Episode #480: Craig Wichner, Farmland LP – Cultivating Wealth with Sustainable Farmland Investing
Visitor: Craig Wichner is the Founder and Managing Companion of Farmland LP, a number one funding fund that generates returns by changing standard business farmland to regenerative sustainable farmland.
Date Recorded: 4/19/2023 | Run-Time: 1:00:38
Abstract: In at the moment’s episode, Craig begins with an replace on his firm after which shares how increased inflation and the shifting macro setting has affected farmland as an asset class, particularly after 2022 when actual property had been one of many few property that didn’t have destructive returns.
Then we dive into the financials of an acquisition they product of a 4,000 acre, 150 yr outdated farm in Northern California again in 2013 for just below $30 million. Craig walks by the funding and timeline to transform the farm to natural, the advantage of 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.
Hearken to Craig’s first look in December 2020 right here.
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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 optimistic correlation with inflation
- 14:10 – Why there’s a scarcity of natural farms
- 23:25 – Strolling by 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; study extra at farmlandlp.com; e-mail ir@farmlandlp.com
Transcript:
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Disclaimer:
Med Faber’s the co-founder and chief funding officer at Cambria Funding Administration. As a result of business laws he won’t focus on any of Camber’s funds on this podcast. All opinions expressed by podcast individuals 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:
In the present day’s episode is sponsored by my associates at YCharts. In the event you’re a monetary advisor, pay attention up. By now you realize YCharts enables 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 reinforce 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’ll be able to even add your personal visuals and your agency branding colours and emblem. Their new replace permits for customized storytelling, supplying you with the power to drag in save tables and charts, or add customized textual content bins that advisors love so as to add disclosures for our associates in compliance. Make your life simpler. Give YCharts a attempt to streamline your course of of constructing 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:
Whats up all people. We’re heading again right down to the farm at the moment with returning company. Craig Wichner, founder and managing accomplice of Farmland LP, the biggest farmland supervisor targeted on natural farmland now managing over 1 / 4 billion {dollars} in property and 15,000 acres of farmland. In the present day’s episode Craig begins with an replace on his firm, after which shares how increased inflation and the shifting macro setting has affected farmland as an asset class, particularly after 2022 when actual property had been one of many few ones that didn’t have destructive returns. Then we dive right into a case examine of an acquisition they product of a 4,000 acre, 150-year-old farm in Northern California again in 2013 for just below $30 million. Craig walks by 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 should you aren’t subscribed to our YouTube channel, what are you ready for? Virtually 15,000 traders 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 at the moment? This stunning, for these not watching on YouTube, this stunning [inaudible 00:03:13] within the background. The place are you?
Craig:
Simply north of San Francisco close to Larkspur.
Meb:
Let’s get a bit of replace briefly in your firm and agency, then we’ll discuss 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 at the moment are 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, stunning floor, stunning groundwater rights or water rights on the whole. Nice rising local weather.
Meb:
Yum. All proper, properly catch us up on the corporate. We’ll submit the present be aware hyperlink listeners if you need the sort of intro episode. However stroll us ahead since 2020, what have you ever guys been as much as?
Craig:
Nice. Nicely, we’re as much as round $250 million in property, about 15,000 acres, 16,000 acres of farmland. Now, for the individuals who don’t know, we purchase standard farmland, Farmland LP buys standard farmland and converts it to natural regeneratively managed farmland as an funding fund. And we actually simply concentrate on including worth to farmland. Enterprise has grown a bit as properly. We now have about eight folks in fund administration and 45 folks in farmland administration, and we lease out two thirds of our acres and we farm a few third of the acres ourselves and our farmland is situated in Northern California, Oregon and Washington.
