Chris Martenson: Welcome to another Peak Prosperity podcast. I am your host, of course, Chris Martenson, and today I am pleased to welcome Craig Wincher onto the program. Craig is the Managing Partner of Farmland LP , a fund that serves as a great model for sustainable business. Craig and his team acquire conventional farmland and convert it to organic, sustainable farmland for the purpose of long-term cash flow and capital appreciation.
I first met Craig a number of years back, and that was when his farmland fund owned about 154 acres of farmland. And now it manages over 2000 acres and is going to be expanding to over 6000. I am really pleased that we here at Peak Prosperity were able to direct accredited investors to that initial fund, and that we do have a business relationship with Farmland LP, because we really do believe in it.
I have since watched with excitement the success he and his partner, Jason Bradford, have had in making it a real and thriving enterprise. At Peak Prosperity, we talk a lot about the need for new models of doing business that will comport well within the growing economic, energetic, and environmental constraints bearing down on all of us. I believe Craig and his team are setting a great example. And I get a boost of optimism about our future knowing that there are innovators like them out there, blazing a trail for others to follow.
Craig, thanks so much for joining me. I am really excited to hear about the latest updates and what you and your team are up to.
Craig Wincher: Very glad to be here.
Chris Martenson: First off, describe Farmland LP – the business model – for our listeners who might be unfamiliar with it, and the factors that led you to pick that model and to believe it would work.
Craig Wincher: Great. Well, you did a great job in the intro. Farmland LP buys conventional farmland and converts it to organic, sustainable farmland as an investment fund. It’s very similar to a REIT, a real estate investment trust. So as we raise capital, we buy farmland, and the investors have the benefit of owning this tangible, appreciating asset over a long period of time. And farmland, like other forms of real estate, generates cash flow. And that cash flow can be delivered in perpetuity over time, if it is managed sustainably, and that is what we specialize in. So we specialize in buying great farmland at great prices that is generating good cash flow, and then adding value to that farmland to increase the cash flow. And we add value in two primary ways.
The first way that we do that is by converting it to certified organic farmland, which is a three-year process. And then once it is certified organic, we can take advantage of the 50 to 200% price premiums for organic goods. It generates more revenue for the farmers, more income for the investors.
The second thing that we do, which is actually the core and heart of what we do, is we specialize in using sustainable agriculture best practices. And what that primarily looks like, particularly in the early period, is bringing in livestock back onto the land. And that livestock is a higher-value crop, so you generate more revenue per acre by having sheep and cattle, and pastured poultry on that land for meat and for eggs. And the other benefit to that the animals leave behind a lot of fertilizer. And so after a three- to seven-year conversion period, you have actually restored the farmland to its original, very strong, biologically fertile state. And it is perfect for bringing in certified organic farmers into the process. And that reduces their input costs, makes the farmers more profitable, and again, generates more revenue for the investors, as well.
Chris Martenson: I love the idea. We have had Joel Salatin on a couple of times. Am I wrong in assuming that the models that he has talked about that he uses at Polyface Farm are somewhat similar to the ones you are using here?
Craig Wincher: Yeah, Joel is great. Joel definitely gets the model. Imagine what it would be like to scale up Joel's model to thousands and tens of thousands, hundreds of thousands, even millions of acres. And in essence, that is what you are talking about with Farmland LP's model.
Chris Martenson: Let's talk about last year. It was a year of drought and great difficulty for a lot of farms. How did your operations fare during that?
Craig Wincher: Well, they fared extraordinarily well. The first thing is, we really take a long-term view when we are looking at buying farmland. We look at buying properties that we want to own for 30-plus years. And so as part of that process, we use 20 major factors in identifying where to buy farmland and which pieces of farmland to buy. And one of those is looking at the climate models. And so the two areas that we have farmland in right now, in the Willamette Valley in Oregon and a certain part of Northern California, those are two areas that were not affected by drought. Whereas most of the rest of the country was. It was the largest natural disaster in U.S. history by land area, the drought was.
