A Weekend On The Farm
If you've been a reader of PeakProsperity.com for more than a few months, you've likely heard us talk about Farmland LP. It's a fund that purchases over-farmed, depleted conventional farmland (at a discounted price), and then spends years nursing the land back to organic status using sustainable farming methods.
Where there was once was a monocrop operation completely dependent on fossil fertilizers and fuels, there now is rich soil full of restored micronutrients supporting a plethora of vegetables, grains, and animals. Investors get the opportunity to receive attractive annual returns on top of the appreciation of the underlying farmland -- which their capital investment is improving the quality of -- all while growing healthy food and creating a lot more jobs in the local community.
It's pretty easy to see why we're such big fans of this model.
In fact, I like it personally so much that I invested in Farmland LP's first fund myself.
As an investor, I have the opportunity to tour any of the fund's 5 farm properties, which are located in southern Oregon and central California. So that's just what I did this past weekend when the Farmland team held its first annual investor gathering at its newest (and largest) property in Stockton, CA.
I was very impressed by the property and what the team is doing there. Being an investor in such a tangible, worthwhile endeavor gives me a fulfillment and an inspiration completely unlike the impersonal relationship I've had with all the "Wall Street" stocks I've ever owned.
So I thought I'd provide a recap of my experience for those interested in learning more about this new type of investing model.
By The Numbers
The first Farmland LP fund raised enough capital to purchase over $50 million worth of farmland. To date, that capital has purchased 5 properties comprising 6,750 acres of distressed farmland, which the team is in process of bringing up to organic status (a process that takes at least 3 years).
The first 3 properties were purchased in southern Oregon several years ago. By the end of 2013, 783 of those acres had been upgraded enough to be certified organic. These are the properties with the most mature operations, and from what I've heard, they're either at or ahead of plan in terms of production.
The remaining acreage owned by the fund is located at 2 separate properties near Stockton, California. These properties have both been owned for less than 2 years, but already have operations underway on them.
The investor event this past weekend took place at the fund's "Burns Farm" property. This property has only been owned for a little over a year, but at 4,200 acres, it's the fund's largest single holding.
Stockton is about a 2-hour drive from where I live, and the drive there was pleasant for my wife, Ashley, and me. As we got close to the property, we realized that we were definitely in farm country. Nearly every surrounding parcel is growing something; crops, nut/fruit trees, wine grapes, etc.
One thing that caught my eye were the several properties we passed that were barren and appeared very dry. Based on what I later heard, it's highly likely these were victims of the drought (2014 so far has been California's driest year on record), who either couldn't afford -- or get access to -- water.
Arriving at the Burns Farm property, we parked and took a shuttle to the old farmhouse where the Burns family once lived. It's being renovated into a dual-use property; serving as a working office for Fund staff as well as a residence for the farm manager. Inside, we were greeted by the Farmland team and met the other investors who also showed up for the day.
Here's a picture of the farmhouse facade (that's Ashley on the porch), and another showing the antique water tower that used to service it:
One of the first folks we met was Frank Savage, the recently-hired farm manager for both of Farmland's California properties. (The second parcel, over 1,500 acres in Brentwood, is located some 15 miles from Burns Farm.) Frank's family have been cattle producers for generations, and in addition to looking the part, he very much seems qualified and comfortable handling his land management duties. He spent a good 15 minutes explaining his phased plans for the fields we were overlooking, a year-by-year roll out planned through 2020:
We then followed Frank outside into a shuttle bus to take a tour of the greater property. Craig Wichner, the Managing Director of Farmland LP, joined as co-host.
Craig and Frank began the tour by explaining how the greatest feature of this property is its water security, both in terms of supply and legal rights.
A big attractor when purchasing the property were the advantageous riparian water rights that came along with it. These rights, dating from the early 1800s, give Farmland the most senior claim to the canal water that flows along the north end of the property. So as long as water flows within the canal (which appeared full despite the current drought), Burns Farm will be able to irrigate its fields:
Another big benefit of the property is the way in which the land has been designed for effective water management. Many decades ago, water engineers were brought in to grade the fields such that water could be let in at the north end and, using gravity alone, sufficiently irrigate the entire acreage.
And after the water has traversed the property, any excess flows into a collection ditch and is returned to the river.
Here's a picture of the canal pipes and a small pumping station on the field side:
Due to its valuable water rights, Farmland doesn't have to pay for the water it uses. Its only water-related cost is the electricity it needs to operate the pumps. While relatively small, that cost, too, will disappear over time as solar pumps are installed over the next few years.
No other property in vicinity of Burns Farm has such a low-cost and high-fidelity water supply. As mentioned earlier, the surrounding farmers have to pay for their water -- in some cases thousands of dollars per acre, a price that can easily become prohibitive, as evidenced by the barren fields I passed on my drive in.
This one feature alone convinced me the Farmland team had found a true gem in this parcel, and gave me great confidence they have a real talent for identifying good value.
Crops & Pasture
On the tour, we passed many fields, each employed for various uses:
Some were being actively managed by tenant farmers, with alfalfa being the most prevalent crop. Apparently, alfalfa prices have been high, and the crop can be harvested every 5 weeks or so. Here's a photo of some alfalfa after a recent harvesting (it's the dark-green plant with the purple flowers):
Other fields were planted with pasture grasses, in which sheep could be seen. A big part of Farmland's management process is to use these pasture grasses and the natural soil disruption ruminating livestock perform to help "heal" the land and bring micronutrients back into the dirt:
Here's a picture of Craig mentioning their near-term plans to erect better fencing in order to bring in more sheep, and very important, start grazing cattle on the pasture land:
Apparently, there's a synergy that comes from having both sheep and cattle graze the same land. The sheep tend to eat certain plants and leave others, which the cattle then come along and mow down. So the biomass is used more completely to support the development of more meat calories. Also, several investors on the tour who were also farmers attested to their experience that vegetation yields are higher after land has been used for grazing both sheep and cattle than for either alone. There just seems to be a natural benefit to the soil when both types of livestock have used it.