Meb:
Nicely, one of many huge issues that has actually modified or accelerated, we may do a variety of completely different adjectives, since we final spoke is a, I imply multi-decade outlined regime that appears to have shifted, which is of certainly one of declining rates of interest and bottoming to 1 the place hastily rates of interest have shot up and inflation. Which is one thing that we haven’t seen in the US or has been a priority for 40 years, actually. Inform me a bit of bit about that. We discuss farmland market on the whole. You may give us an replace overview of the macro and the way it’s impacted curiosity and all the pieces you guys are doing in your world.
Craig:
It looks as if 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. Similar financial worth as the entire workplace buildings within the U.S. or the entire house buildings within the U.S. However once more, 40% of farmland is leased. Farmland actually is business actual property like these different asset lessons. However there’s little or no debt on the farmland sector. And possibly I’ll simply put up a fast slide for you guys for-
Meb:
Yeah, I’d like to see, you’ve got an amazing deck. If we will’t share broadly with the listeners, possibly you’ll allow us to share a number of the slides in these present notes. However there was actually two large takeaways from our final episode that actually 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 dimensions of Farmland. And you’ll see on the slide relative to, wow, it is a nice slide. Relative to varied kinds of business actual property workplace and we really simply did an episode on timber, so the timber business too. All proper, we’ll hand it again to you.
Craig:
Nicely, 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 super adjustments occur when you’ve 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. Truly, 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 simple when you perceive it, which is that rents on farmland, 40% of farmland is rented, as I mentioned. And the hire 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 leads to improve in asset worth as properly 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 a bit of bit extra every year with productiveness will increase and that will increase the returns per acre on the farmland and will increase the asset worth as properly.
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 a three-year natural conversion course of and get rents of $750 an acre on that land.
Meb:
The analogy to business 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, nevertheless it’s a bit of 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 related psychological idea, the business actual property rents versus farmland. What’s the easy takeaway, by the best way, 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 may be very aware of business 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 widespread with farmers and you’d mainly have farmers boycotting the auctions that they might have. And so lenders didn’t need to lend into the house, farmers didn’t need something to do with the banks as properly. And a part of that was prompted, really … What drove it’s in 1971 the U.S. modified its agricultural coverage to inform everybody to mainly plant fence submit to fence submit and get huge or get out. Previous to that, previous to 1971, the coverage had been rather more round conservation.
About 10% of the farmland was all the time not farmed and in conservation reserve applications. 1971 rolls round and due to some political points with Russia, the united states on the time, the coverage grew to become, 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 prompted issues with solvency for them with all of the debt.
Meb:
And I feel with anybody who’s been burned by debt too, you get some PTSD or actually any type of market setting that burns you as soon as. You’ve 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 children who develop up in that setting are those who’re operating, the banks now operating these organizations. Meb, should 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 select up and go work in a manufacturing facility. 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 internet 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. Truly often we like to purchase it a 100% fairness after which do enhancements with leverage if it’s just lately priced.
Meb:
Received it. Okay. It is smart, I feel for most individuals after they give it some thought, that farmland intuitively, should you had been to consider inflation or increased inflation durations, why farmland would do properly, I really feel like that’s considerably of an apparent takeaway. The 2 issues that I mentioned had been actually huge 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 just one% of U.S. farmland is natural. Is that’s nonetheless the case? That appeared like an incredibly low quantity to me.
Craig:
Nicely, 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 super shopper demand. The CEO of Costco, 10% of all natural meals within the U.S. is offered by Costco, so it’s a tremendous 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 with a purpose to develop natural meals with a purpose to serve that market. And it’s that three yr transition to natural that actually holds folks again, holds farmers again from changing.
Meb:
My brother’s doing it proper now in Western Kansas, should you’re watching this on YouTube, this would possibly 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 huge challenges is definitely you possibly can’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 need to. In the event you’re maximizing soil well being and doing regenerative agriculture, then you definitely want mainly 4 crops grown every year and you have 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. Usually in crops you have 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 really want 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 lot 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 completely different set of pests after which rotate again, provides a bit of little bit of soil nitrogen as properly, after which rotate again into corn.
