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

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 at present’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 have been one of many few property that didn’t have unfavorable returns.

Then we dive into the financials of an acquisition they fabricated from a 4,000 acre, 150 12 months outdated farm in Northern California again in 2013 for slightly below $30 million. Craig walks via 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 12 months.

Craig shares some nice slides through the episode, so if you wish to watch on YouTube, click on beneath.

Hearken 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 presents a collection of intuitive instruments, together with quite a few visualizations, complete safety screeners, portfolio building, communication outputs, and market monitoring. To begin your free trial and be sure you point out “MEB ” for 20% off your subscription, click 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 optimistic correlation with inflation
14:10 – Why there’s a scarcity of natural farms
23:25 – Strolling via 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 best ever ESG rating from the biggest agency
53:12 – Authorities-subsidized natural crop insurance coverage
55:15 – What the longer term seems to be like for Farmland LP
56:40 – Farmland LP’s upcoming investor occasions; be taught extra at farmlandlp.com; e-mail [email protected]

Transcript:

Welcome Message:

Welcome to the Med Faber Present, the place the main focus is on serving to you develop and protect your wealth. Be a part of us as we focus on the craft of investing and uncover new and worthwhile concepts, all that will help you develop wealthier and wiser. Higher investing begins right here.

Disclaimer:

Med Faber’s the co-founder and chief funding officer at Cambria Funding Administration. As a consequence 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 mirror the opinion of Cambria Funding Administration or its associates. For extra info, go to cambriainvestments.com.

Meb:

Immediately’s episode is sponsored by my buddies at YCharts. In case you’re a monetary advisor, hear 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 a complete nother stage by serving to you create customized reviews and displays to reinforce conversations with purchasers and prospects. With its simple drag and drop design, the report builder lets you customise over 30 visuals, making it nice for assembly with prospects and purchasers throughout quarter or year-end critiques. You possibly can even add your individual visuals and your agency branding colours and emblem. Their new replace permits for personalised storytelling, supplying you with the power to drag in save tables and charts, or add customized textual content containers that advisors love so as to add disclosures for our buddies in compliance. Make your life simpler. Give YCharts a try 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:

Hi there all people. We’re heading again all the way down to the farm at present 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 property and 15,000 acres of farmland. Immediately’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 have been one of many few ones that didn’t have unfavorable returns. Then we dive right into a case examine of an acquisition they fabricated from a 4,000 acre, 150-year-old farm in Northern California again in 2013 for slightly below $30 million. Craig walks via 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 12 months.

Craig shares some nice slides through the episode, so if you wish to watch it on YouTube, click on on the hyperlink within the present notes. And in case 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 have 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 present? 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 are actually on the fund three?

Craig:

We’re nearly to launch fund three. We truly 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 usually. Nice rising local weather.

Meb:

Yum. All proper, effectively catch us up on the corporate. We’ll submit the present word 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 typical farmland, Farmland LP buys typical 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 effectively. We have now 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 positioned in Northern California, Oregon and Washington.

Meb:

Nicely, one of many massive issues that has definitely modified or accelerated, we might 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 one in all declining rates of interest and bottoming to at least one the place abruptly 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 usually. You can provide 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 like this extremely therefore time. One of many issues that I really like about farmland is that there’s $3.8 trillion value 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 lessons. 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 will have an amazing deck. If we are able to’t share broadly with the listeners, perhaps you’ll allow us to share a few of the slides in these present notes. However there was actually two large takeaways from our final episode that actually have 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, this can be a nice slide. Relative to numerous sorts of industrial actual property workplace and we truly 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 all the sector, $3.2 trillion value of workplace buildings, 78% of that’s debt. And that’s why you see actually super adjustments occur when you will have rates of interest go up or have any credit score points. Farmland, there’s solely 13% LTV on all the sector, so actually tremendously little debt and about half of that debt is simply working strains. 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 truly 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 many years since 1970 farmland returns have overwhelmed inflation by 6.2% per 12 months. And the mechanism of that’s truly 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 principally 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 a bit of 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 truly we’ve demonstrated that we purchase farmland that generates rents of $300 an acre, take it via 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, 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 comparable psychological idea, the industrial 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 significant a part of the transaction versus farmland which has simply traditionally been owned outright. What’s the rationale?

