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Ceres Partners CIO Brandon Zick on How Private Equity Invests in Farmland · Masters in Business

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  Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is Masters in
• 0:11
  Speaker 1: Business with Barry Ritholts on Bloomberg Radio.
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  Speaker 2: On the latest Masters in Business podcast, I sit down
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  Speaker 2: with Brandon Zick. He is the chief investment officer at
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  Speaker 2: Sarah's Farmland Funds, a two billion dollar firm that specifically
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  Speaker 2: invests in farms. I know Brandon for a long time,
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  Speaker 2: and I've watched this asset class grow. I thought this
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  Speaker 2: was really a fascinating conversation. You just have no idea
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  Speaker 2: how complex and interesting farmland investing can be. I thought
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  Speaker 2: this was fascinating, and I think you will also with
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  Speaker 2: no further ado my conversation with Sarah's Farms. Brandon Zick,
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  Speaker 2: thanks for having me.
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  Speaker 1: Berry.
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  Speaker 2: Well, you and I know each other for a long time,
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  Speaker 2: and this is long overdue to have this conversation. And
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  Speaker 2: the Wisdom Tree acquisition was the perfect excuse. Well, we'll
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  Speaker 2: get to that in a moment. I want to start
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  Speaker 2: with your background, which is kind of fascinating. You grew
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  Speaker 2: up on a dairy and crop farm in northeastern Pennsylvania.
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  Speaker 2: How did that farming upbringing shape your attitudes and thoughts
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  Speaker 2: about land, agriculture, value and risk?
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  Speaker 3: Yeah, that's it's a great question because growing up on
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  Speaker 3: a really active family farm, you learn a lot of things,
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  Speaker 3: and one of them was I definitely did not want
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  Speaker 3: to be a farmer for the rest of my life.
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  Speaker 4: We did real work.
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  Speaker 3: I was the oldest of six and so and I
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  Speaker 3: had great parents who you know, instilled great values with us.
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  Speaker 3: But one of those values was the value of hard work.
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  Speaker 3: And we spent a lot of time before and after
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  Speaker 3: school every day actually running this dairy with our parents.
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  Speaker 2: So you're you're up at five five thirty milking cows
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  Speaker 2: before school.
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  Speaker 3: Yeah, before school. Yeah, for us, it'd be about four
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  Speaker 3: point thirty. And with three brothers, usually there's three jobs
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  Speaker 3: on a dairy, milking cow's, working with equipment, and then
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  Speaker 3: managing manure. And even though I was the oldest brother,
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  Speaker 3: I was really good at the third. So that's what
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  Speaker 3: I was focused on.
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  Speaker 2: Well, shoveling manure prepped you for your jobs on Well,
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  Speaker 2: that's right, the obvious, Joe. So let's talk about what
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  Speaker 2: led you to Wall Street. You go to Notre Dame,
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  Speaker 2: you get a BBA in finance and a concentration in Japanese,
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  Speaker 2: which is sort of surprising. What was that career plan
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  Speaker 2: originally other than not a farmer.
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  Speaker 3: Yeah, when I went to Notre Dame, I just wanted
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  Speaker 3: to do something different, and I didn't really know what
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  Speaker 3: I wanted to do. But I actually had a friend
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  Speaker 3: in my dorm that I said, what are you majoring in?
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  Speaker 3: And he said, well, my dad works at Mari Lynch.
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  Speaker 3: I think finance. And I said, well, that sounds interesting,
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  Speaker 3: and so that's how I started thinking about that. And
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  Speaker 3: taking Japanese as a freshman at Notre Dame was really
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  Speaker 3: more about just doing something different than the Latin and French.
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  Speaker 3: I took at my judge war at Ice School and
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  Speaker 3: scrant in Pennsylvania, and they talked to me into doing
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  Speaker 3: a study abroad in Japan, and I really fell in
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  Speaker 3: love with the country and the culture. And if I
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  Speaker 3: had been looking in you forward, instead of reverse, I
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  Speaker 3: probably would have taken Chinese or something else that I
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  Speaker 3: was looking backwards, and you know, continued on with the
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  Speaker 3: Japanese and then was lucky enough throughout my career to
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  Speaker 3: be able to spend some time there, not full time,
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  Speaker 3: but at least to travel to Japan. And if we
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  Speaker 3: ever get to the point that we have Japanese investors.
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  Speaker 3: That'd be really exciting too.
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  Speaker 2: So first gig right out of school is you become
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  Speaker 2: you join the finance analyst program at Lehman Brothers. Was
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  Speaker 2: that here? Was that close?
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  Speaker 3: Yeah?
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  Speaker 4: That was here in New York. Yeah.
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  Speaker 3: We started training in one World Trade at July of
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  Speaker 3: two thousand and one, and we were eventually in three
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  Speaker 3: World Financial Center. And I spent three years at Lehman
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  Speaker 3: Brothers and learned a lot of different things, but some
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  Speaker 3: of it was I don't know what I want to do,
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  Speaker 3: and I had a friend that had moved to Morgan's
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  Speaker 3: and that's how I made my way shortly thereafter over
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  Speaker 3: there and spent six years at Morgan Stanley in various roles,
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  Speaker 3: but I knew I always wanted to be on the
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  Speaker 3: buy side. And everyone dreams of being in private equity
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  Speaker 3: and how do you get there?
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  Speaker 4: And it's a difficult path.
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  Speaker 3: And when you think about what are the things that
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  Speaker 3: you could be good at or that you have interest in,
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  Speaker 3: That's how I kind of looped back around to this
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  Speaker 3: agriculture piece because I had a lot of valuation experience
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  Speaker 3: at Morgan Stanley and we worked on a number of
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  Speaker 3: transactions and I thought, well, how do I apply this
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  Speaker 3: to agriculture, And they're just it's not like in every
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  Speaker 3: other asset class where there's thirty or forty places and
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  Speaker 3: everyone has a fund and you just choose where you
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  Speaker 3: want to go. There's actually very few people that invest
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  Speaker 3: in agriculture exclusively, and so it was kind of stacking
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  Speaker 3: that background of valuation and transaction experience and maybe a
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  Speaker 3: rekindled interest in agriculture and farmland, not on the actual
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  Speaker 3: labor side, but on the investment side. How do you
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  Speaker 3: do this outside of just the big boys like John
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  Speaker 3: Deere or Kseih or at the time on Santo or
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  Speaker 3: these big egg companies.
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  Speaker 4: How do you do it?
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  Speaker 3: So that's kind of how I made that path all
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  Speaker 3: the way back around.
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  Speaker 2: So you prefer spreadsheets to pitch forks and shovels.
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  Speaker 4: A little bit.
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  Speaker 3: Yeah, Although there are plenty of days in my career
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  Speaker 3: now that you get tired of being in the office
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  Speaker 3: new side, I'd much rather drive around and look at
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  Speaker 3: some of our properties and check in on some of
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  Speaker 3: our farm tenants.
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  Speaker 2: Well, we're going to talk about the farms and the
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  Speaker 2: tenants and what that investment process is like. But I
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  Speaker 2: just want to stay with Morgan Stanley for a moment.
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  Speaker 2: You're there for six years. You start out really is
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  Speaker 2: a grunt and strategic planning, due diligence, valuation analysis, deal
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  Speaker 2: negotiation execution. But eventually you become a VP in the
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  Speaker 2: investment management division. Is that way you really hone your
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  Speaker 2: chops on acquisitions and strategy.
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  Speaker 3: Yeah, it was an interesting time to be there within
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  Speaker 3: investment management. Morgan Stanley had a mandate to really grow
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  Speaker 3: that business, actually on the alternative side. So the plan
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  Speaker 3: had been to put together a pretty sizable balance sheet
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  Speaker 3: by minority stakes and asset managers, maybe take some asset
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  Speaker 3: managers like front Point over completely. And then the Great
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  Speaker 3: Financial Crisis happened and we went from a team that
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  Speaker 3: was really given the opportunity to use a balance sheet
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  Speaker 3: to we were told we need to create a balance sheet.
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  Speaker 3: So things that we had bought now needed to be sold.
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  Speaker 3: And that was really the impetus for the transaction that
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  Speaker 3: sold Van Campen and a handful of other Morgan Stanley
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  Speaker 3: equity businesses to Investo. So on that deal, I was
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  Speaker 3: actually working more on the sell side of that deal.
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  Speaker 3: And when you're selling things, you realize this probably isn't
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  Speaker 3: a long term career strategy.
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  Speaker 4: Eventually you run out of things to sell, I.
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  Speaker 2: Once the seper balance sheet runs down. So you started
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  Speaker 2: at Leman, but you got out of there before the
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  Speaker 2: financial crisis. You lived through the financial crisis. At Morgan Stanley.
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  Speaker 2: The CEO at the time was John Mac Is that right?
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  Speaker 4: Oh?
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  Speaker 3: When I started, it was Phil Purcell. John Mack came
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  Speaker 3: shortly thereafter, and then or came back shortly thereafter, and
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  Speaker 3: then during my time there within investment management, James Gorman
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  Speaker 3: to take over.
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  Speaker 2: I had Mac on the program a couple of years
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  Speaker 2: ago after he wrote his autobiography, and really, of all
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  Speaker 2: the major brokerage farms, there were a handful of companies
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  Speaker 2: that came through the financial crisis balance sheet and reputation intact.
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  Speaker 2: Max seems to be the guy that guided Mogan Stanley through,
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  Speaker 2: cut that very reasonable deal with Mitsubishi for some much
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  Speaker 2: needed capital and came out the other side. And Morgan
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  Speaker 2: Stanley is now absolutely one of the biggest broken shops,
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  Speaker 2: full service broken shops on the street.
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  Speaker 4: Yeah.
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  Speaker 3: I mean they've you know, not without peril for everyone
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  Speaker 3: at that time, but certainly you know, they were able
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  Speaker 3: to navigate, navigate through and away that very few were
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  Speaker 3: able to do it as successful as Morgan Stanley was.
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  Speaker 2: And at Morgan Stanley, is that why you got your
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  Speaker 2: chartered Alternative Investment Analyst credit?
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  Speaker 4: Yep, I did that.
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  Speaker 3: I didn't have the time to do the CFA also
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  Speaker 3: during that time, but yeah, it was something that was
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  Speaker 3: slightly different. And you know, I always had interesting commodities
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  Speaker 3: and other types of alternatives, not just hedge funds or
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  Speaker 3: private equity, so there was it was just a.
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  Speaker 4: Way to learn a little more. And I added to
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  Speaker 4: the resume.
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  Speaker 2: How much did the financial crisis precipitate your saying, Hey,
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  Speaker 2: I have skills and I have insights, I'm going back
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  Speaker 2: to farmland but from a different perspective.
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  Speaker 3: Yeah, well, it definitely started the conversation. And being here
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  Speaker 3: in New York, I knew there were very few options
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  Speaker 3: for probably investing in agriculture, at least at that time.
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  Speaker 3: Even today we don't recommend it, but there are people
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  Speaker 3: in the big city on the coasts that invest in farmland.
