s the minimums?
Craig:
It’s accredited solely, it’s 506(c) which permits us to speak publicly about what we do, and that’s a brand new jobs act construction. It’s limitless quantity of capital that we are able to increase usually, but it surely does imply that each investor who is available in must be verified, third-party accredited on that. 50K minimal, We wish individuals to have the ability to take part.
Meb:
Oh man, that’s accessible, that’s nice.
Craig:
We attempt to make it as accessible as doable. And we do have institutional buyers, massive wealth administration companies have their purchasers make investments with us and excessive net-worth people and household workplaces as effectively.
Meb:
After I get round is promoting a few of my farmland, I’ll make investments some proceeds with you guys. I like what you’re doing. At any time when which may be, someday. Discuss to us just a little bit about, all proper, so fund three for instance versus the prior funds. What’s the purpose on the composition of that? Is it going to be 5 totally different geographies? Is it going to be one particular geography, varieties of crops? How do individuals get the cash out? What are the mechanics of the fund for somebody who might make investments immediately? Can they withdraw on 20? I’m making an attempt to do the mathematics. What are we, 2020, 2033. I can’t even say it someday sooner or later.
Craig:
2023 is correct now. We’ll really launch that fund this quarter on there. We simply acquired this anchor 1,100 acre property, in any other case we might have launched fund three already, however that’s a pleasant anchor property for us. Our technique relies on shopping for a minimum of $50 million price of farmland and one tight geographic space. So we are able to have an onsite farm supervisor and actually handle that as you’d handle a 400-unit residence constructing. And that makes it very easy for us to purchase the 100-unit residence constructing subsequent door or the 1,000-unit residence constructing subsequent door with out actually increasing our headcount on that. We have now three main hubs, Northern California, Oregon and the Willamette Valley and Washington. These are nice rising areas. The brand new fund will increase someplace between 250 and $500 million and by farmland typically in these geographies. Plus we’ll add yet one more geography.
At this level it’s in all probability going to emphasise Oregon and Washington simply we just like the pricing dynamics the place they’re proper now. We predict there’s plenty of alternative in these areas. And the funding typically, it’s formally a 10-year fund with one yr optionally available extensions. We inform the buyers to not count on money movement in the course of the first three years after which because it’s accessible, we’ll distribute that money movement, then they’ll have a possibility to exit on the finish or they will keep in so long as they need. So, I view these as form of 30 plus yr belongings, farmlands simply this nice asset class. And so we’ve designed it in order that sure, our job is to extend the money movement and supply liquidity to buyers as shortly as doable. But in addition not drive them out, not drive them to have a taxable loss after which simply attempt to search for one other property.
Meb:
I think about some persons are eager about this generationally the place if given their selection, they might in all probability simply roll or proceed with the properties. Not indefinitely, however definitely for the foreseeable future.
Craig:
That’s how I give it some thought. For me, I do wish to give the buyers liquidity as shortly as doable, however I additionally wish to be stored on my toes and never give them a cause to wish to exit. These are nice belongings and we do give it some thought multi-generation.
Meb:
What occasions over the previous few years has precipitated probably the most curiosity? In the event you may correlate it? I’m wondering if Silicon Valley Financial institution, in my thoughts there’s sure issues that’ll simply drive cash elsewhere. Silicon Valley Financial institution is the kind of factor. It’s like, all proper, effectively A, I acquired to determine if I’ve an excessive amount of cash in a single financial institution. B, is it a financial institution which will disappear underneath the ether? B, ought to I be getting a greater return on my cash than 0%, or one thing like COVID, or one thing like inflation actually ramping up? Previous few years, I imply clearly 60/40 getting smashed final yr whereas farmland outperformed it by what, 20 share factors, some simply astonishing quantity. Is there something particularly the place your cellphone begins ringing off the hook otherwise you beginning to get emails, aside from the Med Faber Present? The rest that’s like, oh, persons are really waking as much as this idea?
Craig:
Effectively, you do have very sensible buyers that aren’t considering contained in the field, and also you’ve simply performed an outstanding job on actually articulating among the complicated developments which might be occurring in nice methods for transferring ahead. However actually in the course of the COVID interval, I acquired the sense that individuals had been actually trying, they had been involved in regards to the world economic system. The federal government had simply printed an amazing sum of money, elevated cash provide 30% or extra, and so they needed to place their cash someplace secure. And in order that was a normal theme for individuals. And that did have an excellent impact on individuals coming to Farmland LP.