Craig:

The banking system may be very aware of 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 principally the ’70s and you then had a farm disaster of debt disaster in late ’70s, early ’80s. And banks have been principally foreclosing on farmland that was not well-liked with farmers and you’ll principally have farmers boycotting the auctions that they’d have. And so lenders didn’t wish to lend into the house, farmers didn’t need something to do with the banks as effectively. And a part of that was precipitated, truly … What drove it’s in 1971 the U.S. modified its agricultural coverage to inform everybody to principally plant fence submit to fence submit and get massive or get out. Previous to that, previous to 1971, the coverage had been far 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 grew to become, let’s overproduce corn and drive down the worth. You had lots of people taking up 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 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 dad and mom and grandparents down the generations have 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, in case you do an funding and you then resolve you don’t like a sector, you simply don’t spend money on that sector anymore. In case you’re a farmer, you’re a farmer, you’re not going to select 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 all the sector. And it’s actually the ethos of the sector at this level. The federal government truly 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 truly 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, generally 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:

Received it. Okay. It is smart, I believe for most individuals once they give it some thought, that farmland intuitively, in case you have been to consider inflation or increased inflation durations, why farmland would do effectively, I really feel like that’s considerably of an apparent takeaway. The 2 issues that I stated have 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:

Nicely, nice information, is as much as 1.2%.

Meb:

Oh child, it’s up 20%. That’s a greater solution to say it, 20% improve. That’s loopy.

Craig:

It’s a surprisingly low quantity. Over 6% of the U.S. meals funds 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 via 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 in an effort to develop natural meals in an effort to serve that market. And it’s that three 12 months transition to natural that actually holds folks again, holds farmers again from changing.

Meb:

My brother’s doing it proper now in Western Kansas, in case you’re watching this on YouTube, this would possibly even be me do the farm he’s doing. And he says it’s not simple and it takes some time.

Craig:

Three years to get licensed. And one of many massive challenges is definitely you’ll be able to’t simply mono crop, like probably the most operationally environment friendly method of managing farmland is to farm one crop 12 months after 12 months after 12 months, proper? And solely rotate when you need to. In case you’re taking a look at maximizing soil well being and doing regenerative agriculture, you then want principally 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 simple for us to get licensed natural. Usually in crops you might want to rotate your crops. In case 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 plenty of pesticides and herbicides on the land after which rotating. The rotation that they do is simply often one 12 months to soybeans, which have a complete completely different set of pests after which rotate again, provides a bit of little bit of soil nitrogen as effectively, after which rotate again into corn.

That’s the first rotation, nevertheless it’s very depending on genetically modified crops and many pesticides and herbicides. If you wish to go away from that, use extra pure techniques, you then want these at the very least three, however usually 4 crops annually after which rotating over time. That’s very difficult for a farmer. And if you consider the common commodity farmer within the U.S. has about $8.5 million value of land and tools they usually make simply $250,000 a 12 months. But when they take three years and convert that via to natural, that’s $750,000 that they’re not going to must ship their children to school or fund their retirement or numerous issues like that. So that actually 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 best way. And if there’s value premiums, 50 200% value premiums natural, why are extra folks not profiting from this? What’s the hindrance?

Craig:

A part of the difficulty is that farmers themselves, 98% of farmland is owned by the farmers and a pair of% is institutional. The large barrier to the present farmers is that three 12 months conversion interval. It’s how do they fund in essence that transition to natural. There’s a variety of experience points, such as you truly must understand how to do that. It’s a lot more durable to develop 4 completely different crops annually and discover completely different markets to promote them to and have the tools 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 in case you’re used to different types of industrial actual property. However we’re the biggest targeted on natural and regenerative agriculture. I’d truly love for there to be extra competitors on this house.

I believe that there’s an amazing alternative on this, however after I go searching on the different institutional buyers, two issues maintain them again. One remains to be a common 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, despite the fact that it’s a $60 billion a 12 months 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 stream from day one. They speak concerning the money stream that they generate from day one, and you may’t take it via a price add course of in case you offered the on getting money stream from day one. We inform our buyers they’re not going to get money stream for 3 years.

We’re going to take it via 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 known as everlasting crops. And when the buyers 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 at first. Then it makes a variety of sense, nevertheless it additionally shrinks the pool of buyers.

Meb:

As we’re speaking about this natural transformation, is it a giant price? I’m considering of obstacles and it simply appears so apparent to me. Is it one thing that, is there a giant price to pay for this to get licensed? Is there a variety of documentation? I imply, you and I have 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 house. However I imply, my God, simply coping with the federal government. Is that this a giant barrier or is it truly, when you learn to do it pretty templated and easy and as costly, what’s the method for somebody who’s by no means been via 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 sophisticated in that if you’re switching from probably monocropping corn to 4 numerous crops, you will have 4 occasions 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 at the very least $50 million value of farmland in a single tight geographic space, now we have sufficient that we are able to say, “Okay, nice. Nicely, now we 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 most effective sheep and cattle tenants for the pasture, the most effective natural tomato farmers or natural candy corn farmers for the vegetable rotations, inexperienced beans and the most effective grain farmers as effectively. After which lease that out as primarily multi-tenant industrial actual property.