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  Speaker 3: And I had a very close friend from Notre Dame
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  Speaker 3: that at the time was running private equity at Notre
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  Speaker 3: Dame's endowment, and I had contacted him and said I'm
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  Speaker 3: interviewing with a few of these firms that invest in farmland,
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  Speaker 3: so groups like John Hancock and UBS that had existing
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  Speaker 3: funds or separate account businesses that would invest in US
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  Speaker 3: or global farmland. And I asked him, have you guys
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  Speaker 3: underwritten them, have you invested with them, have you talked
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  Speaker 3: to them? And he was very frank and he said, generally,
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  Speaker 3: we don't think you get paid for the risk involved
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  Speaker 3: with investing in land and the duration that you need
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  Speaker 3: to hold it.
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  Speaker 4: But he said, let me introduce you to it.
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  Speaker 3: There's another Notre Dame guy that he started something really small.
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  Speaker 3: He's got very few assets, but he's investing in farmland.
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  Speaker 3: And that's how I met our founder, Perry Beef, through
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  Speaker 3: my friend Tim Dozol, who's now the CIO of Notre
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  Speaker 3: Dames and Dowman actually runs the whole shop. So he's
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  Speaker 3: had a very successful career and one of the best decisions,
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  Speaker 3: at least from my standpoint, that he made was putting
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  Speaker 3: Perry and I in touch.
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  Speaker 2: It's amazing how these random introductions through various networking groups
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  Speaker 2: and alumni groups really can lead to some interesting outcomes.
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  Speaker 2: When you joined Sarahs in twenty ten thirty million dollars.
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  Speaker 2: I mean that's a that's a small single brokerage account.
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  Speaker 2: What were you thinking joining a firm that tiny?
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  Speaker 3: You know, that sounds a lot like what my wife
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  Speaker 3: was asking me at the time too. Why are we
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  Speaker 3: doing this and what are we doing? And it was
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  Speaker 3: interesting there were Perry had thirty million in assets, I
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  Speaker 3: think it was seventeen million in equity and we didn't
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  Speaker 3: charge on the debt. So he said, I can afford
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  Speaker 3: to pay you something. It won't be much, but it'll
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  Speaker 3: be something. And I talked to my wife, Aaron, and said,
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  Speaker 3: I think this would be a great opportunity, and she
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  Speaker 3: kind of echoed some of the things that people I
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  Speaker 3: worked with at Morgan Stanley when I.
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  Speaker 4: Said, well what do you do if this? Yeah, what
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  Speaker 4: do you do if this fails?
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  Speaker 3: And of course no one knew anything about what we
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  Speaker 3: were going to do, but they said, well what if
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  Speaker 3: it fails? I said, well, if it fails, there's two
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  Speaker 3: things that give me confidence. One is I'll know it
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  Speaker 3: there's only you know, it's a very small shop. It's
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  Speaker 3: not like some trader in Singapore is going to blow
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  Speaker 3: us up overnight. I'll know it's not working, either the
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  Speaker 3: investments are bad or we're not raising money. And the
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  Speaker 3: second was there's going to be a great skill set
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  Speaker 3: developed here that even if it doesn't work, the worst
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  Speaker 3: thing I can do is just move back to New York.
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  Speaker 3: And now I've got a differentiated thing on my resume.
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  Speaker 3: So you know, we started there. We moved in December
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  Speaker 3: of twenty ten to South Bend, Indiana. It's not a
• 11:21
  Speaker 3: great weather trade really, even in New York December is
• 11:24
  Speaker 3: not great, but South Bend it's much worse.
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  Speaker 2: That's like zero and a lot of snow.
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  Speaker 4: It's cool.
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  Speaker 3: Yeah, there was a lot of snow as the moving
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  Speaker 3: truck was moving in. But it's been great and we
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  Speaker 3: started to really build that momentum. And you know, just
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  Speaker 3: being in on the ground floor of a company with
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  Speaker 3: a founder who has a vision is you know, you
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  Speaker 3: can't ask for anything more.
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  Speaker 2: So farmland is a real asset. It's different from traditional
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  Speaker 2: real estate assets. You think of offices, multifamily, warehouse, there's
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  Speaker 2: so many different single family homes. What is it about
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  Speaker 2: farmland that makes it such a unique investment opportunity?
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  Speaker 3: Yeah, I mean there's a few things that go into
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  Speaker 3: it that just make this market different, and I don't
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  Speaker 3: personally think you have to have grown up on a
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  Speaker 3: farm to know anything about farmland or agriculture. But it
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  Speaker 3: is a very you know, it's a very people person
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  Speaker 3: business because these are the types of properties that we
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  Speaker 3: believe you have to rent directly. We don't use just
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  Speaker 3: property managers to go out and do it. But in
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  Speaker 3: farmland there hasn't really been an institutional roll up. So
• 12:33
  Speaker 3: in office, in manufacturing and distribution centers and cold storage,
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  Speaker 3: everything's been rolled up over time into big institutions. And
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  Speaker 3: probably the most similar to farmland when you think of
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  Speaker 3: what is the underlying asset would be timber, and back
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  Speaker 3: forty years ago Jeremy Grantham and others started a huge
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  Speaker 3: kind of move of taking the end users of timber
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  Speaker 3: and handing their assets that they're going to use as
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  Speaker 3: part of the end product two investors. But in farmland,
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  Speaker 3: the end users don't own the land. So the groups
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  Speaker 3: like John Deere and Monsanto and Mosaic and EIGHTM they
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  Speaker 3: might either sell into agriculture or buy products out of it.
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  Speaker 3: But the land, while it is the true means of production,
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  Speaker 3: it's usually owned by others, not these big corporations. So
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  Speaker 3: particularly in the Midwest. You'd say that active family farmers
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  Speaker 3: like that farm I grew up on, own about forty
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  Speaker 3: percent of the real estate. Institutional investors today own about
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  Speaker 3: three percent, and that includes the largest investors like the
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  Speaker 3: Mormon Church, the Bill and Melinda Gates Foundation, groups like
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  Speaker 3: Cyrus that might own between a couple hundred million to
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  Speaker 3: three or four billion in assets. But you just don't
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  Speaker 3: have these big other groups that own land. It's a
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  Speaker 3: very disperse ownership group made up of estates, trusts, non
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  Speaker 3: farming heirs that have owned this for generations and two
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  Speaker 3: or three generations previously they were actively farming the ground.
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  Speaker 3: They went to college and did other things. But there's
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  Speaker 3: zero pretty much zero vacancy in US farmland.
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  Speaker 2: Zero vacancy. That's amazing.
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  Speaker 3: Every farm that can be farmed is farmed every year.
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  Speaker 3: And you lose farmland every year in the US because
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  Speaker 3: of things like development and conservation and in parts of
• 14:16
  Speaker 3: California maybe lack of water aridity that they take farms
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  Speaker 3: out of production to transfer water to other properties. So
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  Speaker 3: you have this group of this total pile of farmland
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  Speaker 3: in the US that gets smaller every year. You have
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  Speaker 3: farmers that understand this is a scale game. They want
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  Speaker 3: to grow. So it's an interesting dynamic for investors to
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  Speaker 3: come into the space because it's not as if if
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  Speaker 3: you decided tomorrow Berry that you wanted to farm one
• 14:43
  Speaker 3: hundred thousand acres. You could buy all the equipment, the seed,
• 14:46
  Speaker 3: the fertilizer, the chemicals, and you could find the labor
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  Speaker 3: to do all of that. But what you wouldn't find
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  Speaker 3: is one hundred thousand available acres to go farm.
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  Speaker 2: It's that small amount of acreage comes up each year.
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  Speaker 3: Yeah, it's very well, it's just not up. There's not
• 15:01
  Speaker 3: a jump ball every year for it. It's all occupied
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  Speaker 3: and even most farmers. And I'll use the Midwest as
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  Speaker 3: an example because growing up in the Northeast, farmland was
• 15:11
  Speaker 3: much different. There wasn't quite as a robust a rental
• 15:14
  Speaker 3: market in the Midwest, which is one of the reasons
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  Speaker 3: we've focused on that is there's a very robust rental market,
• 15:19
  Speaker 3: and we want to rent land. So we want not
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  Speaker 3: just one or two large farmers who will provide us
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  Speaker 3: with a rent indication or a rent bid. We want
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  Speaker 3: the opportunity to have ten or twenty different farmers and
• 15:31
  Speaker 3: these are all we work with across the board one
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  Speaker 3: hundred and seventy different farm tenants today, and all of
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  Speaker 3: those farm tenants rent our land, they own land, and
• 15:41
  Speaker 3: they rent a lot of land from other people. So
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  Speaker 3: that actually becomes kind of a long term proprietary deal
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  Speaker 3: sourcing network for new acquisitions. So we feel like we
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  Speaker 3: are doing the institutional roll up. If we decided we're
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  Speaker 3: only going to do deals of twenty five or fifty
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  Speaker 3: million in size, there's not a lot of deals to
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  Speaker 3: do every year, and certainly in the Midwest.
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  Speaker 2: Mostly smaller family farms, regional farms that occasionally come up
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  Speaker 2: when the next generation sides, we don't want to farm
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  Speaker 2: this the way mom and dad and grandpa did. We're
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  Speaker 2: going in the big city.
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  Speaker 3: Right, And even a lot of what they've already made
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  Speaker 3: that decision, in some cases a generation to go, but
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  Speaker 3: they still own the land. It's been more of not
• 16:23
  Speaker 3: a financial asset, but more like a family asset. And
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  Speaker 3: what you tend to see and taxes drive a lot
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  Speaker 3: of behavior in every industry. In agriculture, it's pretty meaningful
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  Speaker 3: because if you have this one very large real estate asset,
• 16:37
  Speaker 3: people usually wait to get that step up in basis
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  Speaker 3: and then they're saying, well, now is the time we're
• 16:41
  Speaker 3: going to sell, regardless of market conditions. We don't want
• 16:44
  Speaker 3: to pay the tax going back three, four or five
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  Speaker 3: generations to a cost basis of nothing. So there are
• 16:51
  Speaker 3: kind of unique time periods of maybe twenty twelve and
• 16:53
  Speaker 3: of twenty twelve was an example where there were some
• 16:56
  Speaker 3: new tax things coming up, a higher long term capital
• 17:01
  Speaker 3: gains tax, the Obamacare investment tax, and there was at
• 17:04
  Speaker 3: least a discussion around that, a state tax exemption being
• 17:07
  Speaker 3: reduced from I think at the time it was at
• 17:09
  Speaker 3: four and a half or five and a half million
• 17:11
  Speaker 3: per spouse down to a million. So that drove some
• 17:14
  Speaker 3: real behavior at the end of twenty twelve from people saying,
• 17:17
  Speaker 3: we want to sell this before the taxes go up.
• 17:20
  Speaker 3: Usually folks just wait until they get that step up
• 17:23
  Speaker 3: in basis and then they're going to sell it.
• 17:25
  Speaker 2: And today a family or what is it, fifty to
• 17:29
  Speaker 2: twelve used to be twelve million exemption for states, I
• 17:32
  Speaker 2: think it's up to close to fifteen.