Meb:
Yeah, I’m at all times eager about the place buyers come from, their motivations. And in your space it’s fascinating as a result of there’s those that in all probability come to you from A, “I don’t have farmland publicity facet.” There’s individuals which might be it from a pure diversification or return perspective. There’s different individuals which might be in all probability it from actually a regenerative natural stewardship. They’re like, “Hey, I wish to make investments, however I wish to make investments someplace the place it’s considerate versus faceless or do no evil, stated in another way.” After which I think about it’s additionally a mixture of people, household workplace, all kinds. Do you suppose it’s just a bit little bit of every part? What’s your expertise been over the previous variety of years? You going to get all, I think about it’s just a little more durable for the common monetary advisor. I imply, until they’re putting say, “Hey purchasers, bunch of you guys make investments.” Since you don’t have a public automobile, which for that channel makes it just a little more durable for somebody at UBS or Morgan Stanley or one thing. There’s just a little little bit of every part and motivation’s different as effectively.
Craig:
I believe so. However Invoice Gates popping out as one of many largest farmland homeowners, I believe additionally had an impression on individuals. And when you do the mathematics round that, he put round 5% of his belongings in farmland. And that’s an excellent anchor quantity for individuals. You need to have diversified industrial actual property publicity, actual belongings publicity, and round 5% in farmland is only a ok for Invoice Gates. And I do suppose that there’s simply elevated concern about how leveraged in a normal sense, not with a capital L, not with a capital debt standpoint, however how leveraged the monetary markets are and the way leveraged individuals’s portfolios are simply to shares and bonds.
Meb:
One of many questions I needed to ask was, what’s … I toured one of many largest greenhouses on the planet a couple of week in the past. It’s primarily tomatoes and hashish, but it surely’s one of the technologically superior buildings I’ve been in, I believe ever. And also you begin to see the position of robotics actually speed up on the farm. I imply, I joke on right here on a regular basis that one of the superior items of equipment for my childhood was driving round on a tractor, which a few years in the past had GPS and a TV and every part, air-con. However immediately it’s like subsequent degree and it appears to be accelerating. What are your ideas there? I imply, I think about one of many ways in which you guys may even farm eight several types of crops is the power to effectively work these several types of, it’s totally different to chop some wheat than it’s to reap some strawberries on and on. What’s the position that automation’s taking part in and the way shortly is that like adoption curve occurring right here in 2023?
Craig:
There’s an amazing quantity of know-how that’s being superior on the farm. And it’s tractors, chopping heads, automated harvesting gear for everlasting crops as effectively, not simply wheat and corn that you simply may usually take into consideration. However for instance, when you have a look at blueberry harvesting. One blueberry harvester with 4 individuals on it may well harvest as a lot as 125 hand harvesters. And actually most blueberry fields on the market are arrange for hand harvesting. It’s a must to mainly do every part totally different along with your crops and your plantings and your rows and your varietal choice, et cetera to have the ability to do the machine harvest. However you get recent market high quality blueberries with 4 individuals as an alternative of 125 individuals. So you actually get dramatic value financial savings, high quality will increase as effectively.
Speaking in regards to the vertical farming, we may do vertical farming on our land. We have now plenty of nice land. We have now water, sunshine, labor, et cetera. However once I do the mathematics, and AppHarvest might be an excellent instance, to do a 60 acre greenhouse would value them round $2.5 million per acre for that greenhouse. And for that very same sum of money that it prices them to construct a 60 acre greenhouse, I may purchase 10,000 acres of irrigated farmland. Greenhouses are depreciating belongings. Their working prices are excessive, sometimes round twice the price per pound of meals than farmland grown stuff. However actually in 10 years the query is, “Effectively, would you relatively personal a 10-year previous 60 acre greenhouse or 10,000 acres of irrigated farmland?”
Simply from an funding standpoint, I’m a giant fan. I nonetheless suppose there’s great worth on the farmland facet. If I believed that there was plenty of alternative within the managed atmosphere sector, we’d be investing there as effectively. However it’s actually slim collection of crops. Issues which have a fast turnover and excessive greenback worth per sq. foot are the issues that make sense. So suppose tomatoes, strawberries, hashish, et cetera.
Meb:
Yeah. What’s the hip score and why are you guys primary?