The second point on that is that one of my favorite photos of the year was a picture of a droughted Indiana farm field that was in the Washington Post a few months ago. And it was not my favorite because the cornfield was droughted, but what was interesting was that between the droughted cornfield and the road was a bright green strip of grass. And that bright green strip of grass, here people were looking at this and saying oh, it is an incredible drought condition; poor farmers. Why were the grasses so green? Well, there was plenty of water for the grasses, because their roots go down six to eight feet and more. Corn roots only go down six to eight inches. And so if they had planted more of a perennial crop, rather than an annual crop, we would have produced a lot more beef, for example, in the Midwest than we did.
And some people have kind of this mistaken understanding about corn. They think it is incredibly productive. And the fact is, if you have a farmer who farms an acre of land in Iowa and then ships off all the corn, does all the work, puts in all the fuel, and the fertilizer, and the pesticide, and harvests all that corn and ships it to a feedlot, that feedlot will produce around 1500 pounds of meat from the corn on that acre of land. If, however, that farmer planted a pasture in that land and put a cow on it, and they owned the cow, they would also produce 1500 pounds of meat from that grass. However, instead of just getting the value of the feed, they would also get the value of the cow. And that is really how agriculture used to be, for as long as agriculture went on. Agriculture was having livestock and vegetable crops in a rotation on the land. Unfortunately, over the past 60 years, we have really geared towards just this monocropping system of corn and soy. And we have really destroyed a lot of the soil fertility. But we have also reversed basically 8000 years of agricultural progress over the past 60 years.
Chris Martenson: So what I love is that there is a business model here that seems to make sense that comports with the realities that we are currently talking about. So you mentioned, here is a farmer that grows 1500 pounds of meat either way, but your first example involves a lot of energy inputs to harvest the corn, grow the corn, transport the corn, and do all of that. And the second one sounds a lot less energy intensive. So that sounds like there is also going to be some additional hidden value in there, to not just the farmer but to society at large. And so what I love about this is the idea that we can actually have business models that make sense on ecological foundations, and economic foundations, and energy foundations. It just sounds great. So, question: Are you a mission-driven organization, then? Meaning, are you pursuing this work because of a philosophy, or is it simply a great ROI you have discovered?
Craig Wincher: I do not think there is a very big difference between having a good long-term investment and having it be a sustainable investment. In fact, I think that only when you shorten your time horizon over very, very short periods of time is there some kind of tradeoff. If you think about it, our minimum time horizon is three to four years. If you look at conventional agriculture versus organic and sustainable agriculture, the academic studies have shown if your time horizon is four years or less, then it makes sense to stay as conventional agriculture. But if your time horizon is five years or longer, then it actually makes better economic sense, better on a discounted cash flow basis, to convert to organic agriculture.
And there is this somewhat false dichotomy that people have about their investment portfolios, that they have to get the best returns over the next quarter, the next quarter, the next quarter. But they have really forgotten that they are actually investing for events that are going to happen 10, 20, 30 years down the line. They are investing maybe for their kids going to college, or for their retirement, or possibly for something to pass on to their kids. And from that standpoint, you need to have good investments that will both store value and appreciate over time, as well as deliver great cash flow over those periods. And when you look at the world that way, from a time period of your lifetime, then you want to invest in things that are going to be a source of durable value over a long haul and also deliver good investment returns. And then from that standpoint, from that view, farmland for us is a perfect asset class. Now, gold is a great store of value, but it does not deliver any cash flow. Oil is a wonderful source of cash flow, but it depletes over time. And we view farmland, from a financial perspective, as being kind of in this perfect middle world of having the durability of gold plus the cash flow of producing food over a long period of time.
Chris Martenson: I am fascinated about this idea of how you would calculate returns on this particular investment. So, normally, we think of conventional investment, so there is the cash flow. That might be dividends that might be interest. And then, of course, there is capital appreciation. We can just open up the newspaper and/or go online and check the capital portion of our holdings. How is it that you go about calculating the return on investment or ROI of your fund for investors?
Craig Wincher: There is a little bit of a back-story. It is very simple to calculate the returns of our fund. We have an asset that appreciates over time and we basically get income from rent, lease income from our farmers. And one thing that has really been interesting for me is that I am 43 years old. I have had an investing career in both equities and tangible real assets. My family has owned and managed investment real estate since before I was born. So I kind of grew up in that world. But it is really extraordinary to me how stocks and stock returns have really been at the forefront of people's thinking about investments. There was a time not so long ago when stocks were these strange derivative instruments that people did not understand. And they wanted real, tangible assets because they could understand owning an asset, and generating rents and other returns from those real assets.
