Click the play button below to listen to Chris' interview with Craig Wichner (31m:20s):
Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host Chris Martenson. The hunger for great places to put one's capital that are good for the earth, good for local economies, and good for the investor is immense and intense. Here at peakprosperity.com we talk a lot about the need for new models of doing business that comport well within the growing economic energetic and environmental constraints bearing down on all of us. Today I'm pleased to welcome back Craig Wichner. Craig is the managing partner of Farmland LP, a fund that serves as a great model for sustainable business.
That's not just my view. Farmland LP was just recently named as one of the world's 50 most innovative companies by the magazine Fast Company. In 2013, it was selected for Impact Asset's 50 as one of the 50 funds that lead their field in creating positive social and environmental impact while generating financial returns. Now the way that the Farmland fund works is that investors put up the cash, which allows Craig and his team to acquire conventional farmland and convert it to organic sustainable farmland for the purpose of long-term cash flows and capital appreciation, plus all of these other awesome benefits.
We’ve since watched with excitement the success that he and his partner Jason Bradford have had in making it a real and thriving enterprise. In fact, that success cut off the opportunity for new investors as it filled up and got closed off. Well, Craig is here to tell us the good news. There's a new fund opening up. It's got a more accessible structure for most investors. And we're going to hear about how the other fund has been performing. Craig, thanks so much for joining us today.
Craig Wichner: Very glad to be here.
Chris Martenson: So first off, for those who somehow missed our earlier podcast, please describe the Farmland LP business model for our listeners.
Craig Wichner: Sure, you did a great job. We buy conventional farmland and then convert it to organic sustainable farmland as an investment fund. Basically, the fund is designed to give investors ownership of real assets, of farmland, which we think is one of the most ideal assets to invest in. But, it's really quite challenging to invest in as an individual because in order to really get the most value out of it, you have to manage it well. Just like apartment buildings need management, or commercial office buildings need management.
We're experts at managing farmland. Typically farmland generates a fairly low cash-flow rate to investors compared to apartment building or to commercial office buildings. That's primarily because 40% of farmland in the U.S. is leased, but it's primary leased for growing commodity crops. These commodity crops are typified by having relatively low revenue per acre and also high costs of chemicals. We really switch that management over to a more intensive form of management. Basically, instead of just having one farmer grow one kind of crop on one piece of farmland, when we buy farmland, we really transform the way that it's used so that we have multiple farmers, livestock farmers, crop farmers, vegetable farmers in a real sustainable agricultural rotation. That generates more revenue per acre. There is great cost savings on the chemical side. That results in more profits for the farmers and also in more cash flow for the investors. So, that might sound a little bit complex, but at the end of the day, it results in investors being able to own farmland that's managed better, in a way that generates more cash flow for them and really is a nice long-term sustainable investment for everybody.
Chris Martenson: Well, let's talk about that. So beyond all of the lovely awards and recognition, how has this model really been working out for the land? I assume that you have some measures around whether the land is improving or not. For the farmers, does it work for them? Finally, for investors? Let's start with the land.
Craig Wichner: Great well we own just under 7,000 acres of farmland right now in Northern California and in Oregon, and 783 acres have already been converted to certified organic farmland. That means that we've taken it through a three-year conversion process and can now, when our farmers sell crops off of that land, they get to take advantage of the 50% to 200% price premiums for certified organic goods. The key part of what we do, though, is more of the broader, sustainable agriculture. Even though most of our land is going through the organic conversion process right now, almost all of it is being managed in a sustainable way, which means that we plant actually a tremendous amount of pasture on cropland, and then bring in livestock producers. That sequesters a tremendous amount of carbon, it eliminates a lot of fertilizers and of pesticides from going into the soil and the water and the atmosphere, in addition to lowering costs for the farmers. And so, it really is a much better way of managing farmland.
Certainly the farmland and the people who live near farmland or eat food off of farmland benefit from that. The farmers love it. The farmers get access to—the farmers who we work with are successful farmers. They're producing organic crops, or they're producing high-quality livestock. We work with Bill Nyman of BN Ranch who produces super premium grass-fed beef, and Cattail Creek Lamb, which produces premium quality lamb. These producers get access to either our certified organic or to our transitional organic farmland. They get to produce really high quality meat in a way that changes their business. They get access to much more land than they would be able to afford on their own.