• 17:34
  Speaker 3: Yeah, per spouse, per spouse significantly larger. So any discussion
• 17:38
  Speaker 3: around a reduction in that, which obviously things get being
• 17:42
  Speaker 3: permanent and I'll use air quotes around permanent because everything changes.
• 17:47
  Speaker 3: But yeah, that when you have this one significantly large
• 17:50
  Speaker 3: asset that the tax taxation on that will dictate how
• 17:54
  Speaker 3: they move it sometimes.
• 17:55
  Speaker 2: Huh, really fascinating. Coming up, we continue our conversation with Brandon,
• 18:00
  Speaker 2: chief investment officer of Sarah's Farms, discussing how he helped
• 18:04
  Speaker 2: grow the fund from thirty million dollars up to two billion.
• 18:08
  Speaker 2: I'm Barry Ridults. You're listening to Masters in Business on
• 18:12
  Speaker 2: Bloomberg Radio. I'm Barry Dults. You're listening to Masters in
• 18:30
  Speaker 2: Business on Bloomberg Radio. My extra special guest this week
• 18:33
  Speaker 2: is Brandon Zick. He's chief investment officer of Sarah's Farms.
• 18:37
  Speaker 2: They are a specialty fund investing in farms and farmland.
• 18:42
  Speaker 2: So let's talk a little bit. We were discussing earlier
• 18:46
  Speaker 2: how farmland generates revenue, and we're going to go into
• 18:51
  Speaker 2: great detail with that, but I want to explain to
• 18:53
  Speaker 2: investors what farmland gives them exposure to what are you
• 18:59
  Speaker 2: getting when you buy a chunk or a bunch of
• 19:03
  Speaker 2: different farms.
• 19:04
  Speaker 3: Yeah, so farmland, and I'll focus more on Midwest row crops,
• 19:09
  Speaker 3: but row crops generally are annual crops because there are
• 19:12
  Speaker 3: a few different buckets.
• 19:13
  Speaker 2: And when you say row crops, I think corn, wheat, barley.
• 19:17
  Speaker 3: Yeah, vegetables, annual crops the crops that are planted every
• 19:20
  Speaker 3: year you rotate, as opposed to permanent crops, and really
• 19:24
  Speaker 3: it's a complete distinction.
• 19:25
  Speaker 4: Permanent crops would be things like wine.
• 19:27
  Speaker 3: Grapes, pecans, almonds, pistachios, blueberries, things like that, where your
• 19:34
  Speaker 3: exposure is not just to dirt, which is what row
• 19:38
  Speaker 3: crops really is. Like our asset is dirt, and there's
• 19:40
  Speaker 3: optionality around what you can plant there. Your exposure in
• 19:44
  Speaker 3: permanent crops is more specific to a specific crop and
• 19:47
  Speaker 3: in some cases also a very specific variety. So if
• 19:50
  Speaker 3: you had red delicious apples and they're out of favor
• 19:53
  Speaker 3: and people want honeycrisp apples, then while you own apples,
• 19:56
  Speaker 3: you don't own the prime asset. And so we've focused
• 19:59
  Speaker 3: on most exclusively on row crops and wrote and we've
• 20:03
  Speaker 3: done that for a few reasons. One is we think
• 20:05
  Speaker 3: it's much less risk, but it also hits on the
• 20:09
  Speaker 3: investment objectives of farmland we think more cleanly. So some
• 20:12
  Speaker 3: of that is current income, a positive correlation with inflation,
• 20:17
  Speaker 3: diversification and a portfolio non correlation, and then also an
• 20:21
  Speaker 3: appreciating capital asset. So our asset is primarily dirt, so
• 20:26
  Speaker 3: there's a little bit depreciation you can take around things
• 20:30
  Speaker 3: like if there's buildings or grain storage bins or irrigation equipment,
• 20:35
  Speaker 3: but primarily our asset is just dirt and it's appreciating
• 20:38
  Speaker 3: over time. And the reason for that is a few things.
• 20:42
  Speaker 3: The Chicago Fed has data going back almost seventy years
• 20:45
  Speaker 3: that'll say that farmland has averaged about six percent price
• 20:49
  Speaker 3: appreciation during those seventy years on an annualized basis.
• 20:53
  Speaker 2: Is that real net of inflation or before flave.
• 20:56
  Speaker 4: That's total, that's gross.
• 20:58
  Speaker 3: So if you look at what compose it, what makes
• 21:01
  Speaker 3: up that, it's really just inflation plus gains and productivity.
• 21:04
  Speaker 3: So every time there's new technology, whether it's seed genetics
• 21:08
  Speaker 3: or fertilizer technology or equipment technology, anything that can create
• 21:13
  Speaker 3: more yield on a farm, in theory, that return should
• 21:18
  Speaker 3: fall to the landowner, or at least a portion of
• 21:20
  Speaker 3: it should fall to the landowner, not just to the operator.
• 21:23
  Speaker 3: So if you're an active manager, we feel like you'll
• 21:25
  Speaker 3: capture some of that. If you're a passive owner of
• 21:28
  Speaker 3: land that doesn't understand, well, what is the land actually producing?
• 21:32
  Speaker 3: What should I be generating in rent? How do I
• 21:34
  Speaker 3: capitalize that into a land value? Maybe you don't, but
• 21:37
  Speaker 3: if you look back over time, that capital appreciation has
• 21:40
  Speaker 3: been about six percent and it's really just though maybe
• 21:43
  Speaker 3: there's been a little bit of cap rate compression, but
• 21:45
  Speaker 3: it's more around gain some productivity and then just CPI inflation.
• 21:50
  Speaker 2: Let's talk about inflation. I was reading last week that
• 21:52
  Speaker 2: beef prices are at record highs. For many types of investors,
• 21:57
  Speaker 2: especially fixed income, inflation is really a big challenge to
• 22:02
  Speaker 2: navigate around it. Sounds like with farm land, inflation isn't
• 22:07
  Speaker 2: necessarily a bad thing. How do you think about rising prices,
• 22:12
  Speaker 2: especially in the supermarket, and what that means to the
• 22:15
  Speaker 2: properties you owt?
• 22:17
  Speaker 3: Yeah, So within agriculture, inflation comes two ways. So if
• 22:20
  Speaker 3: you're an operator, if you're a farmer, inflation's real because you're.
• 22:24
  Speaker 2: Pan morph seed, fertilizer, chemicals.
• 22:27
  Speaker 3: Equipment, wages, wages, everything that gets baked into growing that crop,
• 22:31
  Speaker 3: Inflation plays a part in it. As the landowner, the
• 22:35
  Speaker 3: actual dirt has a very positive correlation with inflation over time,
• 22:38
  Speaker 3: So I'm not going to say we love inflationary environments,
• 22:42
  Speaker 3: but this is an investment that's built for inflationary environments.
• 22:45
  Speaker 4: And the way that we.
• 22:46
  Speaker 3: Think about how global central banks treat, you know, the
• 22:50
  Speaker 3: way they do business. We think we're in an inflationary
• 22:53
  Speaker 3: environment for the long term, so we think this is
• 22:56
  Speaker 3: an asset that works well with that.
• 22:58
  Speaker 2: This is a good hedge against rising prices.
• 23:00
  Speaker 4: That's right.
• 23:01
  Speaker 3: And we've you know, back when rates were extremely low,
• 23:04
  Speaker 3: a lot of our investors used farmland or used cyrus
• 23:07
  Speaker 3: as an inflation subs or a fixed income substitute, something
• 23:12
  Speaker 3: that's positively correlated with inflation. Even with rates being higher,
• 23:16
  Speaker 3: I view farmland more as a tips like thing, and
• 23:19
  Speaker 3: we haven't seen much appreciation that.
• 23:21
  Speaker 2: What is the yield on farmland as investor? And where
• 23:26
  Speaker 2: does that yield come from? Is it rent? Is it
• 23:28
  Speaker 2: sale of property? Is it other elements?
• 23:31
  Speaker 3: Yeah, so the gross rental yield on our portfolios range
• 23:36
  Speaker 3: between four and five percent a year. Now, when you
• 23:39
  Speaker 3: think about if you look at the index, so there's
• 23:41
  Speaker 3: non investable indices that are out there, or if you
• 23:45
  Speaker 3: look at the Chicago Fed or some of the large
• 23:48
  Speaker 3: land grant universities, they'll put out a lot of data
• 23:50
  Speaker 3: around what cap rate to do farms trade at, because
• 23:53
  Speaker 3: while there's no Indiana farmland go on Bloomberg yet, there
• 24:00
  Speaker 3: there are a lot of public transactions that happen and
• 24:02
  Speaker 3: will attend two to three hundred public auctions a year,
• 24:06
  Speaker 3: and there'll be an attorney's offices vfws. These are on
• 24:10
  Speaker 3: a random Tuesday night at six o'clock, someone's selling one
• 24:12
  Speaker 3: hundred and twenty acres of farmland and we track where
• 24:15
  Speaker 3: does this sell versus our reserve price? We know what
• 24:19
  Speaker 3: rent we could earn on that property. So what implied
• 24:22
  Speaker 3: caprate is land selling at. Generally speaking, in the Midwest,
• 24:26
  Speaker 3: in the Chicago Fed seventh District, land trades at one
• 24:29
  Speaker 3: and a half to two and a half percent, and
• 24:31
  Speaker 3: your buyer is typically a neighboring farmer, so that's their
• 24:34
  Speaker 3: strategic investment they're making, and that farmer may take the
• 24:38
  Speaker 3: landowner rental return and they're operating return and compress them
• 24:42
  Speaker 3: together to justify whatever price they're paying. But we try
• 24:46
  Speaker 3: to target that four and a half to five and
• 24:48
  Speaker 3: a half percent when we purchase a farm, and that'll come.
• 24:52
  Speaker 3: It'll all come exclusively in terms of rent. That's what
• 24:54
  Speaker 3: we're underwriting. But then the total return will be that
• 24:57
  Speaker 3: mix of rental income and then a preciation over time
• 25:01
  Speaker 3: and appreciation can be that beta that I referred to
• 25:04
  Speaker 3: that you know Chicago Fed data that says six percent
• 25:07
  Speaker 3: a year on average. But then there's alpha that we
• 25:09
  Speaker 3: can add and a lot of that is because the
• 25:11
  Speaker 3: people that are selling farms are usually not active farmers.
• 25:15
  Speaker 3: I mentioned these are estates trust, non farming airs, and
• 25:18
  Speaker 3: there's some low hanging fruit in terms of capex that
• 25:22
  Speaker 3: a farm land investor can do to decrease the risk
• 25:25
  Speaker 3: of a crop growing and also increase the yield. So really,
• 25:29
  Speaker 3: you know, a common thing that we do is add irrigation,
• 25:33
  Speaker 3: and that irrigation will help us increase the yield, decrease
• 25:37
  Speaker 3: the risk for the tenant, and increases our rent. But
• 25:39
  Speaker 3: also we can capitalize that increased rent into a higher
• 25:42
  Speaker 3: land value over time. So if we can find those
• 25:45
  Speaker 3: opportunities to do the capex, that's our bread and butter.
• 25:48
  Speaker 2: I'm going to say something that sounds a little ridiculous,
• 25:51
  Speaker 2: but you're a gram DoD valuation investor into farmland. Is that?