And now [it] has totally shifted so that people do not do not understand that the real value is owning cash-flowing assets for the long haul. And that is really what we specialize in. So, from an investment return prospective, normally farmland – you can go out and you can buy farmland today at a basically a 3.5% to 4% cash flow return to the asset. And that is based on conventional commodity crops. And what we do is we buy farmland. We convert it to organic farmland and then use sustainable agriculture best practices. And what that basically looks like is that we will buy 1000 acres of land that may be growing corn today. And then my business partner, Jason, develops a land management plan, a sustainable agriculture management plan for that land. And really, if you are growing corn year after year on ground, it is really the worst thing for the land. You end up spending a tremendous amount of money on inputs on fertilizers, and pesticides, and you are losing topsoil and you are spending a lot of money irrigating. And actually, after about five years of doing that, you are spending a lot more money on the inputs to grow those crops than you were if you had just managed it sustainably.
Chris Martenson: Hmm.
Craig Wincher: And so we take it through that conversion process to kind of detox, wean it off of the chemical dependency that it is on and restore the soil carbon, restore the soil fertility. And we do that by planting perennial forages, basically pasture, on corn-quality land, and then bringing in expert sheep farmers, cattle farmers, and pasture poultry producers who grow eggs and meat. And we actually get great economics, even during the conversion period, to it being certified organic farmland. And we are also restoring the soil fertility naturally. And then once that soil fertility has been restored over three to seven years, then we rotate it into vegetable farmers. After two to three years, they have used up that soil fertility and we rotate them onto the next piece of pasture and bring in either a grain farmer or put it back into pasture. So in this scenario, we are acting as the land managers. We are creating a tremendous amount of jobs for farmers to grow locally grown, organic, healthy food. And we are making better revenues.
So by bringing in these diversities of farmers, what we are doing is we are making sure that our agricultural practices and the farmers on the land are maximizing the soil fertility from a biological standpoint. And by doing that, you are starting out with the returns on conventional farmland, growing commodity crops, basically crops that compete solely on price. And we are adding premiums to that. So, by getting it certified organic, our farmers are able to make extra revenue and we have profit sharing relationships with them. So we participate in that. So instead of just growing one crop, we grow, we have a sheep farmer, and a chicken farm, basically on the same piece of land, very similar to how Joel Salatin does it. That generates extra returns. And the fertilizer that they leave behind is a really big benefit to the vegetable farmers. And they generate additional revenues and cost savings from that. And at the end of the day, we generate a premium cash flow from the same acre of land simply by using much more sustainable practices. It really is a case where you get premium returns for doing the right thing.
Chris Martenson: Well, what are the impacts on the communities that these farms are serving at this point? What have you noticed happening there?
Craig Wincher: Well, the farmers that we bring in, we work with some very experienced farmers, people who have been, for example, producing premium quality land for the past 30 years. And we are able to provide them with much more acreage to product these high quality sheep than they otherwise would have been able to afford. And in fact, there is not a lot of wonderful land out there, high-quality land that is specifically geared towards pastured production of meats.
Chris Martenson: Uh-huh.
Craig Wincher: And yet this is the area that you get the highest price premiums on and is also in the most demand. So, the farmers that we are working with – we are also working with the young farming family who is building a pastured egg production business, and we have some housing on our properties. And so we are able to lease this family a house, and really help bring into fruition a dream that this family has been working for a long time, to create a pastured egg production business at scale, using sustainable agriculture best practices. And it really is part of a community on this farmland.
So it benefits these young farmers, giving them access to farmland. It benefits the large farmers by helping them scale up their businesses even more. It benefits the community by producing more locally grown food. And really, the demand for locally grown organic food has really been expanding. Organic food has grown basically 16.5% per year since 1990. It is now over 4.5% of the food system. But only 0.7% of the farmland in the U.S. is certified organic. And that is only growing at 8.5%. So you have this big disparity. There is a real big gap between the demand for organic food and the supply of organic farmland to grow that food. And so we are really helping kind of restoring the balance. And the communities really have a tremendous demand for this food, and at the end of the day, it is strengthening communities.