That’s the first rotation, nevertheless it’s very depending on genetically modified crops and plenty of pesticides and herbicides. If you wish to go away from that, use extra pure programs, then you definitely want these not less than three, however usually 4 crops every year 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 tools they usually make simply $250,000 a yr. But when they take three years and convert that by to natural, that’s $750,000 that they’re not going to should ship their children to varsity or fund their retirement or varied issues like that. So that actually is an enormous 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 variety there to be earned and it’s getting wider, by the best way. And if there’s value premiums, 50 200% value premiums natural, why are extra folks 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 pair of% is institutional. The large 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 a variety of experience points, such as you really must know the way to do that. It’s a lot more durable to develop 4 completely different crops every year and discover completely different markets to promote them to and have the tools to try this as properly. Scale turns into very, essential 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 stunning quantity should you’re used to different types of business 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 house.
I feel that there’s an amazing alternative on this, however once I go searching on the different institutional traders, two issues maintain them again. One remains to be a common bias towards natural, like the final bias towards 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, although 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 traders about shopping for an asset that generates regular money stream from day one. They speak in regards to the money stream that they generate from day one, and you may’t take it by a worth add course of should you offered the on getting money stream from day one. We inform our traders they’re not going to get money stream for 3 years.
We’re going to take it by 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 may 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 referred to as everlasting crops. And when the traders are available with that good long run time prize and that 5 years or extra time horizon, they usually know upfront they’re not going to get money stream proper to start with. Then it makes a variety of sense, nevertheless it additionally shrinks the pool of traders.
Meb:
As we’re speaking about this natural transformation, is it an enormous price? I’m considering of limitations and it simply appears so apparent to me. Is it one thing that, is there an enormous payment to pay for this to get licensed? Is there a variety 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, possibly. We didn’t even do something, so we cleaned up the house. However I imply, my God, simply coping with the federal government. Is that this an enormous 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 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 doubtlessly monocropping corn to 4 numerous crops, you’ve got 4 instances the complexity that you just had earlier than. Our farm administration staff will get the land licensed natural. We map out a 10-year crop rotation plan on the land, and by shopping for not less than $50 million price of farmland in a single tight geographic space, we’ve sufficient that we will say, “Okay, nice. Nicely, we’ve 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 properly. After which lease that out as primarily multi-tenant business actual property.
Meb:
Sounds altogether too smart. Let’s speak a bit of bit about you guys final couple years. You might both do it by case research, you might simply discuss broad phrases, what you guys have been searching for, what you’ve been shopping for, any market tendencies you need to discuss, have costs. I imply I’ve seen your returns and I understand how the funds work, however any overview you need you possibly can kick it off and we will undergo any which method you need.
Craig:
Most likely the easiest way to reply your query is an instance of a farm that we’ve taken throughout the conversion course of and actually created much more variety on that. And there’s a brand new slide up right here if folks need 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 just lately appraised for a bit of over $77 million, and the conversion course of was fairly fascinating. After we purchased it, it was nice farmland, a number of the oldest water rights in California, really pre-1914 water rights. Our water rights are senior to the state of California. We will speak in regards to the worth of water, Meb as a result of I feel that’s among the best causes to purchase farmland, is definitely to get what I feel 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, they usually 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 a five-year crop rotation. And the income was below $350 an acre for that. After we purchased it, we took it by an natural conversion course of. One of many farmers wished 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 growth and simply loved farming 10,000 acres. And he mentioned, “You guys need this 2,000 acres again, we’re executed. 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 at the moment, the place up to now there have been no natural acres, we now have over 2,900 acres licensed natural and in everlasting crops. Went from three standard crops to 12 crops at the moment. 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 important improve within the efficiency of the land, and it really works. And really these numbers replicate solely one of many issues that we’ve executed is we recognized a number of 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’ve experience in blueberries, so we really planted them ourselves, and we’re simply partway by the maturation means of these blueberries. Our internet final yr, internet 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 a bit of little bit of debt, I do know, we talked about it to start with. 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 comfy with debt. Usually, we want to see 30% plus or minus 10% on debt is an inexpensive LTV quantity as the costs elevated. And due to a number of the debt that was accessible within the house 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 purposeful. Because the charges had been going up, we shifted over to a 100% fairness for purchasing 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 various farmers on the podcast, and I feel should 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 a bit of extra, inform us a bit of deeper about why that is so vital? How do you shield your self towards errors right here or getting in bother 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’ve an enormous 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 filth and the water individually, and while you do this, we frequently really feel like we’re shopping for the filth and getting the water free of charge.