• 25:57
  Speaker 2: Am I getting this right?
• 25:58
  Speaker 4: Yeah?
• 25:59
  Speaker 3: I mean there's no black box here to what we're doing.
• 26:01
  Speaker 3: It's really a blocking and tackling strategy. And we encourage
• 26:05
  Speaker 3: all of our investors when they when they're contemplating this,
• 26:08
  Speaker 3: or even on an annual or bi annual basis, come
• 26:12
  Speaker 3: out and look at these properties and see what we're doing.
• 26:14
  Speaker 3: And we have folks that have, you know, trade, they've
• 26:17
  Speaker 3: been trading their entire career, and they'll come to a
• 26:19
  Speaker 3: farm auction and say, well, you were underwriting the same
• 26:22
  Speaker 3: rent on two properties across the street from each other.
• 26:25
  Speaker 4: One sold for X, one sold for two X. How
• 26:28
  Speaker 4: does that happen?
• 26:29
  Speaker 3: And it's just who wanted which one and how In
• 26:32
  Speaker 3: some in some cases or instances, the way in which
• 26:35
  Speaker 3: the farm is being sold is inefficient. The rental market's
• 26:39
  Speaker 3: completely inefficient. So there are times that we've bought properties,
• 26:43
  Speaker 3: in some cases from other institutional investors and we've doubled
• 26:46
  Speaker 3: the rent on day one, not because we wanted to
• 26:48
  Speaker 3: charge an uneconomic rent, but because the farmer was willing
• 26:52
  Speaker 3: to pay that rent for that land, and the active
• 26:56
  Speaker 3: management that the previous owner was using was either not
• 26:59
  Speaker 3: very good or not that act. So that's where we
• 27:01
  Speaker 3: think we do a really good job of just identifying
• 27:04
  Speaker 3: where can we add alpha? And then again, it's not
• 27:08
  Speaker 3: a black box. This is really just ticking and tying
• 27:11
  Speaker 3: and blocking into.
• 27:12
  Speaker 2: So let's talk about that alpha. You talked about rental
• 27:16
  Speaker 2: income and appreciation and sale of land. But I recall
• 27:20
  Speaker 2: a conversation we had years ago up in Maine where
• 27:24
  Speaker 2: you described all these additional ways that professional farmland management
• 27:30
  Speaker 2: generates improved economics. And some of the notes I took
• 27:35
  Speaker 2: mineral rights, solar and wind farm easements, additional land use.
• 27:42
  Speaker 2: How do you take farmland that for centuries has just
• 27:45
  Speaker 2: been producing crops and find ways to improve the economics?
• 27:49
  Speaker 3: Yeah, and you know, investing in the US is a
• 27:53
  Speaker 3: key part of this, because the landowner has a lot
• 27:55
  Speaker 3: of rights that in other parts of the world you
• 27:57
  Speaker 3: just don't have. So mineral rights here in the US
• 27:59
  Speaker 3: that the surface owner generally.
• 28:01
  Speaker 2: Owns them all the way down right.
• 28:02
  Speaker 3: Yeah, and in some cases those rights have been severed
• 28:05
  Speaker 3: one hundred years ago. And in certain parts of the
• 28:08
  Speaker 3: Midwest and out west you don't own mineral rights.
• 28:11
  Speaker 4: We like to own them. It's kind of funny.
• 28:14
  Speaker 3: The family farm I grew up on in northeastern Pennsylvania,
• 28:16
  Speaker 3: growing up, no one knew what Marcella's shale was, but
• 28:19
  Speaker 3: everyone in Susquehanna County has made more money pumping gas
• 28:22
  Speaker 3: than they ever did milking cows. And it was really
• 28:25
  Speaker 3: seeing that in the early two thousands that as we
• 28:28
  Speaker 3: buy land, you think, well, how do you maximize the value?
• 28:32
  Speaker 3: These are real assets. They have to be actively managed,
• 28:35
  Speaker 3: something as simple as harvesting timber that's really low hanging fruit,
• 28:39
  Speaker 3: doing select cuts, renting farms out for recreation, or hunting. Frankly,
• 28:44
  Speaker 3: if you don't rent it out, someone will hunt that
• 28:46
  Speaker 3: property anyway without insurance and without paying you anything.
• 28:49
  Speaker 4: So you might as well.
• 28:50
  Speaker 3: Get insurance and get paid for it. So Perry had
• 28:53
  Speaker 3: Perry veth our founder. He had been doing that long
• 28:56
  Speaker 3: before in parts of Indiana and Illinois, generating mineral rights.
• 29:00
  Speaker 3: But the way that he structured our Vehicle was really
• 29:03
  Speaker 3: beneficial to some of these long term value options because
• 29:06
  Speaker 3: I think when he was starting serious in two thousand
• 29:08
  Speaker 3: and seven, most of the people that he worked with
• 29:11
  Speaker 3: at the time and friends of his in private equitieset
• 29:14
  Speaker 3: just set up a typical draw down fund and get
• 29:16
  Speaker 3: it invested.
• 29:17
  Speaker 2: As opposed to perpetual.
• 29:18
  Speaker 3: Yeah, at the end of eight or ten years just
• 29:20
  Speaker 3: sell them all off. He decided that an evergreen fund
• 29:23
  Speaker 3: really fit the asset class better because most of the
• 29:26
  Speaker 3: farm tenants were working with they want to farm this
• 29:29
  Speaker 3: property for ten, twenty thirty years, and that's kind of
• 29:32
  Speaker 3: the way they're thinking in terms of how they grow
• 29:33
  Speaker 3: their business, and being able to own the property for
• 29:37
  Speaker 3: that long makes a lot of sense if you have
• 29:39
  Speaker 3: less ease that want to rent that way. And if
• 29:41
  Speaker 3: you think of who are the ultimate over time, who
• 29:44
  Speaker 3: are going to be the ultimate investors in this asset class,
• 29:46
  Speaker 3: It's going to be folks that have very long dated
• 29:49
  Speaker 3: either goals or liabilities. So in Endowment's foundations, trust infrastructure funds,
• 29:54
  Speaker 3: insurance companies. So having this long dated asset where you're
• 29:57
  Speaker 3: not forced to churn or forced to have these transaction
• 30:01
  Speaker 3: cost is really important. And what we found later on
• 30:04
  Speaker 3: too was some of the optionality around farm So wind
• 30:08
  Speaker 3: has been around for a long time and that's kind
• 30:10
  Speaker 3: of a mildly incremental increase in revenue on why you.
• 30:14
  Speaker 2: Can put a wind farm up on a farm, but still.
• 30:17
  Speaker 3: You continue to farm it. Yeah, on a seven hundred
• 30:19
  Speaker 3: acre farm. We have one in western Indiana has seven
• 30:23
  Speaker 3: wind turbines, they might take up twenty acres total between
• 30:26
  Speaker 3: the turbine and the roads. The rest of it we
• 30:28
  Speaker 3: continue to rent, so that rent from those wind turbans,
• 30:31
  Speaker 3: it's incremental. It might increase twenty or thirty basis points
• 30:34
  Speaker 3: over your farm rent, so we'll take it, but it's
• 30:38
  Speaker 3: not going to change your life. When we started doing
• 30:40
  Speaker 3: things like solar so solar, instead of seeing twenty or
• 30:45
  Speaker 3: thirty basis points, you're seeing on an option period maybe
• 30:48
  Speaker 3: a three to five x.
• 30:50
  Speaker 4: The income reach.
• 30:51
  Speaker 3: Really, so if you think back to we're buying land
• 30:54
  Speaker 3: at a four and a half to five and a
• 30:55
  Speaker 3: half percent income over the course of five years during
• 30:58
  Speaker 3: an option period, if it were to go to and
• 31:00
  Speaker 3: now we're generating fifteen to twenty twenty five percent annualized income.
• 31:05
  Speaker 3: So we like that, but in that case, it's taking
• 31:07
  Speaker 3: the whole footprint of the land. And if when we
• 31:09
  Speaker 3: buy a farm, we're just underwriting it as an agricultural property,
• 31:13
  Speaker 3: farm rents capex, what type of return do we think
• 31:16
  Speaker 3: we can earn over time, and we're targeting kind of
• 31:18
  Speaker 3: that eight to ten percent net through a cycle on farmland.
• 31:22
  Speaker 3: But then once we own the property and as you
• 31:24
  Speaker 3: aggregate properties over time. Maybe we started with a couple
• 31:28
  Speaker 3: hundred acres ten or twelve years ago, but now in
• 31:31
  Speaker 3: a township, we now own two thousand acres and it's
• 31:33
  Speaker 3: just been all of these incremental bolton acquisitions. Now that
• 31:38
  Speaker 3: has probably more interest from some of the developers on
• 31:41
  Speaker 3: the solar side or for other things too that can
• 31:43
  Speaker 3: be even much higher revenue or value, But we always
• 31:47
  Speaker 3: fall back on if it's just a farm, that's what
• 31:49
  Speaker 3: we underwrote, and we're happy with that, and we'll continue
• 31:52
  Speaker 3: to aggregate those properties over time. We have over five
• 31:55
  Speaker 3: hundred today. There are years where we'll do thirty or
• 31:58
  Speaker 3: forty closing or transactions to invest eighty or one hundred million.
• 32:03
  Speaker 3: Most institutional investors would never do that, but we've really
• 32:07
  Speaker 3: decided that that's where you can add a lot of
• 32:09
  Speaker 3: alpha on the acquisition side by doing these boltons at
• 32:12
  Speaker 3: a discount to what that Like you said, it's a
• 32:15
  Speaker 3: very finance worthy strategy. It's just being applied to an
• 32:19
  Speaker 3: asset class that usually don't see it.
• 32:21
  Speaker 2: You mentioned leases. When I think of a lease, I
• 32:24
  Speaker 2: think of either an apartment lease for a year or two,
• 32:27
  Speaker 2: or my office lease here in New York for ten years.
• 32:31
  Speaker 2: How long does the average farmer lease their land for
• 32:38
  Speaker 2: or lease your land for if they want to farm
• 32:41
  Speaker 2: a crop.
• 32:42
  Speaker 3: Yeah, so we try to target three to five year leases,
• 32:44
  Speaker 3: and I'd say three is the overwhelming majority. Given that
• 32:48
  Speaker 3: our farms are mostly growing row crops. You can see
• 32:51
  Speaker 3: three years on the Board of Trade. You have transparency
• 32:54
  Speaker 3: to wear our prices. So farmers if they want to hedge,
• 32:57
  Speaker 3: if they want to think about selling apart to their
• 33:00
  Speaker 3: crop into the future, they can do that and we
• 33:03
  Speaker 3: can all agree, okay, over the next three years, this
• 33:05
  Speaker 3: is what that rental income will be. But when you
• 33:08
  Speaker 3: think about other like across a farmer's portfolio, I mentioned
• 33:12
  Speaker 3: they own land and they intend to own that forever,
• 33:16
  Speaker 3: you know, that's how they think about it. And they
• 33:18
  Speaker 3: rent our land and those are usually three year leases,
• 33:21
  Speaker 3: but then they rent a lot of land from other people.