Chris Martenson: Food quality and security are two big issues in my household. And I was just reading, I guess it was maybe two months ago in the New York Times Sunday Magazine, they had a whole article in their food section about the central valley of California. And the summation of that was multiple farmers told this author, the journalist, that they knew they were farming in unsustainable ways but felt locked into the paradigm, and it was very difficult to get out. And the mysterious part about this to me is that we do find people, such as yourself, who have found a way to step outside of that. There are lots of farming operations, Joel Salatin’s, that have stepped outside of it. It seems to be working, and yet a lot of people feel locked. It is almost like there are two completely parallel universes. And it seems difficult for people to figure out how to get from point A to point B.
But as you mentioned, over here at point B, a lot of demand, high-quality food, people are interested in that. And so I am wondering if you have some advice. We have a lot of interest among our community for sustainable business models in general, particularly in a net-energy constrained world. So do you have any advice or a specific criteria that you could share on how folks might go about evaluating, identifying what you would consider to be a good business model in this world?
Craig Wincher: Yeah, well, I think that was extraordinarily well said. There are some very specific barriers that separate these two universes of agriculture. And one is this commodity-based form of chemical dependent agriculture that has really been only in place from the 1950s, when artificial fertilizers – cheap, essentially free, artificial fertilizers – came into play. And really, for thousands of years before that, you had tremendous diversity in crop rotations. Actually, in 1950, the average farm produced about five crops per farm per year. So that includes livestock, vegetables, and grains in sustainable rotations. If you look at that number today, we have gone from five crops per farm per year to 1.2 crops per farm year. We have almost a perfect monocrop system all across the United States. And that was really dependent on these cheap inputs.
And really over the past 20 years what has happened is that the assumption that those inputs are cheap and essentially free has shifted. It is actually now more cost effective, more profitable, to produce grass-fed meat than it is to produce the corn, grain-fed meat. So there has been a shift in the economic system. But unfortunately we have basically 60 years’ worth of investment that has gone into these monocropping systems. As farmers got more successful, they would simply buy larger equipment for planting and harvesting corn. And so we are left with this huge built environment. Unfortunately, the average age of farmers today is 60 years old. And so these people have really been farming under this system the whole entire time. And they have all the equipment, and they have usually debt on their place. And they are simply not making the transition.
And so what we generally do is we look for farmland – we buy farmland from the farmers who are retiring or dying and it is in their estates. And then we take it through that conversion period. And it is really just a three-to five-year conversion period. There is a lot more complexity. You are talking about going from a farmer who may be producing on 1000 acres with a certain set of equipment, to having multiple farmers on the land, producing multiple kinds of crops on the land. And it takes management, it takes expertise to take it through that conversion period.
But that end state, as you said, that alternate universe is a fully functional, thriving universe that is proven scientifically, and economically, and agronomically for thousands of years. And it is incumbent on the communities to figure out how to fund that transition. And it involves changing the management of the land. It involves funding the farmers to invest in livestock. And it involves the community buying those products to help with that transition. And, it may seem like a little bit of faith at first, but if you break these things down into their little components, investing in farmland, investing in good farmers, and buying sustainably produced local food, you are really talking about things that deliver wonderful economic benefit and community benefit, as well. And this is really the vision for what agriculture can be again in the future.
Chris Martenson: I think it is fascinating that you mention that it was basically in the 1950s where things really shifted. I believe the first supermarket in the United States was 1947. So we are really talking about the way most people think this is just how farming is actually a very recent invention, possibly a diversion from what farming used to be and will be again.
And so to get from point A to point B, though, this is really fascinating, where I think we need business models like the ones you are talking about, because it does take support. I am a big fan of saying that where you have to enable and embolden our young people to make a lot of mistakes as we try and figure out how to navigate from a high-energy society to a slightly lower-energy society. That is not an easy transition. We do not have any history books to really guide us. So guess what, we are going to have to make a few mistakes in there.