Meb:
I used to be going to say, what’s the normal breakdown should you had been to really … Is it 90% land worth, 10% water mentally? I do know there’s in all probability not a precise breakdown, however is there a assemble you concentrate on it?
Craig:
That’s really fairly good, and it’s really simply wacky, actually 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 would possibly promote for $5,000. Okay, however you fast-forward to at the moment. 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 will have a look at very, excellent knowledge, the worth of that water proper, both on a money stream foundation or on an asset worth foundation. As a result of actually water is a property, similar to proudly owning a bit of actual property, simply related to farmland, blended and blurred along with farmland. Water is one thing that actually has super worth. Australia has arrange a water market, the US has not. If that occurs it will likely be a large change.
Meb:
You guys presently are California, Oregon, Washington, is that proper?
Craig:
That’s right.
Meb:
Going again to how traders take into consideration this, the place it slots in. We’ve lengthy talked about actual property and actual property are usually not homogenous. You’ve actual property, which is clearly very completely different, business actual property. Even inside business actual property you’ve got knowledge facilities, you’ve got single household housing, you’ve got workplace house, college, medical, on and on and on. You’ve farmland and issues like that. However even once more, inside farmland you’ve 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 have been mentioned, we are likely to lump actual property collectively for related traits. However 2022 is an effective instance. The place many kinds of actual property did very poorly farmland was in all probability to my information, one of many solely few lengthy solely property 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 properly. 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 completely different crops rising on the West Coast and it gives 50% or extra of fruits, nuts and greens for instance within the U.S. so very, very, very giant 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 the public sale system that may change very quickly. And there was a variety of capital going into that house. However it leads to 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 seek out property and more durable to seek out an operator for these property. And in order that’s why these markets have gone up lower than the Midwest. and it leads to imbalances as a result of should 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 will present simply the correct amount of water that’s wanted, whereas the Iowa farmland is extra rain fed and a bit of bit topic to the variability, so we will 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 once 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. should you wished to provide 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 properly. 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 feel common 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 possibly can say, “right here’s my farm, I can’t do something with it,” which I feel is a characteristic, not a bug. Discuss to us a bit of bit about the way you guys put collectively these funds. So for traders, 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 will increase on the whole, nevertheless it does imply that each investor who is available in needs to be verified, third-party accredited on that. 50K minimal, We would like folks 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 traders, giant wealth administration corporations have their purchasers make investments with us and excessive net-worth people and household places of work as properly.
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, in the future. Discuss to us a bit of bit about, all proper, so fund three for instance versus the prior funds. What’s the objective on the composition of that? Is it going to be 5 completely different geographies? Is it going to be one particular geography, kinds of crops? How do folks get the cash out? What are the mechanics of the fund for somebody who might make investments at the moment? Can they withdraw on 20? I’m making an attempt to do the maths. What are we, 2020, 2033. I can’t even say it someday sooner or later.