So the farmers are extraordinarily happy with this as well. Our investors are also very happy. There are two forms of returns that we generate: One that is from the appreciation of farmland. The second is the cash flow that we generate. We haven't done any distributions yet. It’s not in the plan. We tell the investors not to expect cash flow for the first two to three years while they're taking it through the conversion process, but our revenues have been increasing substantially year over year. The plan is, and we expect to generate some cash-flow distributions this year. It's not guaranteed. Lots of regulatory disclosures inserted there, but that's the plan and we expect that to happen.
Chris Martenson: If all goes according to plan when this is really running, what would be the sort of rate of return that you might expect? What range would be available there?
Craig Wichner: Well farmland is basically selling today on average for 3.5% cash flow to the asset. What we focus on—we use 20 different metrics to analyze farmland before we buy it. One of those metrics is being able to show to ourselves that we can generate 6% to 8% net cash flow to the investor after a four to five year conversion period. So, it starts—so initially we're investing in planting pasture and in putting up livestock fencing and in improving the land, and then ramping up to that 6% to 8% cash flow after four to five years.
Chris Martenson: Right, but early cash flows are going into improving the property from a substantial standpoint, too, right?
Craig Wichner: Exactly right.
Chris Martenson: Alright, so let's talk about the new fund that you are envisioning at this point in time. First of all, what is it? And what are you targeting here?
Craig Wichner: So, we're putting the finishing touches on the next fund, which will be a REIT, a farmland REIT.
Chris Martenson: What's a REIT?
Craig Wichner: Yes. If you're not familiar with what a REIT is, a REIT stands for a Real Estate Investment Trust. That was created in the '60s as a legal structure for people—it was really set up, so that investors could invest in a portfolio of real assets, like real estate, in the same way that they invest in companies. So, you can invest in Microsoft and in Google and in Amazon by buying a share of that company; until the 1960s, there was really no great way of investing in a share of a portfolio of cash-flowing real assets.
And so, to recognize that real assets are different, they set up this REIT structure. REITs can only hold cash-flowing assets, and at least 90% of the cash flow must be distributed to the investors each year. As long as you follow a number of requirements, then those cash-flow distributions are basically tax advantaged, essentially tax free. Normal companies are subject to double taxation, so they're taxed at the corporate level and then when you get your dividends, they're taxed again. The REIT structure allows that cash to be distributed tax-free at the corporate level. So it's really a very nice way for investors to both get the advantage of a portfolio of appreciating assets as well as to get cash flow in tax-advantaged way.
Chris Martenson: Now, are there any other farmland REITs out there right now?
Craig Wichner: There is one publically traded one called Gladstone. They buy pure conventional farmland. They lease it out. They say in their documents that they intend to, when possible, basically sell it to developers. So, they want to own farmland for a period of time and then sell it to developers. We think that's—we prefer not to do that. We actually think that farmland is an extraordinary asset. We want to own and manage it for a very long period of time.
We think that basically the ability to produce food is going to be worth more than condo land in the future. Some slight differences on that.
But really what we do—Farmland LP is really the only way that we know of (and we know quite a bit of ways) for investors to be able to participate in helping to buy high-quality farmland that is managed sustainably and is designed to give investors long-term ownership of farmland and of long-term cash flow. One of the nice things about the REIT structure that we're setting up—initially it's going to be a private REIT, meaning not traded on the public stock market. It is limited to accredited investors. We have to have at least 100 investors in order to be a REIT. We can have up to 499 investors in this fund. The plan is that after we acquire $250 million or so worth of farmland to increase that cash flow. Then, the plan is to take it public as a REIT, so that anyone can really invest in farmland, benefit from the cash flow.
Also, when we're public, basically anyone, including farmers or investors, can invest in this farmland and also help us to buy more farmland and to convert more farmland to organic sustainable farmland. That really, for us, is one of the ideal ways for farmland to be held and managed. Farmland to us is really a public good. It's really a commons. Right now, it's all privately owned and to some extent immune to customer demand for organic and sustainably produced food. There is a real imbalance between the demand for organic food and the supply of organic farmland. So, our fund is one way that we can help to bridge that gap and to really bring farmland ownership back to being really part of the commons, really held by the people, which is great.
Chris Martenson: Now, when this REIT goes public, I presume that means that the requirement to be an accredited investor drops at that time?
Craig Wichner: That's correct. You could go to any one of the discount brokerages and buy a share of the stock.