And I was really taken this year when I visited an 11,000 acre corn operation. It was in Maryland, of all places. And the average age of the two farmers running it was well above your 60-year mark. And when I queried, were their sons or daughters getting involved, they said no; they almost laughed about it, because here they were running this operation, which nominally had millions of dollars in revenue every year. They were running at $150 per acre profit. And it does not take much to wipe $150 of profit, if the margins were, I think they were running at maybe 2%, maybe 3% based on current land pricing. So, if you are thinking about coming into that as a young person, I cannot imagine wanting to step into that farming operation with that much risk, that much responsibility, that little amount of reward, but also knowing that it is fundamentally unsustainable. That is not the kind of thing that really compels young people to jump up and say yeah, sign me up. Maybe that is part of the trend here.
Craig Wincher: That is exactly right. And also, how do they come up with all the capital just to buy the farmland to get started? The agricultural system that we have today is based on the same essential game that created the modern financial system, which is requiring literally trillions of dollars' worth of bailouts. It hilarious, Ben Bernanke basically saying that he is going to print money until the employment situation improves is something that is almost funny to me, and it just makes absolutely no sense at all. And yet this is the paradigm of the leaders of the politicians and the economic system that we have today.
Agriculture is basically driven by those same factors that have resulted in the economic system. And the fundamental mismatch that really put agriculture on the course where we are today is viewing agriculture as a chemical-based system as opposed to a biological-based system. I was driving around with Bill Niman yesterday. Bill Niman founded Niman Ranch in the mid-70s, built that up to a $60 million business, left about a half a dozen years ago. It is the largest natural, ethically produced meat company in the U.S. And he has now started a new company, BN Ranch.
Bill is an advisor of ours. I am on his board of directors. He is just an absolutely extraordinary guy and very wise. And as he was talking yesterday, he used the phrase, “Better living through chemistry.”
Chris Martenson: Uh-huh.
Craig Wincher: And, when nitrogen was low in people's fields after the war, they basically took this ammonium nitrate explosive and put it on the fields and increased crop productivity. And then, they were also fertilizing the weeds, as well. So they say oh, now we have this weed problem. Well, let's put this herbicide on them and kill the weeds. Okay, great, well now you have 1000 acres of corn. Well, now all the pests that like to eat corn are eating the corn. Great, well, let's spray insecticides, more chemicals. And oh, well, now we have these herbicide resistant weeds, well let's genetically engineer the crops to be able to tolerate more herbicide.
And you end up with this very focused, very methodical, and somewhat ineffective system over a short period of time, where you view agriculture as a chemical-based system. And that works until the inputs are not cheap and until the soil carbon has been burned down. And you have really rid the environment of its life and vitality. And you can switch it back around; it just takes time and it just takes investment. Fortunately the economic factors at play say that sustainable agriculture is much better economically now than the unsustainable agriculture that we have in place today. It is just going to take 30 years of investment in order to transition back. And I do think it is important that we transition as fast as possible, just in case there are any energy, or supply, or climate issues that we have in place that may happen over time.
We do not have a Ben Bernanke to print more food for us or print more farmland. And so it is really incumbent on the agricultural system to build up those reserves in the form of soil carbon and sustainable agriculture practices before we need it. Because when the Hurricane Sandy hits, you cannot buy insurance as the storm is on your doorstep. You have to get it into place ahead of time.
Chris Martenson: And we know all of these pressures in terms of world food production need to increase because we are heading to nine billion people. We know that soil is being depleted, if not outright lost. We know that water itself is becoming an extraordinary issue. There are a lot of issues out there, and it sounds like the model that you are running is one way that we could address that. I am really glad you are doing what you are doing. It is approaching thousands of acres, and dare I say it needs to be millions and millions of acres to really provide that security you are talking about. So I am fully in support of it.
Craig, I am interested, what are some of the most important lessons that you could share with us that you have learned in being a sustainable entrepreneur, if I could use that term?
Craig Wincher: You can use it. So there is a social responsible ratings organization called B-Corp, and we received the highest B score ever. We did not set out to do that. We really focused on building a business model that just delivered on its fundamental returns, owning a stable cash flowing asset, and increasing cash flow by using agronomic best practices, sustainable agriculture best practices. And that is what we go to work and do every day. The reasons why we did it – I really had a big shift when my daughter was born. And, really, the moment that she was born, I just had what, again, Bill Niman calls a parental epiphany, where my life was now about helping her dreams come true and really, the dreams of everyone in her generation. And I asked myself, what am I doing to make a difference 20 years from now for the world that we are going to give them? And that timeframe and wanting a world that works is really what drives us every day.