• 33:23
  Speaker 3: Those other people, even if a farmer's been operating that
• 33:26
  Speaker 3: land for thirty years, it's usually thirty one year leases.
• 33:30
  Speaker 3: So making decisions because the land owner, I'm not going
• 33:33
  Speaker 3: to say they're not sophisticated, but they're unwilling to do
• 33:36
  Speaker 3: a multi year lease because they want to have the
• 33:38
  Speaker 3: optionality to sell the property free and clear of a
• 33:40
  Speaker 3: lease if they decide they want to sell it. So
• 33:44
  Speaker 3: usually when farmers look to us, they're saying, well, we
• 33:46
  Speaker 3: want to add a new combine or a tractor, or
• 33:49
  Speaker 3: make these overhead or hiring or infrastructure decisions. They actually
• 33:53
  Speaker 3: view a three year lease as a long term lease.
• 33:55
  Speaker 3: In the farmland space, we have some leases that'll go
• 33:59
  Speaker 3: eight or ten years if they're growing more specialty crops.
• 34:02
  Speaker 3: So we have about twenty percent of our portfolio that
• 34:05
  Speaker 3: generates higher revenue because they're growing things like potatoes for
• 34:09
  Speaker 3: potato chips, processing tomatoes. The kind of highest quality mint
• 34:14
  Speaker 3: you can grow in the world is in the Midwest,
• 34:16
  Speaker 3: so we grow that on our properties, and that requires
• 34:19
  Speaker 3: a more diverse rotation and a longer planning for the farmer.
• 34:24
  Speaker 3: So we'll allow a longer lease in those instances. And
• 34:27
  Speaker 3: we allow that because they're paying us a stronger rent.
• 34:29
  Speaker 2: Huh. Really kind of fascinating. I want to talk about scale.
• 34:33
  Speaker 2: You mentioned boltons and a lot of things. I'm kind
• 34:36
  Speaker 2: of fascinated by the scale. And the question I wanted
• 34:42
  Speaker 2: to ask is, are each farm that comes up for sale,
• 34:47
  Speaker 2: do they have the same or different value for different acquires,
• 34:52
  Speaker 2: Like I'm going to assume if you're the adjacent farm,
• 34:56
  Speaker 2: that next form might be more valuable. You spend a
• 34:58
  Speaker 2: lot of money on combine and tractors. Hey, if you
• 35:01
  Speaker 2: can use it on five hundred acres instead of three hundred,
• 35:05
  Speaker 2: your cost par acres should go down. Of course, what's
• 35:09
  Speaker 2: the impact on scaling up? And what's a big farm?
• 35:12
  Speaker 2: Is one hundred acres big? Is a thousand acres big?
• 35:15
  Speaker 4: Yeah? I mean it's all relative.
• 35:16
  Speaker 3: But to your point about are there different values for
• 35:20
  Speaker 3: different buyers. Absolutely, even if two buyers both intend to
• 35:24
  Speaker 3: farm it, there are absolutely differences in how someone will
• 35:28
  Speaker 3: value it. In some cases on the same land, that
• 35:31
  Speaker 3: comes down to what crop do you intend to grow?
• 35:33
  Speaker 3: So I had talked briefly about specialty crops, but if
• 35:37
  Speaker 3: you're if there's a farm in northern Indiana with irrigation,
• 35:40
  Speaker 3: that comes up. If the tenant we're looking at wants
• 35:42
  Speaker 3: to grow corn and soybeans, they're going to be able
• 35:45
  Speaker 3: to pay us one rent. If the tenant we're talking
• 35:47
  Speaker 3: to would grow popcorn and processing tomatoes or potatoes, they
• 35:52
  Speaker 3: can pay us almost double this rent on the same land.
• 35:55
  Speaker 3: So when we look at farmers we're trying to identify
• 35:58
  Speaker 3: which farmer can generate the high revenue, has a strong
• 36:01
  Speaker 3: balance sheet, operates with the least amount of risk so
• 36:05
  Speaker 3: that our rent will be paid every year in the spring.
• 36:07
  Speaker 3: But there's it's really important when you look at land
• 36:11
  Speaker 3: to determine what's the highest and best use, even just
• 36:14
  Speaker 3: on the agriculture side. So when you think of every
• 36:17
  Speaker 3: farmer would love to have thousand acre blocks of land
• 36:19
  Speaker 3: in the Midwest, that's hard because the history of ownership
• 36:22
  Speaker 3: was the.
• 36:23
  Speaker 4: Homestead Act, so it's forty acre blocks.
• 36:25
  Speaker 3: So within our portfolio, we have forty acre farms, and
• 36:28
  Speaker 3: we don't love doing those transactions, but if we can
• 36:31
  Speaker 3: bolt them onto an existing property with an existing lease
• 36:34
  Speaker 3: and the same farmer, that's kind of a no brainer.
• 36:37
  Speaker 3: But our largest farms in southwestern Georgia. It's seven thousand
• 36:40
  Speaker 3: contiguous acres, so that's about ten square miles in one piece.
• 36:43
  Speaker 3: It's all irrigated and the history of ownership there is
• 36:46
  Speaker 3: plantations out west, the history of ownerships ranches, so these
• 36:50
  Speaker 3: larger tracts of land, you tend to see more institutional
• 36:53
  Speaker 3: investment in those areas along with permanent crops, and there's
• 36:57
  Speaker 3: a lot of reasons. People will tell you it's around
• 37:00
  Speaker 3: scale and efficiency. In some cases, I think it's just
• 37:03
  Speaker 3: you can write a bigger check. If I need to
• 37:05
  Speaker 3: deploy fifty million at once, I can do it better
• 37:07
  Speaker 3: in those areas because the farms are just bigger, where
• 37:10
  Speaker 3: it's a permanent crop that it's one hundred or two
• 37:12
  Speaker 3: hundred thousand dollars an acre, so I can deploy capital
• 37:15
  Speaker 3: more quickly. For us, it's harder to gain that scale,
• 37:19
  Speaker 3: but it really starts with that tenant network. So those
• 37:22
  Speaker 3: one hundred and seventy farmers we work with today, they
• 37:25
  Speaker 3: farm our one hundred and seventy thousand acres or one
• 37:27
  Speaker 3: hundred and eighty thousand acres. They own collectively about two
• 37:31
  Speaker 3: hundred and fifty thousand acres that I don't expect they
• 37:33
  Speaker 3: will sell, but that's kind of what they own. But
• 37:36
  Speaker 3: they rent over seven hundred and fifty thousand acres from
• 37:39
  Speaker 3: other people, and those other people are those estates, trust
• 37:42
  Speaker 3: non farming airs. And when those folks want to sell,
• 37:45
  Speaker 3: usually they don't have a public auction. Usually it's a
• 37:47
  Speaker 3: private transaction. The first person they call is their farm tenant.
• 37:51
  Speaker 3: And while we would love if our fund was closed.
• 37:53
  Speaker 3: We would love to see prices just continue to escalate
• 37:57
  Speaker 3: up forever, you know.
• 37:59
  Speaker 4: Over the time.
• 38:00
  Speaker 2: They're also on both sides.
• 38:01
  Speaker 4: Yeah, we like cycles.
• 38:02
  Speaker 3: So when farmers have really strong balance sheets, like in
• 38:05
  Speaker 3: twenty twenty one and twenty twenty two, they were probably
• 38:08
  Speaker 3: not passing on as many of those purchase options to us.
• 38:11
  Speaker 3: But now we've we're in our third year of lower
• 38:14
  Speaker 3: commodity prices. Farmers have to be careful about how much
• 38:17
  Speaker 3: working capital they're going to liquidate to go buy a
• 38:21
  Speaker 3: long term masse. And if it's a very strategic farm
• 38:24
  Speaker 3: to them, they're going to try to buy it very
• 38:25
  Speaker 3: close to home. But if it's something they're willing to
• 38:28
  Speaker 3: travel for and they're currently farming, and as much as
• 38:31
  Speaker 3: they'd like to grow their acres to that point about
• 38:33
  Speaker 3: efficiency you mentioned, they don't want to lose acres. So
• 38:36
  Speaker 3: if a farmer farms five thousand acres, if one of
• 38:40
  Speaker 3: their landlords who owns five hundred cells and they don't,
• 38:43
  Speaker 3: they're either not able to buy it or someone that
• 38:45
  Speaker 3: we're partnering with them on. If they're not able to
• 38:49
  Speaker 3: buy it, then they just lose those acres and they
• 38:51
  Speaker 3: immediately become over capitalized, every other acre becomes more expensive
• 38:55
  Speaker 3: to farm, and so they think about it in terms
• 38:58
  Speaker 3: of protecting acres and growth. When you say, well, why
• 39:02
  Speaker 3: would they partner with someone like us? So when we
• 39:04
  Speaker 3: look at farms that would make sense to add to
• 39:07
  Speaker 3: the portfolio, in some cases we'd pay a little more
• 39:09
  Speaker 3: because it's a strategic farm that's close by, but we
• 39:12
  Speaker 3: say no. Probably twenty nine times out of thirty, we're
• 39:16
  Speaker 3: at a public auction. The hit rate is low, and
• 39:19
  Speaker 3: while we'd like that to be higher. That's the investment discipline.
• 39:21
  Speaker 3: We will lose sometimes by forty or fifty percent above
• 39:25
  Speaker 3: our reserve price.
• 39:26
  Speaker 2: Back to Graham Dot absolutely you mentioned ranch ranching. We've
• 39:30
  Speaker 2: been mostly talking about farming. When I think of ranches,
• 39:34
  Speaker 2: I think of cattle farms, horse farms, sheep. What do
• 39:37
  Speaker 2: these ranchers do? How much of the assets you own
• 39:41
  Speaker 2: are ranches versus farms? Whereas there're a mix, Some do
• 39:44
  Speaker 2: a little bit of both.
• 39:45
  Speaker 4: Some can do both.
• 39:46
  Speaker 3: Not our farm, so our portfolio is exclusively farming, not
• 39:51
  Speaker 3: ranching acres. You tend to see those ranching acres, you know,
• 39:54
  Speaker 3: if you think of what's the highest and best use
• 39:57
  Speaker 3: if you could grow amongst row crops, even corn the
• 40:00
  Speaker 3: highest revenue, then soybeans then we I mean cotton would
• 40:04
  Speaker 3: be up there as well. But as you look kind
• 40:07
  Speaker 3: of down the value cycle, ranching would be very low
• 40:10
  Speaker 3: because you're you're just not generating much rent. So it's
• 40:13
  Speaker 3: more marginal land that's used for that or larger tracks
• 40:16
  Speaker 3: of land. Typically, Like one of the big farmland owners
• 40:19
  Speaker 3: is the Mormon Church. They're also one of the five
• 40:22
  Speaker 3: largest cattle feeders in the country, so they own a
• 40:24
  Speaker 3: lot of ranch land, so they're actually raising.
• 40:27
  Speaker 2: Cattle and then sending it to their own cattle.