Chris Martenson: Fantastic! I mean. I love the idea and particularly to help this get out to a much broader range of people because I think that it's just a fantastic model. So, tell me about the properties that you will be targeting. This will be a pretty big step up in your holdings at that point, I would assume. So, first of all, what are you looking for in general? But specifically, do you have your eye on certain areas and maybe on properties that you don't have to divulge at this point? Thirdly around that, how are you going to manage that scale?
Craig Wichner: Great! So we currently manage $50 million worth of farmland. And so this would be a fivefold expansion of that, going up to $250 million worth of farmland. That fund is going to be focused on five distinct geographies, or types of farmland. Our focus is the U.S. We currently have farmland in Northern California and in Oregon. We would expand in those areas. And then, there'll be a third location on the East Coast. Then there'll be two additional areas that we will basically decide after we raise $100 million to $150 million. The reason for that is that when we look at our 20 major criteria that we use to buy farmland, part of that depends on the price of farmland and on the cash flow that we can generate from that farmland after we convert it. The farmland markets are somewhat dynamic in terms of their pricing. And so, those areas will be determined basically in a year or two or more depending on various pricing components.
Chris Martenson: Well, that brings me perfectly to my next question. I want to talk about risks. You mentioned dynamic pricing. That's one way for it. Is there a farmland bubble?
Craig Wichner: One of my favorite books is: Extraordinary [Popular] Delusions and Madness of Crowds. That was written 150 years after the tulip bubble. Of course there were many other bubbles throughout history. You'd think that after 150 years, we would learn. But it's very hard to tell that you're in a bubble. We actually as human beings live on a bubble. Our planet is mostly rock with a tiny little thin atmosphere and with water on it, but you'd think that we were the center of the universe. In fact, it's just a tiny little bubble that we live on, but it's immensely hard to tell from inside of a bubble that you're in one. And so, one of the ways that we determine if we're in a bubble or not, is by looking across asset classes. We look at factors that may be affecting it. One of the main bubbles that I see, actually—it may be delusions or madnesses—is actually with the $5 trillion or so of printing that the Central Bank is doing and artificially keeping interests rates low. That to me has created a tremendous bubble in the credit markets.
We also think that there are bubbles in the stock market as well. One of the nice things about real assets is that you can look at those assets based on the cash flow that they're generating. It certainly is impacted by some of the macro factors, such as interest rates. We definitely see some signs of bubbles in the farmland. One of the interesting things is that the total value of farmland in the U.S. has increased basically over the past eight years from $2 trillion to $2.9 trillion. Most of that gain has happened in Midwest farmland, primarily in the commodity crop-growing regions where they grow primarily corn. So we definitely see farmland bubbles in the Midwest. We were able to buy farmland of equal or of better productivity in California for about ½ of the price of that same productivity that you would get in the Midwest. So, it is. These bubbles are regional. These bubbles are depending on crop types. We break things down into the major different geographical regions: Central U.S., East Coast, Pacific Northwest, Southwestern U.S. etc.
We also break them down by crop types. So commodity crops, permanent crops such as grapes or citrus orchards or apple orchards and things like that. Dairy is another class. Pasture land is another class. We see that there are different sectors that have different levels of bubbles in them. Almond land for example in California, huge bubble on that land. Same with the corn land in the Midwest. But there are other sectors, for example Dairy, that is absolutely being crushed right now partially due to the high cost of hay because a lot of land has been converted into almond orchards or into other things. So, we do think that there are some bubbles. We do see a general pricing inflation on the land that is, I think, in general we're kind of on the borderline of a bubble. It's just inflated. It's certainly not inflated compared to some of the other asset classes. We are cognizant of risk. One of the main things is that farmland is not an efficient market in the selling market.
Two pieces of farmland right next to each other could have very different water rights, but they might sell for the same price. And so, if you're not able to analyze for water rights, and water, you might get crushed. Another component is that there are these different geographies. So if you look across that the Midwest, or if you look at California, certain prices on a productivity basis, it's just going to vary in terms of price. We think that some of that is madness and delusions. We rely on cash flow as our primary metric for grounding us. What kind of biological productivity can we get from each piece of ground, and what kind of economic value can we generate from the selling of that food. That is what grounds us and kind of keeps us away from the bubbles. And so, that's why in some areas, one piece of farmland, we may be interested in one year, but if the pricing changed dramatically, we wouldn't be interested in that, or vice versa.