Craig:
2023 is true 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’d have launched fund three already, however that’s a pleasant anchor property for us. Our technique relies on shopping for not less than $50 million price of farmland and one tight geographic space. So we will have an onsite farm supervisor and actually handle that as you’d handle a 400-unit house constructing. And that makes it very easy for us to purchase the 100-unit house constructing subsequent door or the 1,000-unit house constructing subsequent door with out actually increasing our headcount on that. We now have 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 usually 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 a variety of alternative in these areas. And the funding usually, it’s formally a 10-year fund with one yr optionally available extensions. We inform the traders to not anticipate money stream in the course of the first three years after which because it’s accessible, we’ll distribute that money stream, 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 sort of 30 plus yr property, farmlands simply this nice asset class. And so we’ve designed it in order that sure, our job is to extend the money stream and supply liquidity to traders as shortly as doable. But in addition not pressure them out, not pressure them to have a taxable loss after which simply attempt to search for one other property.
Meb:
I think about some individuals are occupied with this generationally the place if given their alternative, they might in all probability simply roll or proceed with the properties. Not indefinitely, however actually for the foreseeable future.
Craig:
That’s how I give it some thought. For me, I do need to give the traders liquidity as shortly as doable, however I additionally need to be saved on my toes and never give them a purpose to need to exit. These are nice property and we do give it some thought multi-generation.
Meb:
What occasions over the previous few years has prompted 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, properly A, I received to determine if I’ve an excessive amount of cash in a single financial institution. B, is it a financial institution that will disappear below 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 couple of years, I imply clearly 60/40 getting smashed final yr whereas farmland outperformed it by what, 20 proportion factors, some simply astonishing quantity. Is there something specifically the place your cellphone begins ringing off the hook otherwise you beginning to get emails, aside from the Med Faber Present? Anything that’s like, oh, individuals are really waking as much as this idea?
Craig:
Nicely, you do have very sensible traders that aren’t considering contained in the field, and also you’ve simply executed an outstanding job on actually articulating a number of the advanced tendencies which might be occurring in nice methods for transferring ahead. However actually in the course of the COVID interval, I received the sense that individuals had been actually wanting, they had been involved in regards to the world financial system. The federal government had simply printed an amazing amount of cash, elevated cash provide 30% or extra, they usually wished to place their cash someplace secure. And in order that was a common theme for folks. And that did have impact on folks coming to Farmland LP.
Meb:
Yeah, I’m all the time occupied with the place traders come from, their motivations. And in your space it’s fascinating as a result of there’s folks that in all probability come to you from A, “I don’t have farmland publicity facet.” There’s folks which might be it from a pure diversification or return perspective. There’s different folks which might be in all probability it from truthfully a regenerative natural stewardship. They’re like, “Hey, I need to make investments, however I need to make investments someplace the place it’s considerate versus faceless or do no evil, mentioned otherwise.” After which I think about it’s additionally a mixture of people, household workplace, every kind. Do you suppose it’s just a bit little bit of all the pieces? What’s your expertise been over the previous variety of years? You going to get all, I think about it’s a bit of more durable for the common monetary advisor. I imply, until they’re inserting say, “Hey purchasers, bunch of you guys make investments.” Since you don’t have a public car, which for that channel makes it a bit of more durable for somebody at UBS or Morgan Stanley or one thing. There’s a bit of little bit of all the pieces and motivation’s diverse as properly.
Craig:
I feel so. However Invoice Gates popping out as one of many largest farmland house owners, I feel additionally had an impression on folks. And should you do the maths round that, he put round 5% of his property in farmland. And that’s anchor quantity for folks. It’s best to have diversified business actual property publicity, actual property 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 common sense, not with a capital L, not with a capital debt standpoint, however how leveraged the monetary markets are and the way leveraged folks’s portfolios are simply to shares and bonds.
Meb:
One of many questions I wished to ask was, what’s … I toured one of many largest greenhouses on the planet a few week in the past. It’s primarily tomatoes and hashish, nevertheless it’s some of the technologically superior buildings I’ve been in, I feel 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 some 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 all the pieces, air-con. However at the moment 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 completely different to chop some wheat than it’s to reap some strawberries on and on. What’s the position that automation’s enjoying and the way shortly is that like adoption curve occurring right here in 2023?