And I think the lesson for entrepreneurs in this is that if you are going to be an entrepreneur, you have to start with a fundamentally good business model. And you are only going to be working on things that are really going to make a difference for you and your world in the future. And it really requires more from the entrepreneur, more thinking about building their business model. More thinking about how they are going to do it step-by-step and grow their business. And always keeping a focus on what are the metrics, in addition to the financial metrics, that they are going to make a difference on.
Chris Martenson: And when you started this, would you say that you had a lot more explaining to do because it was, say, an alternative business model? Or did you find the reception was warm from the get go?
Craig Wincher: Essentially, the reception was very warm. Most people do not have a familiarity with real estate, let alone farmland investing. And so most of the explaining is just around – some people say, well, how can you make any money in farmland? And what they do not know is that 40% of farmland in the U.S. is leased today, and that it is a cash-flowing asset just like an apartment building, or an office building, or one of the timber REITs. And that we are thinking about it, I would say, slightly differently than people had thought about farmland in the past, where it has been one farmer owns one piece of land and growing one kind of crop. And it has resulted in the agricultural system that we have today, to us thinking about farmland a little bit more like an office building, where you have a group that owns the asset, like an office building. Like an REIT, a group that manages that asset, like we manage farmland using sustainable agriculture best practice, and then tenants in there. I run a business and we rent office space. And if I need office space, I just rent more office space. I do not have to own this office building and deal with the headaches of that. I just get to rent office space.
But we have an agricultural system where we force farmers essentially to buy a new office building every time they want to expand their production, and then, if they are organic farmers, we force them to take it through another three-year organic conversion process before they can sell the crops that the market demands. If they are successful – let's say they double their acreage, they then – if they are successful, they are going to sell everything the next year, and then what are they going to do? Well, they have to go out and buy more farmland, a really gigantic burden that we have put on organic and sustainable farmers.
What we do is, we buy the land, we take it though that conversion process, and then provide the highest quality land at a large scale and on a very low-risk basis to successful farmers, to grow crops that you and lots and lots of people all want to eat. So that is the role that the investors get to play in helping transition this. They are really transitioning the land use out of the commodity, chemical-based agriculture system into this organic, sustainable agriculture system where you have many more farmers on a piece of land on a rotating basis and it works very well.
Chris Martenson: Well, that is fantastic. Craig, what are your plans for the future? I heard wind that you have another fund coming out potentially in 2013, is that right?
Craig Wincher: That is right. So, this fund is closing at the end of Q1 next year, and this will be 6300 acres and $42 million worth of farmland. And then towards the second half of next year, we are going to open up a second fund, and that will be a brand new pool of farmland.
Chris Martenson: Well, fantastic, looking forward to that, and how should those who might be interested in learning more about your operations, how would they go about doing that?
Craig Wincher: They are welcome to look at our website at www.farmlandlp.com . They can also e-mail us. I am at email@example.com . And we are glad to send them information. This fund right now is open to accredited investors and there is a $500k minimum at this point, just due to SEC requirements that have us limited to 99 investors. We have 67 investors right now. And next year's fund will be a much lower minimum again.
Chris Martenson: Fantastic. Also, we do have a link provided at the bottom of this podcast, where you can just click on that, e-mail us, and we will get you in contact, as well. So, with that, I really, really admire what you have done and thank you for taking the time to share some of your insights and learnings. And the thing I like most about this is that often people ask – they feel powerless, like what could we possibly do? The trends are all heading in the wrong direction. And the answer is that in fact, there are lots of things we can do today that make sense. They make economic sense. They make ecologic sense. They make energy sense.
And by the way, in all investments going forward, those are the filters I apply now. If they do not make sense on all three of those dimensions, they probably do not make sense in the long term. And by the way, for me, that is what an investment is – it is an investment in the future. So, thank you for showing us a way that we can invest in the future and that it is possible.
Craig Wincher: Great talking with you, as always, Chris.
Chris Martenson: Thanks.