Chris Martenson: I imagine that this also presents some, let's say, stability for the farmers who are leasing the fields because they're not in on this for the full capital amount right? Farmland prices have gone up a lot, but farmland debt has gone up a lot, and so what you're doing is removing that debt component at least for the people who are working the land. So, as long as there is demand for the product, I can imagine that the cash flows have a pretty good chance of being there. Is that a fair way to look at that, or am I overstating something?
Craig Wichner: No, it's a very good way of looking at it. Commercial office buildings are a great analogy here. For my business, I rent office space. When I double my employees, when I double my business, I add more office space. It's nice and simple. For farmers, when they double the size of their business, they have to buy a whole new piece of farmland. The equivalent is me having to buy a whole new office building every time I want to double my business. That's madness. It's even worse for organic and sustainable farmers because it takes three years to convert that farmland to organic land. Those farmers have to basically double the size of their land and then take it through a three-year conversion process before they can actually sell their products to their core markets. And then all of a sudden, they have to literally double their sales that next year in order to start generating the proper revenue on that.
This is made all the more worse by this 3.5% cash flow to the asset that farmland is being priced at, basically, a 3.5% cap rate, if you're familiar with real-estate terms. This means that it's very expensive for these organic and sustainable farmers, the ones who are doing the best thing for the land. It's very difficult for them to actually grow their business. That's why the conversion of farmland has been far slower than the growth in organic food. Basically 0.7% of U.S. farmland is certified organic while 4% of the amount that we spend on food is organic. So, what we do is, we're able to buy large tracks of land. So, we've bought land, as much as almost $30 million, which, I don't know too many individual farmers who can afford that. So we were able to buy these large tracks of land that previously were growing just commodity crops, just literally three commodity crops on a $30 million piece of farmland.
We've been able to change that land use, and so we're bringing on many more farmers doing many different kinds of things: sheep, cattle, a variety of different crops and really increase the economics, the revenue that that farmland can generate. The farmers absolutely love it because they don't have to go into debt. We'll make this first fund unleveraged. Basically the farmers are just not exposed to any of that debt at all. We actually love to do either revenue sharing or profit sharing with the farmers, but if they have a bad year, we have a bad year. If they have a great year, then they're still paying just the normal percent of revenue or profits that they would've paid, had they been exposed to all of the risk of owning the farmland and of being in debt. So, it's really a much fair and much more aligned method of working with farmers. It's just simply a better way of managing the farmland.
Chris Martenson: Boy, talk about heading towards the future on all of this. I love that whole story. I know that someday we're going to 100% organic farmland. We're at 0.7%, so I guess there are some legs on this story, because we have to go back to a sustainable way of producing. I know a lot of people who are in their 20s and 30s, bright and shiny, not a lot of capital, but boy they're ready to do really amazing, complex things. To really farm sustainably is a complex endeavor. What I love is that you are in partnership with the farmers to help manage both the capital side of that and the complexity side of that, with Jason Bradford there really helping to manage and to oversee all of that. Farming of the future is not going to be easy, but here's the thing: Wall Street likes to take what I heard somebody call our "lazy money," you just send it off and hope for the best. But to really build assets takes talent, and it takes hard work. So, your fund is a way to engage a person's assets in some really good fundamental hard work that needs doing. That you're able to do it in a win/win/win way is just a fantastic story.
Craig Wichner: Well, yes. You mentioned Jason. I just spent the past couple of days at our farmland with Jason. His name is Jason Bradford. He's a PhD. He's my business partner. He runs the farmland management side of the business, and he's just absolutely extraordinary. He really understands sustainable agriculture and really focusing on maximizing the biology of the soil to increase the biological productivity of the cropland, which results in better economics. It's pretty, actually, simple. Agriculture has been in place, modern agriculture, not modern actually. Just agriculture has been in place for 10,000 years. Really, starting in the 1600s we developed what is basically considered the modern crop rotation. That's the four-field rotation. It incorporates legumes, which are nitrogen fixing crops, plants that basically add fertility to the soil. That worked extraordinarily well for a long period of time.
What it looks like, though, is a diverse use of the farmland. In 1950, U.S. farms produced an average of five crops per farm per year: livestock, vegetables, grains, in a nice sustainable agricultural rotation. It was really the leftover munitions manufacturers, the people who—in World War II, basically we developed this tremendous infrastructure for building bombs. That was ammonium nitrate as the primary ingredient there. And, really in the '50s, they said, "Hey, if we put this ammonium nitrate on farmland, it actually makes it more productive. It restores the nitrogen." And so, what that did is it allowed farmers to basically kick livestock off of the land and put them in the feed lots, and really eliminate this rotation. So, from 1950, we had five crops per farm per year; today we have 1.2 crops per farm per year. We have almost eliminated diversification on our farmland. That is unsustainable from the standpoint of good soil biology and from agricultural history.