Craig:
There’s an amazing quantity of expertise that’s being superior on the farm. And it’s tractors, chopping heads, automated harvesting tools for everlasting crops as properly, not simply wheat and corn that you just would possibly usually take into consideration. However for instance, should you have a look at blueberry harvesting. One blueberry harvester with 4 folks on it may harvest as a lot as 125 hand harvesters. And actually most blueberry fields on the market are arrange for hand harvesting. It’s important to mainly do all the pieces completely different along with your vegetation and your plantings and your rows and your varietal choice, et cetera to have the ability to do the machine harvest. However you get contemporary market high quality blueberries with 4 folks as an alternative of 125 folks. So you actually get dramatic price financial savings, high quality will increase as properly.
Speaking in regards to the vertical farming, we may do vertical farming on our land. We now have a variety of nice land. We now have water, sunshine, labor, et cetera. However once I do the maths, and AppHarvest might be instance, to do a 60 acre greenhouse would price them round $2.5 million per acre for that greenhouse. And for that very same amount of cash that it prices them to construct a 60 acre greenhouse, I may purchase 10,000 acres of irrigated farmland. Greenhouses are depreciating property. Their working prices are excessive, usually round twice the price per pound of meals than farmland grown stuff. However actually in 10 years the query is, “Nicely, would you fairly personal a 10-year outdated 60 acre greenhouse or 10,000 acres of irrigated farmland?”
Simply from an funding standpoint, I’m an enormous fan. I nonetheless suppose there’s super worth on the farmland facet. If I assumed that there was a variety of alternative within the managed setting sector, we’d be investing there as properly. However it’s actually slender choice 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 folks need to have a look at that. And possibly 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 fascinated by what the ecological worth was of what we did. They really gave us a $250,000 grant and we introduced in two consulting corporations to have a look at what we did and quantify it for us. And so these two corporations 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% internet financial acquire to the investor, however we additionally delivered 46% internet acquire to the ecosystem within the type of soil, carbon sequestered, cleaned water, clear air, et cetera, biodiversity.
And should you dig into the numbers a bit of bit, what it confirmed is that if that land had been managed conventionally, it will have prompted $8.5 million price of ecosystem service hurt. And the best way that we managed it created $12.5 million price of ecosystem service profit. So, an actual double backside line return each to the traders and to the ecosystem. Partially due to that scientific report that we did we introduced within the largest ESG scores agency to provide us a rating on our system. We do a bunch of various scores, however we introduced these guys in and this group does the scores for MSCI. In the event you see an ESG scores on MSCI, these are the backend guys behind it.
They went in, we went by a three-month course of with them. They rating you on a number of completely 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 common agricultural agency of their system has a rating of 17, so not doing properly for the world. And we acquired the very best rating that they’ve ever given to any certainly one of their 10,000 companies. We received 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 essential not solely to get licensed natural, which is a federal regulated commonplace. But in addition have these third get together scores which might be delivered. You’ll be able to’t get a 100 on stuff. Some pretend business scoring is rather like, “Oh, you’re all sustainable.” “Nicely, oh nice, I suppose we will go house. We’re all executed.”
However it’s really actually vital, similar to you by no means say, “Oh, we’re executed by way of delivering income on the sustainability facet,” there’s all the time one other step you possibly can take. There’s all the time issues you possibly can 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 all the time considering of different yield. Clearly, farmland is a reasonably simple return stream, whether or not it’s by 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 certainly one of 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 without doubt one of the finest methods to extend, so soil carbon, and it’s solely executed 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 problem has been, it’s difficult to really mixture the carbon. Each completely different soil sort, each completely different geography, each completely different crop rotation has a distinct protocol that must be developed with a purpose to quantify the quantity of carbon, not less than in line with the best way that the carbon markets are structured at the moment.