Craig:
Oh, as a result of we’re superior. One of many issues, I’ll pop that up on the display if individuals wish to have a look at that. And perhaps I’ll offer you only a fast little bit of the backstory. We’re very science oriented in what we do, as a result of we purchase farmland and converter to natural regeneratively managed farmland, the USDA was really … And do it at scale. The USDA was really very involved in what the ecological worth was of what we did. They really gave us a $250,000 grant and we introduced in two consulting companies to have a look at what we did and quantify it for us. And so these two companies checked out each tractor cross, each crop that went on the bottom, each enter that went in, and on $50 million price of farmland these guys confirmed not solely did we ship a 70% web financial achieve to the investor, however we additionally delivered 46% web achieve to the ecosystem within the type of soil, carbon sequestered, cleaned water, clear air, et cetera, biodiversity.
And when you dig into the numbers just a little bit, what it confirmed is that if that land had been managed conventionally, it will have precipitated $8.5 million price of ecosystem service hurt. And the way in which that we managed it created $12.5 million price of ecosystem service profit. So, an actual double backside line return each to the buyers and to the ecosystem. Partially due to that scientific report that we did we introduced within the largest ESG rankings agency to present us a rating on our system. We do a bunch of various rankings, however we introduced these guys in and this group does the rankings for MSCI. In the event you see an ESG rankings on MSCI, these are the backend guys behind it.
They went in, we went by way of a three-month course of with them. They rating you on a number of totally different measures and offer you an final rating out of a 100 factors. In the event you get 50 or beneath, you’re doing unhealthy for the world. In the event you get 50 or above, you’re doing good for the world. The typical agricultural agency of their system has a rating of 17, so not doing effectively for the world. And we acquired the very best rating that they’ve ever given to any one among their 10,000 firms. We acquired a rating of 82 on that. And we beat insurance coverage firms and tech firms and biotech firms and all types of firms on that. And there’s a 12-page report that’s accessible on this. However for us it’s crucial not solely to get licensed natural, which is a federal regulated customary. But in addition have these third social gathering scores which might be delivered. You possibly can’t get a 100 on stuff. Some faux trade scoring is rather like, “Oh, you’re all sustainable.” “Effectively, oh nice, I suppose we are able to go house. We’re all performed.”
However it’s really actually essential, identical to you by no means say, “Oh, we’re performed by way of delivering earnings on the sustainability facet,” there’s at all times one other step you may take. There’s at all times issues you may enhance on and that’s why we like issues like this hip rating.
Meb:
Is there any carbon credit score angle to this at any level, or I’m at all times considering of different yield. Clearly, farmland is a fairly simple return stream, whether or not it’s by way of the crops in addition to appreciation of the land. Are there different different yield sources you guys ever have a look at for these properties? Is carbon one among them?
Craig:
We sequester about half a ton to a ton of carbon per yr on every of our 15,000 acres. It’s an amazing, primarily byproduct of specializing in wholesome soil biology and good land practices. Cowl cropping for instance is among the greatest methods to extend, so soil carbon, and it’s solely performed on about 3% of farmland acres within the U.S. Farmland is the second-largest carbon sink accessible after the oceans. There’s actually an amazing alternative to sequester carbon there. The difficulty has been, it’s difficult to really combination the carbon. Each totally different soil kind, each totally different geography, each totally different crop rotation has a distinct protocol that must be developed in an effort to quantify the quantity of carbon, a minimum of in response to the way in which that the carbon markets are structured immediately.
And the profit, if carbon costs are $20 per ton, they could be larger than that now, however let’s use $20 a ton. If we’re sequestering half a ton to a ton of carbon per yr, that’s 10 to $20 further revenue per yr on that, which is okay. In the event you’re producing $300 an acre typical lease and you will get an additional 10 or 20 bucks, effectively, okay, that’s good. But when I can convert it to natural and get $750 an acre lease, that 10 to $20 doesn’t change my habits.
Meb:
Yeah, and specializing in the large return, the large muscle motion, the large return driver, it makes much more sense than the rounding errors. As we simply had Ramit Sethi on the podcast stated, “Deal with $50,000 issues as an alternative of $5 issues.” Now he’s speaking about lattes and different issues, however I believe it applies. I typically get seduced in an identical method in our enterprise of getting distracted by shiny concepts when the principle focus is correct in entrance of my face, really easy to do. Craig, we talked about rather a lot. What did we miss? Something that we haven’t touched on immediately that you simply suppose is essential or significant that we glossed over?