• 40:29
  Speaker 3: Yeah, and they'll graze the cattle and then eventually, you know,
• 40:32
  Speaker 3: take that all the way to market. That's the type
• 40:34
  Speaker 3: of vertical integration you'll see in some areas and row
• 40:37
  Speaker 3: crops you just don't see that. We like to identify
• 40:40
  Speaker 3: tenants we're working with that if they have a dairy,
• 40:43
  Speaker 3: so they need the land to feed the cows, they
• 40:45
  Speaker 3: need the land for their nutrient management program. Those tenants
• 40:48
  Speaker 3: are willing to pay more for farms if it's a
• 40:51
  Speaker 3: strategic farm that's close by because they can't travel.
• 40:54
  Speaker 4: All over the place.
• 40:55
  Speaker 3: But a lot of our tenants they might have a
• 40:57
  Speaker 3: home base that kind of looks like the center of
• 40:59
  Speaker 3: this table, and the radius that they'll travel. Being willing
• 41:03
  Speaker 3: to farm, they'll rent in these other areas if they
• 41:06
  Speaker 3: can find enough acres to have scale, because ultimately, every
• 41:09
  Speaker 3: time a son or daughter wants to come back to
• 41:11
  Speaker 3: the farm to help increase that family business, you can't
• 41:15
  Speaker 3: just slice the pie more ways. You have to grow
• 41:17
  Speaker 3: the pie. And I mentioned earlier the amount of total
• 41:20
  Speaker 3: acres in the US is going down every year. And
• 41:23
  Speaker 3: in the Midwest you don't have problems of aridity or erosion,
• 41:27
  Speaker 3: but you have a lot of development pressure coming in.
• 41:29
  Speaker 3: The cities are expanding, manufacturings expanding, So there are acres
• 41:33
  Speaker 3: that farmers lose for those reasons every year.
• 41:37
  Speaker 2: So it seems absurd to talk about farmland and artificial intelligence.
• 41:43
  Speaker 2: But there are two different ways I want to go
• 41:45
  Speaker 2: with this. The first is these giant data centers they
• 41:51
  Speaker 2: pay a lot more. They are a higher spending buyer
• 41:55
  Speaker 2: or renter than say someone growing row crops. What's relationship
• 42:00
  Speaker 2: between farmland and AI and big infrastructure investing.
• 42:05
  Speaker 3: Yeah, I mean we're seeing it firsthand now in the Midwest.
• 42:09
  Speaker 3: The amount of additional building that's happening around data centers
• 42:14
  Speaker 3: is unbelievable. And the amount of capital that's being invested
• 42:17
  Speaker 3: in these areas like Ohio, Indiana, Michigan, Illinois around data
• 42:22
  Speaker 3: center development, it's really staggering when you think about it.
• 42:25
  Speaker 3: So there's just outside of South Indiana two very large
• 42:29
  Speaker 3: data center projects that I think each is investing between
• 42:32
  Speaker 3: nine and eleven billion on these data centers. And the
• 42:35
  Speaker 3: real estate price, even if it's I think our average
• 42:38
  Speaker 3: cost per acre across our portfolio is about eight thousand dollars.
• 42:41
  Speaker 3: You see data center prices anywhere from one hundred to
• 42:44
  Speaker 3: three hundred thousand dollars in.
• 42:45
  Speaker 4: A twelve at least, if not more.
• 42:48
  Speaker 2: And who are these? Who are the companies that are
• 42:49
  Speaker 2: these big buyers? All the big names we know.
• 42:51
  Speaker 4: Yeah, it's the big ones that are out there.
• 42:53
  Speaker 2: I think you see a little Microsoft. Who else is.
• 42:57
  Speaker 3: Groups like Amazons, Like what you're finding now is a
• 43:02
  Speaker 3: lot less hoteling space for data centers and they're all
• 43:05
  Speaker 3: single user and it seems like they're going after the
• 43:08
  Speaker 3: best locations, which would be large tracts of land close
• 43:12
  Speaker 3: to infrastructure. So you want natural gas, you need three
• 43:15
  Speaker 3: phase power with capacity on the line. You need fiber
• 43:18
  Speaker 3: lines or rail access to run fiber. You need water,
• 43:22
  Speaker 3: and while there are multiple ways for cooling water, whether
• 43:26
  Speaker 3: it's closed loop or open loop, is a big part
• 43:27
  Speaker 3: of all of it. So what you tend to find
• 43:31
  Speaker 3: are a lot of these old rust belt areas, but
• 43:35
  Speaker 3: kind of virgin farmland is the best candidate for it,
• 43:38
  Speaker 3: and you have these single users that are going after
• 43:42
  Speaker 3: that land. So in our portfolio, we've aggregated large properties
• 43:46
  Speaker 3: over time, and there seems to be a lot of
• 43:47
  Speaker 3: interest around that because it's just there are very few
• 43:51
  Speaker 3: of these places where you can do it. It's not
• 43:53
  Speaker 3: like even a distribution center that next to every exit
• 43:56
  Speaker 3: on the highway you could justify putting one there. You
• 43:59
  Speaker 3: need all the energy and water infrastructure and fiber infrastructure,
• 44:03
  Speaker 3: and you need capacity. So every new and there aren't
• 44:06
  Speaker 3: a lot of new natural gas fired power plants that
• 44:09
  Speaker 3: get built, but when one gets built, it seems like
• 44:11
  Speaker 3: a logical kind of co user of that power would
• 44:15
  Speaker 3: be one of them.
• 44:16
  Speaker 2: I was gonna say, what about colocation where you just
• 44:18
  Speaker 2: run ant gas line and build your own electrical facility
• 44:21
  Speaker 2: adjacent to one of these power plants.
• 44:23
  Speaker 3: I feel like some of that is definitely happening and
• 44:25
  Speaker 3: will continue. I mean, ultimately some of these data centers
• 44:28
  Speaker 3: will all be powered by modular nukes.
• 44:31
  Speaker 4: When when you get down to it, you need is
• 44:33
  Speaker 4: that what we're talking potentially?
• 44:35
  Speaker 3: Yeah, I mean the idea of when a data center
• 44:37
  Speaker 3: is going in or even a big manufacturing facility. Sometimes
• 44:40
  Speaker 3: you'll see colocation of solar, and while solar has a
• 44:44
  Speaker 3: lot of benefits, it's not going to power something like that.
• 44:47
  Speaker 3: That's more just I think for credits to sell into
• 44:49
  Speaker 3: the grid. I mean, we have three mile island potentially
• 44:52
  Speaker 3: coming back on, so there's a lot of different options.
• 44:55
  Speaker 3: And I think across states like New York State, they've
• 44:58
  Speaker 3: closed down, some nuclear facilities are consolidated.
• 45:02
  Speaker 2: Well sure them never opened here. They spent billions over
• 45:05
  Speaker 2: twenty years. There was no escape route. Bid islands are
• 45:10
  Speaker 2: not great places for nuclear facilities. But you know, you
• 45:13
  Speaker 2: see countries like France ninety plus percent of their power
• 45:16
  Speaker 2: generation comes from nuclear.
• 45:19
  Speaker 3: Right, And the hard thing when you think about power,
• 45:21
  Speaker 3: I mean I kind of laugh. I had two siblings
• 45:24
  Speaker 3: that both went to Cornell, so I've been to Ithaca
• 45:26
  Speaker 3: quite a bit. We own farms in upstate New York,
• 45:28
  Speaker 3: and every time I drive from our farms there down
• 45:31
  Speaker 3: to our family farm in northeastern Pennsylvania. You'll drive through
• 45:34
  Speaker 3: parts of New York State that we'll say no industrial.
• 45:37
  Speaker 3: You'll see signs that say no industrial, soular, no wind farms,
• 45:39
  Speaker 3: no fracking, no nuclear, but they all turn on their lights.
• 45:43
  Speaker 3: So we have this really perverse view out there that
• 45:49
  Speaker 3: you could call it nimbiism, you can call it whatever
• 45:51
  Speaker 3: you want, but we need more of everything.
• 45:53
  Speaker 2: More power for sure.
• 45:54
  Speaker 3: Yeah, if you look at a there's a few great
• 45:56
  Speaker 3: grafts out there that show kind of the history of
• 45:59
  Speaker 3: con umption for power and the same amount of coal
• 46:02
  Speaker 3: that's been used throughout history.
• 46:06
  Speaker 4: This year will be the year that the most coal
• 46:08
  Speaker 4: is used.
• 46:08
  Speaker 3: The most peat that's ever been burned or wood is
• 46:11
  Speaker 3: happening this year, the most oil produced or burned, natural gas.
• 46:14
  Speaker 3: The only energy source that's ever gone down really is
• 46:17
  Speaker 3: nuclear and that was out of the out of regulation.
• 46:21
  Speaker 2: Is there's a lot of fears around it.
• 46:23
  Speaker 3: And so if you look at what do we need,
• 46:25
  Speaker 3: there's no energy in my opinion, there's no energy transition
• 46:27
  Speaker 3: that whatever happens is we need more of everything.
• 46:30
  Speaker 2: So that's really fascinating. I saw a chart I forget
• 46:34
  Speaker 2: where the biggest producer of solar energy in the United States, Walmart,
• 46:40
  Speaker 2: all their distribution centers, all their superstores, especially in the South.
• 46:45
  Speaker 2: They just say, we have dead space on the roof
• 46:47
  Speaker 2: loaded up with solar, and they're not only subsidizing their
• 46:51
  Speaker 2: own power consumption, they're getting credits for selling it back
• 46:54
  Speaker 2: to the grid.
• 46:55
  Speaker 3: Yeah, I think it makes a ton of sense, especially
• 46:57
  Speaker 3: if you're building greenfield when you can. Actually it's tough
• 47:00
  Speaker 3: to retrofit things for solar. And even when we look
• 47:03
  Speaker 3: at farmland that goes to the idea of these little
• 47:07
  Speaker 3: community solar gardens, I don't think is very scalable. You
• 47:10
  Speaker 3: tend to see more industrial sized solar fields, and it's
• 47:14
  Speaker 3: you know, from the landowner standpoint, or the farmers standpoint,
• 47:17
  Speaker 3: or the the If a farmer is the owner, you
• 47:20
  Speaker 3: know they're interested in the highest and best use. So
• 47:23
  Speaker 3: what you tend to see is we have farm tenants
• 47:25
  Speaker 3: that they sell land for development all the time. They
• 47:28
  Speaker 3: you know, these farmers are very sophisticated, they're CEOs. This
• 47:32
  Speaker 3: has been happening for generations where someone will sell land
• 47:35
  Speaker 3: that's close to town for a very high price and
• 47:38
  Speaker 3: then they'll move twenty miles farther out and buy three
• 47:41
  Speaker 3: times the amount of land and set up shop there.
• 47:43
  Speaker 3: So while the idea of a farmer moving always seems,
• 47:47
  Speaker 3: you know, really hard to believe, this has been happening forever.
• 47:50
  Speaker 3: The western suburbs of Chicago have extended and extended and extended.
• 47:54
  Speaker 3: And farmers are you know, I consider them dumb as
• 47:56
  Speaker 3: a fox.
• 47:56
  Speaker 4: Like they'll they'll sell for see that as a farmer, Yeah,
• 48:00
  Speaker 4: I know, it's it's interesting.