And the profit, if carbon costs are $20 per ton, they may be increased 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 earnings per yr on that, which is ok. In the event you’re producing $300 an acre standard hire and you may get an additional 10 or 20 bucks, properly, okay, that’s good. But when I can convert it to natural and get $750 an acre hire, 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 mentioned, “Concentrate on $50,000 issues as an alternative of $5 issues.” Now he’s speaking about lattes and different issues, however I feel it applies. I typically get seduced in an analogous method in our enterprise of getting distracted by shiny concepts when the primary focus is true in entrance of my face, really easy to do. Craig, we talked about lots. What did we miss? Something that we haven’t touched on at the moment that you just suppose is vital 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%, they usually be sure 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 folks. And that makes positive that these farmers can keep in enterprise decade after decade, regardless of the climate cycles. In the event you don’t develop meals one yr, you’ve received an actual societal problem. That is the explanation why the federal government will mainly be sure that all of the farmers succeed.
Nicely, it takes 10 years the best way the crop insurance coverage is ready up. It takes 10 years’ price of rising a specific sort of crop in a specific county to ensure that it to be eligible for crop insurance coverage. Nicely, we’re now 25 years into natural certification. We’ve received a ton of crop variety that’s now accessible for crop insurance coverage from the federal government. And so we’re capable of get crop insurance coverage for increased revenue margin crops that actually take away the chance. You get 80% crop insurance coverage in your crops. We develop 40 completely different crops throughout our farms, so we get a variety of inherent diversification and with that crop insurance coverage on it. It actually creates this gorgeous magical asset class. You don’t have hire insurance coverage to your house buildings or workplace constructing insurance coverage in your workplace buildings, however we’ve authorities funded crop insurance coverage on this. It’s a reasonably matched asset class, solely 2% institutionally owned, and that creates some actually fantastic dynamics for traders to nonetheless get into the house.
Meb:
Hear, hear. Nicely, what’s the longer term appear to be for you guys? I imply, final time we talked, I imply, I feel the reply I think about is simply plant and develop, proper? Increase a bit and carry on doing what you’re doing. However is there anything in your mind that you just’re occupied with as we glance out to 2024, 2025?
Craig:
We’ve spent the previous variety of years actually constructing out our farm administration firm. We now have this 45-person farm administration firm that actually is simply wonderful. The whole lot is finished at price, it’s not a revenue middle for us. We do it at price. In order we scale up these prices mainly get amortized over extra acres. I feel we’re at a really good stage to broaden 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 prime quality farmland with nice water rights into the longer term. Long term we’ll create these, we’ll do one thing enjoyable round as soon as the property are all absolutely money flowing in order that it’s simpler for everybody to take part in, however we will discuss 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 folks discover out extra about you guys? What’s the perfect locations?
Craig:
Yeah, so our web site @farmlandlp.com is a good place to get in touch with us. We’re really having an investor occasion at our California farm that has the blueberries originally of June. After which within the fall we’ve investor occasion up in Oregon the place we harvest wine grapes. We actually wish to get the traders out to the farms.
Meb:
Yeah, man, that ought to be a straightforward 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 a variety of enjoyable.
Meb:
Cool. Nicely, Craig, it’s been a variety of enjoyable as traditional, becoming a member of you, catching an replace. Thanks a lot for becoming a member of us at the moment.
Craig:
Nice speaking to you, Meb as all the time.
Meb:
Listeners, should you loved this episode, try the hyperlink within the present notes for our first episode of Craig that was launched on the finish of 2020. Podcast listeners will submit present notes to at the moment’s dialog mebfaber.com/podcast. In the event you love the present, should you hate it, shoot us suggestions at suggestions@theMebfabershow.com. We like to learn the evaluations. Please overview us on iTunes and subscribe the present wherever good podcasts are discovered. Thanks for listening, associates, and good investing.