This 4,200-acre parcel will be large enough to support a colorful variety of tenant farmers of many stripes. And over time, as the pastureland becomes certified organic, a greater diversity of options will become available.
In the near term, existing tenant relationships with non-organic farmers will continue. But as new fields come on-line, organic farmers will be brought on. It sounds like tomatoes will be the first organic crops grown once the soil is ready.
And as mentioned, cattle will arrive shortly. Farmland already is pasturing cattle for BN Ranch (Bill Niman's new operation) at the nearby Brentwood parcel.
Interestingly, near the end of the tour, we saw that there were some small natural gas pumps on the farmland. Those are legacy relationships that still remain in place and generate annual rents for the property. Even though the economics could be attractive, the Farmland team does not plan to expand those operations, as they aren't aligned with the fund's mission and principles. But for the near-term future at least, "gas farming" will also be in the mix, as well.
As we drove around the border of the farm, Craig and Frank occasionally asked us to look out at the surrounding properties. A number of them were growing fruit/nut trees or grapes.
They explained that the sale prices per acre for these farms were ~3x what the Farmland fund purchased Burns Farms for. That's largely due to the higher price of olives/wine grapes/etc versus what is currently being grown on Burns Farm's fields.
But the takeaway is that the soil type is the same across all these adjoining properties; meaning that if it ever decides to, Farmland can start growing trees/vines on Burns Farm and thereby materially multiply the economic value of its acreage. It's unclear if doing so is actually part of its multi-year phased roll-out plans, but it's a nice fall-back option to have (in fact, I joked with Craig that his Plan B sounded like it would require a name-change for the fund to "Vineland LP").
Craig also shared an interesting anecdote about how the property had already been approached by a buyer. Apparently a group of almond growers expressed interest in purchasing half of the Burns Farm parcel for near the price Farmland paid just a year ago for the entire acreage. The fund turned down the offer, but it's reassuring to know it has the option of recouping 100% of its Burns Farm purchase price within just one year, while retaining 50% of the land to continue operations on.
As an investor, I'm glad the offer was declined. And after seeing the property first-hand, I feel confident that more, even sweeter offers will come in over the coming years. But like the Farmland management, I have confidence that their strategy of re-activating the land to its best (and most sustainable) use will yield the greatest gains over the long haul (and be best for the land, itself).
We returned from the tour to a white-linen luncheon spread beneath an outdoor tent by the main farmhouse. Nearby was a nursery pen where new-born lambs were taking their first steps.
We sat down to music and a buffet of locally-grown foods. The meal included beef from the BN Ranch cattle from the nearby Brentwood property, which I have not stopped raving about. I'm not that much of a beef snob, but man, that meat was amazing!
Craig and his business partner, Jason Bradford, gave a short speech about their long-term vision and what they hope to achieve with all the Farmland properties (whereas Craig is the "business guy", Jason is the "farming guy" and is responsible for the management and operation of all the fund's properties). Surrounded by children, they recounted how their initial inspiration came out of building a better future for their families. I was happy to hear that it sounds like in future years, the fund may also offer youth camps and internships on its farms, as well.
All of this was wonderful and it left me with great excitement at what the Farmland team is building, as well as a satisfaction as an investor that I've never had from owning any paper "stock". At Peak Prosperity, we're always looking for new and more constructive ways to invest capital outside of the Wall Street casino, and I was very glad to have first-hand evidence that Farmland's model is an attractive alternative.
Which is why the biggest highlight of the experience for me was not the farm itself, but the Peak Prosperity members I met there who had been referred through our site's coverage of the fund. At least five times, an individual or couple approached to thank me for introducing them to Farmland LP. As gratifying as it was for me personally to be impressed by the operations at Burns Farms, it means so much more to hear that our referred site members felt the same (and quite frankly, a big relief!)
Plus, as always, it's a real joy to learn what nice, interesting people PP.com readers are when I get the chance to meet them in person :)
The California and Oregon farmland properties mentioned in this recap were purchased by Farmland LP's first fund, which closed to new investors in December of last year. Peak Prosperity helped a number of readers invest in the fund before that deadline.
If you weren't able to invest in the Fund, but wish you had, don't despair. There's good news.
The Farmland team has been hard at working setting up a new fund, one that will execute its model at a bigger scale. It will be structured as a real estate investment trust (REIT), which will give it certain advantages over the first fund (which is a limited partnership).
And most important, it will available to the public soon; within weeks. When it opens, we'll post a fresh interview with Craig Wichner and explain how those interested can learn more about the new fund. But should you have questions in the interim, feel free to contact us here.
We at Peak Prosperity will keep a close eye on this opportunity; though we are actively looking for others, as well, that offer similar ability to invest capital in ways that generate attractive returns beyond just the financial. We're looking for vehicles that increase resiliency across as many of the recently-discussed 8 forms of capital as possible.
This process takes time. Not only are they substantially harder to identify than publicly-traded stocks, but they take a long time to vet for quality. But as we find good candidates, we commit to surfacing them for your consideration here. Think of it as "investment scouting" to complement our current "info scouting".