Meb:

Sounds altogether too smart. Let’s speak a bit of bit about you guys final couple years. You possibly can both do it via case research, you possibly can simply discuss broad phrases, what you guys have been searching for, what you’ve been shopping for, any market traits you wish to discuss, have costs. I imply I’ve seen your returns and I understand how the funds work, however any overview you need you’ll be able to 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 all through the conversion course of and actually created much more variety on that. And there’s a brand new slide up right here if folks 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 a bit of over $77 million, and the conversion course of was fairly fascinating. After we purchased it, it was nice farmland, a few of the oldest water rights in California, truly pre-1914 water rights. Our water rights are senior to the state of California. We will speak concerning the worth of water, Meb as a result of I believe that’s the most effective 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 taking a look at 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 have 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 via a five-year crop rotation. And the income was below $350 an acre for that. After we purchased it, we took it via 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 achieved. Simply tell us if you need it.”

And the opposite group we truly labored with to assist truly do the work on the land as we have been changing it to natural. And fast-forward to at present, 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 typical crops to 12 crops at present. And went from two farmer tenants to seven farmer tenants on that land. And elevated the income per acre for us from slightly 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 mirror solely one of many issues that we’ve achieved is we recognized a few of the floor that was simply splendid for natural blueberries on that floor, so about 600 acres.

We went out, we established a partnership with Driscolls, now we have experience in blueberries, so we truly planted them ourselves, and we’re simply partway via the maturation strategy of these blueberries. Our internet final 12 months, 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 truly improve fairly considerably as that matures.

Meb:

You guys use a bit of 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 employ for the way a lot debt you’ll make use of on a farm or an operation or a purchase order? How do you consider it?

Craig:

It’s fairly delicate to debt costs. Up till just a few years in the past we have been very snug with debt. Sometimes, we wish to see 30% plus or minus 10% on debt is an affordable LTV quantity as the costs elevated. And due to a few of the debt that was accessible within the house with the federal government sponsored enterprises, you have been in a position to get it at a reduction to already low-cost free cash charges. Now the debt markets are simply not useful. Because the charges have 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 taking a look at only a 100% fairness for the entire thing. Within the case we have been in a position to 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 a lot of farmers on the podcast, and I believe in case you have 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 essential? How do you shield your self in opposition to errors right here or getting in bother with a property that both might not have the precise water rights or that sooner or later on the subject of international warming or altering geopolitics and borders, the way you shield your self?

Craig:

And now we have a giant display principally 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 truly worth the grime and the water individually, and if you do this, we frequently really feel like we’re shopping for the grime and getting the water without cost.

Meb:

I used to be going to say, what’s the normal breakdown in case you have been to really … Is it 90% land worth, 10% water mentally? I do know there’s most likely not an actual breakdown, however is there a assemble you consider it?

Craig:

That’s truly fairly good, and it’s truly 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 have been as little as $2,500 an acre, and the water rights have been one other $2,500 an acre. So the irrigated land would possibly promote for $5,000. Okay, however you fast-forward to at present. 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, 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 an enormous change.

Meb:

You guys presently 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 property and actual property should not homogenous. You’ve actual property, which is clearly very completely different, industrial actual property. Even inside industrial actual property you will have knowledge facilities, you will have single household housing, you will have workplace house, college, medical, on and on and on. You’ve farmland and issues like that. However even once more, inside farmland you will have 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 property collectively for comparable traits. However 2022 is an efficient instance. The place many sorts of actual property did very poorly farmland was most likely to my data, one of many solely few lengthy solely property that had nice efficiency. Is {that a} truthful remark? I’m making an attempt to think about even what else might have endured final 12 months. Shares and bonds clearly did horrible, however farmland put up a strong 12 months. Is that correct?