• 48:02
  Speaker 3: They'll sell for a very high price, and when that
• 48:04
  Speaker 3: development doesn't happen, they'll buy it back for less and
• 48:06
  Speaker 3: they'll wait for the next round of development and sell
• 48:08
  Speaker 3: it again.
• 48:09
  Speaker 2: So that's funny.
• 48:10
  Speaker 3: So, you know, some of the competition we see when
• 48:12
  Speaker 3: we're buying farms, it's not just farmers that had profitable years.
• 48:16
  Speaker 3: It's farmers that have ten thirty one exchange money because
• 48:19
  Speaker 3: they sold land to a data center.
• 48:21
  Speaker 2: Or they have like three years to reinvest before they
• 48:24
  Speaker 2: get hit with taxes something.
• 48:25
  Speaker 3: Yeah, it's about eighteen months and they've identify properties, but
• 48:28
  Speaker 3: they have to go out there and reinvest it and
• 48:31
  Speaker 3: kind of like like to keep their cost basis. And
• 48:34
  Speaker 3: farmers are really good at you know, figuring their way
• 48:38
  Speaker 3: around these tax codes, and you know, good for them.
• 48:40
  Speaker 3: And I think that's a lot of the competition we
• 48:42
  Speaker 3: see are ten thirty one buyers because there's just big
• 48:45
  Speaker 3: dollars getting thrown around.
• 48:47
  Speaker 2: They have no choice, they have to get deployed otherwise.
• 48:49
  Speaker 4: Yeah, and they want to continue to buy farm land.
• 48:51
  Speaker 3: And a lot of farmers, I mean it's really interesting
• 48:54
  Speaker 3: when you talk to them and you'd say, well, what's
• 48:56
  Speaker 3: your dream scenario. And one of our tenants who sold
• 48:59
  Speaker 3: some land to a solar company and they were selling
• 49:01
  Speaker 3: land for a data center. I said, well, what's your
• 49:04
  Speaker 3: goal and they said, well, we want to continue to farm.
• 49:06
  Speaker 3: We just want to do it debt free. So it's
• 49:08
  Speaker 3: not like they just want to buy a place in Florida.
• 49:10
  Speaker 3: They'll have one, but they want to continue to farm,
• 49:13
  Speaker 3: so they want to go buy more.
• 49:14
  Speaker 2: Farm Really interesting. Coming up, we continue our conversation with
• 49:18
  Speaker 2: Brandon Zick, chief investment officer of Sarah's Farms, discussing the
• 49:23
  Speaker 2: state of farmland investing. Today. I'm Barry Ridults. You're listening
• 49:28
  Speaker 2: to Masters in Business on Bloomberg Radio. I'm Bury Ridults.
• 49:44
  Speaker 2: You're listening to Masters in Business on Bloomberg Radio. My
• 49:48
  Speaker 2: extra special guest this week is Brandon Zick. He's chief
• 49:51
  Speaker 2: investment officer of Sarah's Farms. They are a specialty fund
• 49:55
  Speaker 2: investing in farms and farmland. We haven't really talked about
• 50:00
  Speaker 2: the risk of farming. And a couple of my favorite
• 50:04
  Speaker 2: YouTube shows. So I'm a car guy. I like Harry's
• 50:08
  Speaker 2: Garage and his adjacent channel is Harry's Farm, and watching
• 50:12
  Speaker 2: him do this stuff, you realize what a difficult job
• 50:16
  Speaker 2: farming is, especially sometimes it's drought, sometimes it's too much rain,
• 50:22
  Speaker 2: it's so expensive and so much of your product is
• 50:27
  Speaker 2: totally out of your control. And then if you liked
• 50:31
  Speaker 2: top Gear, there's an Amazon show called Clarkson's Farm and
• 50:35
  Speaker 2: it makes you realize, God, this is an impossible business.
• 50:39
  Speaker 2: At least in the UK, farmers there having a really
• 50:42
  Speaker 2: hard time. So let's talk a little bit about the
• 50:45
  Speaker 2: risks of farming and the risk of investing in farming.
• 50:50
  Speaker 2: What are the possible downsides?
• 50:52
  Speaker 4: Yeah, so on. Being a farmer is a very difficult business.
• 50:56
  Speaker 3: I mean, there are so many different risk factors and
• 50:59
  Speaker 3: so many decisions points that you can make that completely
• 51:02
  Speaker 3: can impact your bottom line in a material way. Not
• 51:05
  Speaker 3: just what crop you grow and when you plant, but
• 51:07
  Speaker 3: when you sell it, how you sell it, who you
• 51:10
  Speaker 3: sell it to, how you store your grain, and all
• 51:13
  Speaker 3: these things can change year to year and to your point,
• 51:16
  Speaker 3: and this kind of goes back to there hasn't been
• 51:19
  Speaker 3: a lot of institutional roll up yet on the land side,
• 51:22
  Speaker 3: but the people that sell inputs to farmers, and the
• 51:26
  Speaker 3: inputs can be seed, fertilizer, equipment, whatever it may be.
• 51:29
  Speaker 3: And the buyers of their crop, the large grain buyers
• 51:32
  Speaker 3: out there, your bungies and adms and cargills, they all
• 51:36
  Speaker 3: have a lot of pricing power. Your average farmer doesn't
• 51:39
  Speaker 3: have any pricing power, so they are a price taker
• 51:41
  Speaker 3: on the input side. There are a price taker on
• 51:43
  Speaker 3: the crop side. So part of our value add for
• 51:47
  Speaker 3: investors is we try to identify farmers that are the
• 51:50
  Speaker 3: most well positioned to have whatever pricing power they can get.
• 51:53
  Speaker 3: So they have to have scale so that when they're
• 51:56
  Speaker 3: buying inputs that they can go out and negotiate the
• 51:59
  Speaker 3: best price possible. You want farmers that can store their
• 52:02
  Speaker 3: grain so they're not selling it all at harvest. They
• 52:05
  Speaker 3: want to be able to sell it into the spring
• 52:06
  Speaker 3: when other people don't have the crop. Yeah, so hopefully
• 52:10
  Speaker 3: you get that positive carry. So we try to identify
• 52:12
  Speaker 3: those folks. But when you're looking at investing in farmland,
• 52:17
  Speaker 3: what are the downsides? Well, there's certain just climate issues.
• 52:21
  Speaker 3: So if you're close to a river and it floods,
• 52:23
  Speaker 3: that's a problem. If you have very sandy soils and
• 52:26
  Speaker 3: it doesn't rain and you have drought, that's a problem.
• 52:29
  Speaker 3: So we like to have farms where we can do
• 52:32
  Speaker 3: some of that capax like adding irrigation or adding drainage,
• 52:35
  Speaker 3: so that you can help manage some of those risks.
• 52:37
  Speaker 2: How do you manage around weeds, past bugs, and disease,
• 52:41
  Speaker 2: because there are a lot of dangerous diseases that literally
• 52:45
  Speaker 2: come in on the wind.
• 52:46
  Speaker 3: Yeah, and that's I mean part of what the way
• 52:49
  Speaker 3: we've constructed this portfolio. I mean, Perry was really prescient
• 52:53
  Speaker 3: when he thought about the Great Lakes the Midwest. It
• 52:55
  Speaker 3: wasn't just because he was from Wisconsin or he was
• 52:58
  Speaker 3: traveling to the Midwest. Because in the Midwest we have
• 53:01
  Speaker 3: the best soil, some of the best water resources. And
• 53:04
  Speaker 3: what I mean by that is these recharging aquifers. The
• 53:07
  Speaker 3: Great Likes aquifers, but also it rains during the crop season.
• 53:10
  Speaker 3: So the cheapest form of irrigation is still just rains.
• 53:13
  Speaker 3: You don't have to turn anything on or do anything.
• 53:15
  Speaker 3: But there are parts of the South and the West
• 53:17
  Speaker 3: where it doesn't rain when you're growing a crop, or
• 53:19
  Speaker 3: it's very sporadic, so you can't really grow a crop
• 53:22
  Speaker 3: without irrigation. In the Midwest, it's more supplemental. So from
• 53:25
  Speaker 3: a risk management standpoint, it starts with good soil, good water.
• 53:30
  Speaker 3: We like good infrastructure so you can move your crops
• 53:32
  Speaker 3: around you Also, and I had mentioned earlier, we like
• 53:36
  Speaker 3: areas where it's a highly competitive market for rent because
• 53:38
  Speaker 3: we're renting ground. We want to have lots of farmers
• 53:41
  Speaker 3: out there that are all looking to grow, they're all
• 53:44
  Speaker 3: looking to add acres, and so that makes a very
• 53:46
  Speaker 3: competitive market from the rental side. Some of the stuff
• 53:50
  Speaker 3: that you know, investing in the US isn't a risk,
• 53:53
  Speaker 3: but there are a lot of people and a lot
• 53:55
  Speaker 3: of managers that invest outside of the US. Currency risk
• 53:58
  Speaker 3: is a big deal, Sovereign risk is a big deal.
• 54:01
  Speaker 3: I mean, there's been many investors that have had more
• 54:03
  Speaker 3: than their handslapped for buying land in South America, particularly
• 54:06
  Speaker 3: in Brazil, that they found out the group they bought
• 54:09
  Speaker 3: it from might not have been the owner. And there's
• 54:11
  Speaker 3: a lot of things that we think transparency is key.
• 54:15
  Speaker 3: But we we really like title insurance, we like rule
• 54:19
  Speaker 3: of law. So we invest in the US, We invest
• 54:21
  Speaker 3: in areas that are very friendly to farmers. And so
• 54:25
  Speaker 3: that's we don't own any land in California today. Maybe
• 54:28
  Speaker 3: we will at some point. I think that's a little
• 54:30
  Speaker 3: bit more difficult from a regulatory environment, and water is
• 54:34
  Speaker 3: something that we view as longer term. You know, water
• 54:37
  Speaker 3: is going to be a gating issue or a gating
• 54:39
  Speaker 3: factor in a lot of areas, and you're seeing not
• 54:42
  Speaker 3: just regulation but restriction all across the country. So we
• 54:45
  Speaker 3: want to be in areas where water is plentiful. It's
• 54:47
  Speaker 3: one thing to have a paper water, right, It's another
• 54:49
  Speaker 3: to have water availability.
• 54:51
  Speaker 4: And that's what we focus on.
• 54:52
  Speaker 2: So last question, last two questions before we get to
• 54:56
  Speaker 2: our favorite questions. We ask all our guests, let's look
• 54:59
  Speaker 2: out five or ten years. What are some of the
• 55:02
  Speaker 2: biggest opportunities in farmland and what are some of the
• 55:06
  Speaker 2: potential dislocations and risks you're considering.