Craig:
The magical factor about farmland. And once I began, we didn’t have this, crop insurance coverage, so natural crop insurance coverage. Principally the commodity sector has had this excellent profit for crop insurance coverage, authorities funded crop insurance coverage. The federal government subsidizes crop insurance coverage by 40 to 60%, and so they ensure that the farmer, the federal government has the vested curiosity in ensuring that meals is produced yearly. And so, one of many key methods they do that’s to supply crop insurance coverage for individuals. And that makes positive that these farmers can keep in enterprise decade after decade, irrespective of the climate cycles. In the event you don’t develop meals one yr, you’ve acquired an actual societal concern. That is the explanation why the federal government will mainly ensure that all of the farmers succeed.
Effectively, it takes 10 years the way in which the crop insurance coverage is ready up. It takes 10 years’ price of rising a specific kind of crop in a specific county to ensure that it to be eligible for crop insurance coverage. Effectively, we’re now 25 years into natural certification. We’ve acquired a ton of crop range that’s now accessible for crop insurance coverage from the federal government. And so we’re capable of get crop insurance coverage for larger revenue margin crops that basically take away the chance. You get 80% crop insurance coverage in your crops. We develop 40 totally different crops throughout our farms, so we get plenty of inherent diversification and with that crop insurance coverage on it. It actually creates this beautiful magical asset class. You don’t have lease insurance coverage to your residence buildings or workplace constructing insurance coverage in your workplace buildings, however we now have authorities funded crop insurance coverage on this. It’s a fairly matched asset class, solely 2% institutionally owned, and that creates some actually great dynamics for buyers to nonetheless get into the area.
Meb:
Hear, hear. Effectively, what’s the longer term seem like for you guys? I imply, final time we talked, I imply, I believe the reply I think about is simply plant and develop, proper? Develop a bit and carry on doing what you’re doing. However is there anything in your mind that you simply’re eager about as we glance out to 2024, 2025?
Craig:
We’ve spent the previous variety of years actually constructing out our farm administration firm. We have now this 45-person farm administration firm that basically is simply wonderful. Every thing is finished at value, it’s not a revenue middle for us. We do it at value. In order we scale up these prices mainly get amortized over extra acres. I believe we’re at a really good stage to develop these areas that we’re in with out growing headcount on that and actually benefiting from the economies of scale. And we’ll simply proceed to be targeted and execute on shopping for top quality farmland with nice water rights into the longer term. Long run we’ll create these, we’ll do one thing enjoyable round as soon as the belongings are all totally money flowing in order that it’s simpler for everybody to take part in, however we are able to speak about that in a yr or two.
Meb:
Now that we’re out of COVID you do any extra real-world meetups? You maintain any occasions on the farm? The place can individuals discover out extra about you guys? What’s the perfect locations?
Craig:
Yeah, so our web site @farmlandlp.com is a superb place to get involved with us. We’re really having an investor occasion at our California farm that has the blueberries firstly of June. After which within the fall we now have investor occasion up in Oregon the place we harvest wine grapes. We actually wish to get the buyers out to the farms.
Meb:
Yeah, man, that must be a simple promote. It’s just like the Buffet, the Berkshire assembly ticket. So long as you’re an investor, you get entree, you bought to stomp some grapes, you bought to get your ft moist.
Craig:
Just about. It’s fairly wonderful to get again out on the farm and actually really see sustainable regenerative agriculture occur at scale. And other people say our blueberries are the perfect tasting blueberries that individuals have ever had, and it’s plenty of enjoyable.
Meb:
Cool. Effectively, Craig, it’s been plenty of enjoyable as standard, becoming a member of you, catching an replace. Thanks a lot for becoming a member of us immediately.
Craig:
Nice speaking to you, Meb as at all times.
Meb:
Listeners, when you loved this episode, take a look at the hyperlink within the present notes for our first episode of Craig that was launched on the finish of 2020. Podcast listeners will publish present notes to immediately’s dialog mebfaber.com/podcast. In the event you love the present, when you hate it, shoot us suggestions at suggestions@theMebfabershow.com. We like to learn the evaluations. Please evaluation us on iTunes and subscribe the present wherever good podcasts are discovered. Thanks for listening, pals, and good investing.