The economic result of that is that we now spend almost 15% of the entire revenues generated by farmland on chemicals. So, fertilizers, pesticides, and genetically modified seeds are the result of the loss of that soil fertility. That number can be dramatically reduced, and actually produce more food per acre if we do pretty straightforward things like put more crop land back into pasture, and bring livestock back on the pasture. Now with today's modern economics, that has to be done at scale. It's too complex, we believe, at a large scale for one farmer to produce sheep and cattle and vegetables and grains. It's complex to produce that, and it's complex to distribute those out to the market. By us looking at farmland and managing it like an office building that has multiple tenants—what's the best way to manage an office building? Well, you find a great tenant for the penthouse. You find some retail tenants for the bottom. You put great tenants in the building. Someone is responsible for managing that.
We look at farmland as: we're the land stewards. We're responsible for making sure that the land is managed well. And so, we say, "Oh, great! You know what, sixty to eighty percent of this land needs to be in pasture all of the time. You know what, to best manage pasture, you need cattle producers and sheep producers, and you need pastured egg producers. And that should be in pasture for three to seven years or more." Then, after that land is certified organic, after that land is fully fertile, then you can rotate organic vegetable farmers on to 10% to 20% of the land. They'll get great productivity because of all of the natural nitrogen that's in that soil, and no disease pressure that otherwise they'd have to spray all kinds of chemicals onto the land for.
And after two to three years, they've used up that soil fertility, they get to move onto the next piece of fresh organic pasture and we rotate in a grain producer or put it back into pasture for the cattle managers. This is an extraordinary and a wonderful way of managing farmland. It's the way that farmland, in some ways, was managed sustainably for 400-500 years before this. We really think that it's the way that it's going to be managed in the future. The new economic framework of a REIT that was created in the '60s is a great way for basically everyone to be able to participate in farmland being managed in this good way. We think that we're a good example—and maybe a 1.0 example—but a good example of what's possible for the future.
Chris Martenson: Craig, that was just an absolutely fantastic description of all of that. I couldn't be a bigger fan of what you're up to, and you and Jason have put together just a beautiful structure. I just love how it works. So, I'm sure that there are going to be a lot of people interested in this. How can an interested, accredited investor learn more?
Craig Wichner: So, the REIT is not open yet, but if you're interested in learning about it when it is, then you can certainly go to our website, www.farmlandlp.com. You can send us an email at [email protected] You can also sign up for updates on our, essentially, our blog on our news page. We really believe in communicating what we're doing. We think that pictures are an extraordinary way of communicating about what we do. So, our blog, which is at farmlandlp.com/news, really has a lot of farm updates. It has regular pictures. We also do thought pieces really explaining some of the background and the detail of what we do and of why we do it. And so, I think that your audience is going to be very interested in the information there. You can also sign up for regular updates there.
Chris Martenson: We'll have all of the links to those things at the bottom of this podcast at our site. So, you can just look up at the links there and click on them, and you'll get right over to those places. Final question: What's the range of times when the REIT might be finished?
Craig Wichner: It'll be open this quarter.
Chris Martenson: Open this quarter, fantastic! Alright, well Craig, it's just been an absolute pleasure talking to you again. I'm really looking forward to helping see this REIT becoming a success and go forward, because what you're doing is so important.
Craig Wichner: Thanks Chris. What you're doing with communicating the intersection of energy, the environment, and economics, is really just absolutely extraordinary and cutting edge. I've met a number of your audience members and they're just extraordinary. They just really get it. Life is not one dimensional. Life is not simple. You communicate the complexities of where we are and of where we're going in a way that is simple and straightforward. So, thanks for your work.
Chris Martenson: Well, thanks for that. I'm glad that there are responses to it that make sense and feel good. That's what Farmland LP is. It leads the way that says, "Look! We can be clever about this. We can do good and still make the world a better place. It's all possible." We just have to get out of our mindset that we send our money to Wall Street and they do horrible things with it. We can do better, and that's what you're doing. So, thanks for that. I hope to have this podcast again, when we have more to talk about.
Craig Wichner: I look forward to talking to you soon Chris.
Chris Martenson: Thanks.