Craig:

That’s correct truly. On common, farmland is up about 10% and only one 12 months over 12 months, so ’21 to ’22 and a few areas just like the Midwest are up. I’m taking a look at 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 consider farmland costs, the dominant value is that Midwestern farmland, however there’s 300 completely 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 giant markets which are diversified. One of many fascinating issues concerning 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 based mostly on CSR factors, corn suitability ranking 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 via the public sale system that may change very quickly. And there was a variety of capital going into that house. 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 case you’re an outdoor 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 ends in imbalances as a result of in case you truly 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 truly 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 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 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 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. in case 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 very 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 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’ll be able to say, “right here’s my farm, I can’t do something with it,” which I believe is a function, not a bug. Discuss to us a bit of 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 elevate usually, nevertheless it does imply that each investor who is available in needs to be verified, third-party accredited on that. 50K minimal, We wish 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 buyers, giant wealth administration corporations have their purchasers make investments with us and excessive net-worth people and household workplaces as effectively.

Meb:

Once 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. Each time 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, sorts of crops? How do folks get the cash out? What are the mechanics of the fund for somebody who might make investments at present? 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 truly 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 is predicated on shopping for at the very least $50 million value 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 elevate someplace between 250 and $500 million and by farmland usually in these geographies. Plus we’ll add yet another geography.

At this level it’s most likely 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 12 months optionally available extensions. We inform the buyers to not anticipate money stream through 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 12 months 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 buyers as shortly as doable. But in addition not power them out, not power them to have a taxable loss after which simply attempt to search for one other property.

Meb:

I think about some individuals are fascinated about this generationally the place if given their selection, they’d most likely 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 property and we do give it some thought multi-generation.

Meb:

What occasions over the previous few years has precipitated probably the most curiosity? In case you might correlate it? I ponder 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 obtained 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 few years, I imply clearly 60/40 getting smashed final 12 months whereas farmland outperformed it by what, 20 proportion factors, some simply astonishing quantity. Is there something particularly the place your telephone begins ringing off the hook otherwise you beginning to get emails, aside from the Med Faber Present? The rest that’s like, oh, individuals are truly waking as much as this idea?

Craig:

Nicely, you do have very sensible buyers that aren’t considering contained in the field, and also you’ve simply achieved an exceptional job on actually articulating a few of the complicated traits which are occurring in nice methods for transferring ahead. However actually through the COVID interval, I obtained the sense that individuals have been actually trying, they have been involved concerning the international economic system. The federal government had simply printed an amazing amount of cash, elevated cash provide 30% or extra, they usually needed to place their cash someplace protected. And in order that was a common theme for folks. And that did have an excellent impact on folks coming to Farmland LP.

Meb:

Yeah, I’m at all times fascinated about the place buyers come from, their motivations. And in your space it’s fascinating as a result of there’s those that most likely come to you from A, “I don’t have farmland publicity side.” There’s folks which are taking a look at it from a pure diversification or return perspective. There’s different folks which are most likely taking a look at it from truthfully 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, 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, except they’re putting 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 different as effectively.

Craig:

I believe so. However Invoice Gates popping out as one of many largest farmland house owners, I believe additionally had an impression on folks. And in case you do the maths round that, he put round 5% of his property in farmland. And that’s an excellent anchor quantity for folks. You must have diversified industrial actual property publicity, actual property publicity, and round 5% in farmland is only a adequate 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 needed to ask was, what’s … I toured one of many largest greenhouses on the earth a few week in the past. It’s primarily tomatoes and hashish, nevertheless it’s probably the most 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 probably the most superior items of equipment for my childhood was using round on a tractor, which a few years in the past had GPS and a TV and all the pieces, air con. However at present it’s like subsequent stage and it appears to be accelerating. What are your ideas there? I imply, I think about one of many ways in which you guys might even farm eight various kinds of crops is the power to effectively work these various kinds 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 taking part in 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, slicing heads, automated harvesting tools for everlasting crops as effectively, not simply wheat and corn that you just would possibly usually take into consideration. However for instance, in case you have a look at blueberry harvesting. One blueberry harvester with 4 folks on it may possibly harvest as a lot as 125 hand harvesters. And actually most blueberry fields on the market are arrange for hand harvesting. You need to principally do all the pieces completely different together 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 folks as a substitute of 125 folks. So you actually get dramatic price financial savings, high quality will increase as effectively.

Speaking concerning the vertical farming, we might do vertical farming on our land. We have now a variety of nice land. We have now water, sunshine, labor, et cetera. However after I do the maths, and AppHarvest might be an excellent 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 might purchase 10,000 acres of irrigated farmland. Greenhouses are depreciating property. Their working prices are excessive, usually round twice the associated fee per pound of meals than farmland grown stuff. However actually in 10 years the query is, “Nicely, would you slightly personal a 10-year outdated 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 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 effectively. 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 ranking 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 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 truly … And do it at scale. The USDA was truly very eager about 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 take a look at what we did and quantify it for us. And so these two corporations checked out each tractor go, each crop that went on the bottom, each enter that went in, and on $50 million value of farmland these guys confirmed not solely did we ship a 70% internet financial achieve to the investor, however we additionally delivered 46% internet achieve to the ecosystem within the type of soil, carbon sequestered, cleaned water, clear air, et cetera, biodiversity.

And in case you dig into the numbers a bit of bit, what it confirmed is that if that land had been managed conventionally, it could have precipitated $8.5 million value of ecosystem service hurt. And the best way that we managed it created $12.5 million value 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 scores agency to present 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 case you see an ESG scores on MSCI, these are the backend guys behind it.

They went in, we went via 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 case you get 50 or beneath, you’re doing unhealthy for the world. In case 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 best rating that they’ve ever given to any one in all their 10,000 companies. We obtained a rating of 82 on that. And we beat insurance coverage corporations and tech corporations and biotech corporations and all types of corporations 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 normal. But in addition have these third celebration scores which are delivered. You possibly can’t get a 100 on stuff. Some faux business scoring is rather like, “Oh, you’re all sustainable.” “Nicely, oh nice, I assume we are able to go residence. We’re all achieved.”

However it’s truly actually essential, similar to you by no means say, “Oh, we’re achieved when it comes to delivering income on the sustainability facet,” there’s at all times one other step you’ll be able to take. There’s at all times issues you’ll be able to 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 reasonably easy return stream, whether or not it’s via the crops in addition to appreciation of the land. Are there different various yield sources you guys ever have a look at for these properties? Is carbon one in all them?

Craig:

We sequester about half a ton to a ton of carbon per 12 months 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 greatest methods to extend, so soil carbon, and it’s solely achieved 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 sophisticated to really mixture the carbon. Each completely different soil sort, each completely different geography, each completely different crop rotation has a special protocol that must be developed in an effort to quantify the quantity of carbon, at the very least based on the best way that the carbon markets are structured at present.

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 12 months, that’s 10 to $20 extra earnings per 12 months on that, which is okay. In case 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 massive return, the massive muscle motion, the massive 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 a substitute of $5 issues.” Now he’s speaking about lattes and different issues, however I believe it applies. I typically get seduced in the same 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 rather a lot. What did we miss? Something that we haven’t touched on at present that you just suppose is essential or significant that we glossed over?

Craig:

The magical factor about farmland. And after I began, we didn’t have this, crop insurance coverage, so natural crop insurance coverage. Mainly 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 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 folks. And that makes certain that these farmers can keep in enterprise decade after decade, irrespective of the climate cycles. In case you don’t develop meals one 12 months, you’ve obtained an actual societal subject. That is the rationale why the federal government will principally ensure 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’ value 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 obtained a ton of crop variety that’s now accessible for crop insurance coverage from the federal government. And so we’re in a position to 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 lease insurance coverage in your residence buildings or workplace constructing insurance coverage in your workplace buildings, however now we have authorities funded crop insurance coverage on this. It’s a reasonably matched asset class, solely 2% institutionally owned, and that creates some actually great dynamics for buyers 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 believe 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 the rest in your mind that you just’re fascinated 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 actually is simply superb. Every thing is completed at price, it’s not a revenue heart for us. We do it at price. In order we scale up these prices principally get amortized over extra acres. I believe we’re at a really good stage to increase these areas that we’re in with out rising 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 property are all absolutely money flowing in order that it’s simpler for everybody to take part in, however we are able to discuss that in a 12 months 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 most effective locations?

Craig:

Yeah, so our web site @farmlandlp.com is a good place to get in touch with us. We’re truly having an investor occasion at our California farm that has the blueberries originally of June. After which within the fall now we 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 needs to 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 toes moist.

Craig:

Just about. It’s fairly superb to get again out on the farm and actually truly see sustainable regenerative agriculture occur at scale. And folks say our blueberries are the most effective 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 standard, becoming a member of you, catching an replace. Thanks a lot for becoming a member of us at present.

Craig:

Nice speaking to you, Meb as at all times.

Meb:

Listeners, in case 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 submit present notes to at present’s dialog mebfaber.com/podcast. In case you love the present, in case you hate it, shoot us suggestions at [email protected]. We like to learn the critiques. Please evaluate us on iTunes and subscribe the present anyplace good podcasts are discovered. Thanks for listening, buddies, and good investing.