• 55:10
  Speaker 3: Yeah, so in terms of opportunity, I mean, we think
• 55:13
  Speaker 3: there's just so much capacity out there to continue to
• 55:16
  Speaker 3: invest in the current markets where we are today. But
• 55:19
  Speaker 3: within the US, we think, you know, the world's going
• 55:23
  Speaker 3: to continue to need food as water becomes more expensive
• 55:26
  Speaker 3: in other parts of the US. So California as an example,
• 55:29
  Speaker 3: or Arizona as an example, a lot of those crops
• 55:33
  Speaker 3: that people want to have the USA stick around, so
• 55:36
  Speaker 3: vegetables produce, they're going to be grown more, at least
• 55:40
  Speaker 3: seasonally in areas where they're cheaper to grow, and every
• 55:45
  Speaker 3: or so a lot of that today, a lot of
• 55:47
  Speaker 3: produces grown to Mexico, and that's labor's the biggest issue.
• 55:51
  Speaker 4: Labor there is next to nothing.
• 55:53
  Speaker 3: So if people don't care, if they're blueberries or if
• 55:57
  Speaker 3: they're watermelons, say USA, and then it will all come
• 56:01
  Speaker 3: from Mexico. If people don't care, because it's just from
• 56:03
  Speaker 3: a cost of production standpoint, it's so much less. But
• 56:06
  Speaker 3: in California, the cost of water. So let's say you
• 56:10
  Speaker 3: have a well that you need to pump a thousand
• 56:12
  Speaker 3: gallons a minute to grow celery. That might cost a
• 56:16
  Speaker 3: couple hundred thousand dollars a year. The cost of the
• 56:18
  Speaker 3: well itself is a million dollars to grow that same salery,
• 56:21
  Speaker 3: maybe less of it because you're not growing year round.
• 56:23
  Speaker 3: In Michigan, that well costs fifty thousand dollars and it
• 56:26
  Speaker 3: costs two hundred dollars a year to operate. So even
• 56:29
  Speaker 3: if the labor cost was same same, the cost of
• 56:31
  Speaker 3: productions much less. And every crop in the US, almost
• 56:36
  Speaker 3: every crop moves west to east toward the population center,
• 56:39
  Speaker 3: So if you're east of the Mississippi, you've cut a
• 56:41
  Speaker 3: huge freight cost off of the cost of production too.
• 56:44
  Speaker 2: So it's best straight to the west east coast and
• 56:47
  Speaker 2: much cheaper than coming up from Mexico.
• 56:49
  Speaker 3: Yes, and I think over time, you know, we're going
• 56:51
  Speaker 3: to see more and more of that high revenue production
• 56:53
  Speaker 3: move there, So we view that as an opportunity. A
• 56:56
  Speaker 3: risk is always does the cost of labor out technology
• 57:00
  Speaker 3: growth We've seen and part of the reason we like
• 57:03
  Speaker 3: row crops are because there's more technology being implemented a
• 57:07
  Speaker 3: much less labor.
• 57:08
  Speaker 2: I'm glad you mentioned that because one of the things
• 57:10
  Speaker 2: that was fascinating on both those shows were the GPS
• 57:15
  Speaker 2: driven tractors. So if you're going to run a combine,
• 57:18
  Speaker 2: you're going to lay fertilizer down, you're going to harvest.
• 57:22
  Speaker 2: These things essentially drive themselves long before TESLA because doing
• 57:27
  Speaker 2: that efficiently is a giant money saver. Talk about the
• 57:32
  Speaker 2: technology that's making farmland more productive.
• 57:34
  Speaker 3: Yeah, I mean technology, I would say, and agriculture is
• 57:37
  Speaker 3: moving as fast as anywhere, and it's really because there
• 57:40
  Speaker 3: are real tactical issues around labor's too expensive, the cost
• 57:44
  Speaker 3: of inputs has gone up. So to talk to our
• 57:47
  Speaker 3: farmers and that's a big part of our underwriting is
• 57:49
  Speaker 3: we want farmers who are using the latest technology. Whereas
• 57:52
  Speaker 3: in the past, if someone was planning a crop, they
• 57:55
  Speaker 3: would broadcast equally across the entire field, the fertilizer, the
• 57:59
  Speaker 3: seas and when you look at actually some of these farms,
• 58:03
  Speaker 3: the soil types and quality throughout a farm can be
• 58:06
  Speaker 3: highly diverse. You could have five to one hundred different
• 58:09
  Speaker 3: soil types. So the soil mapping that they can do
• 58:12
  Speaker 3: with technology to.
• 58:13
  Speaker 2: Them see a satellite right via satellite.
• 58:15
  Speaker 3: And they also use probes to get out there, trust
• 58:18
  Speaker 3: but verify you go out there and do that, and
• 58:20
  Speaker 3: then they can use variable rate applications of fertilizer and seeds.
• 58:25
  Speaker 3: So in an acre of ground of really high quality
• 58:28
  Speaker 3: black dirt, they might plant thirty five thousand seeds per acre,
• 58:33
  Speaker 3: but then in the sandy or lower quality soil, it's
• 58:36
  Speaker 3: only twenty thousand and achieve the same yield. So what
• 58:41
  Speaker 3: you're doing is saving money on the seed, applying fertilizer
• 58:45
  Speaker 3: so that it's not running off. And farmers don't want
• 58:47
  Speaker 3: waste either, because that's money that's just rolling away.
• 58:50
  Speaker 2: And this isn't just satellite. It's satellite, it's drone. It's
• 58:53
  Speaker 2: a lot of high tech tools that you don't think of.
• 58:57
  Speaker 2: You think of picks and shovels with farms, but there's
• 58:59
  Speaker 2: a lot high tech here.
• 59:00
  Speaker 3: Well, and something as easy as if you said, twenty
• 59:03
  Speaker 3: years ago you had irrigation on a property, these big
• 59:06
  Speaker 3: irrigation pivots, and you know there's some publicly traded companies
• 59:09
  Speaker 3: that manufacture all these in the US, like Valley and Lindsay.
• 59:12
  Speaker 3: And twenty years ago, if a farmer had twenty pivots,
• 59:15
  Speaker 3: they'd have to have five or six different people in
• 59:17
  Speaker 3: the morning get in a truck and go out and
• 59:20
  Speaker 3: start them up, and then throughout the day drive by
• 59:22
  Speaker 3: and make sure they're still running. Now that farmer can
• 59:25
  Speaker 3: control everything from his or her iPhone they can start it,
• 59:28
  Speaker 3: stop it, monitor they have soil moisture probes out? Are
• 59:32
  Speaker 3: they moisture probes out in the soil so that they
• 59:34
  Speaker 3: know do we need it? In some cases they are
• 59:37
  Speaker 3: using AI or some learning mechanisms to say, well, based
• 59:40
  Speaker 3: on is it going to rain, we're not going to
• 59:43
  Speaker 3: turn itself on. So farmers are subscribing to some of
• 59:46
  Speaker 3: this kind of smart data to go out there and
• 59:48
  Speaker 3: make them a better operator.
• 59:50
  Speaker 4: And those are the farmers that.
• 59:51
  Speaker 3: When you look at who are the people that are
• 59:54
  Speaker 3: going to grow, they're the ones that are using the
• 59:56
  Speaker 3: latest technology that'll do that.
• 59:57
  Speaker 2: And our final question before our favorite, what do you
• 1:00:00
  Speaker 2: think people don't understand or aren't talking about when it
• 1:00:05
  Speaker 2: comes to farmland as an investment.
• 1:00:09
  Speaker 3: Yeah, I think most people don't understand just the sophistication
• 1:00:12
  Speaker 3: of the farmers they're dealing with. When people say what's
• 1:00:15
  Speaker 3: going on in agriculture, they paint with a very broad brush.
• 1:00:18
  Speaker 3: And you wouldn't say that if you said what's going
• 1:00:21
  Speaker 3: on in accounting, Well, there's some great accountants and probably
• 1:00:23
  Speaker 3: some poor ones.
• 1:00:24
  Speaker 4: Or what's going on in.
• 1:00:25
  Speaker 3: Any industry, you have to look at who are the
• 1:00:28
  Speaker 3: people leading the way and that's who we try to
• 1:00:30
  Speaker 3: partner with because we think they will help us generate
• 1:00:33
  Speaker 3: the best returns. Whenever that Bloomberg Indiana Farmland Go exists,
• 1:00:38
  Speaker 3: it's going to be pretty fully priced.
• 1:00:39
  Speaker 4: I think it'll be much more efficient.
• 1:00:41
  Speaker 3: The inefficiency is still out there, and I think that's
• 1:00:45
  Speaker 3: what we're able to I won't say take advantage of,
• 1:00:48
  Speaker 3: but that's what we've been able to lever over time
• 1:00:50
  Speaker 3: is focusing on that inefficiency. There will be a lot
• 1:00:53
  Speaker 3: more money that comes in investing in farmland. We're seeing
• 1:00:56
  Speaker 3: crowd sourcing of farms. We're seeing more public rates that
• 1:00:59
  Speaker 3: are going to be launched, and that we'll be out there.
• 1:01:02
  Speaker 3: But I think it's a long way. When you think
• 1:01:04
  Speaker 3: of there's no cheap beta, there'll be a lot of
• 1:01:06
  Speaker 3: expensive beta out there. There are still alpha generators, and
• 1:01:10
  Speaker 3: this is NASA classic. You just have to go pick
• 1:01:11
  Speaker 3: a manager. You can't just say acid allocation helps us
• 1:01:14
  Speaker 3: and gets us there. You have to pick a manager.
• 1:01:16
  Speaker 2: There's no vanguard for a passive indexing fall.
• 1:01:20
  Speaker 4: Now, yeah, there's no wisdom try for that. Yeah.
• 1:01:22
  Speaker 2: Now all right, so let's jump to our favorite questions
• 1:01:25
  Speaker 2: we ask all our guests, starting with tell Us about
• 1:01:28
  Speaker 2: your mentors who helped shape your career.
• 1:01:31
  Speaker 3: Yeah, so I'll start with my parents, because they encouraged
• 1:01:36
  Speaker 3: all of us, on the six of us and our
• 1:01:38
  Speaker 3: family do something else.
• 1:01:39
  Speaker 4: We know this is.
• 1:01:40
  Speaker 2: Not not uncommon with farmers, right.
• 1:01:42
  Speaker 3: Yeah, And they both grew up on dairy farms, and
• 1:01:46
  Speaker 3: we grew up on my dad's family farm. And my
• 1:01:49
  Speaker 3: parents were both very well educated. You know, I'll remember
• 1:01:52
  Speaker 3: some of my best memories as a kid. We're having
• 1:01:54
  Speaker 3: dinner watching Jeopardy with them, and it was we always shocked.
• 1:01:58
  Speaker 4: How do they know all these ans ran the table exactly.
• 1:02:00
  Speaker 3: We were not very successful, but you know, our parents
• 1:02:03
  Speaker 3: were really focused on education and just doing you know,
• 1:02:07
  Speaker 3: something better. You know, we'll always have the family farm.
• 1:02:10
  Speaker 3: My mom still lives there today and it's great to
• 1:02:12
  Speaker 3: go back there. But you know, they really encouraged all
• 1:02:15
  Speaker 3: of us go do something else and gave us the opportunity.
• 1:02:17
  Speaker 3: There was no pressure for any of us to come
• 1:02:19
  Speaker 3: back to the farm. They actually said, I remember my
• 1:02:22
  Speaker 3: dad telling me the year you were born in the
• 1:02:24
  Speaker 3: year you graduated high school, the price of milk was
• 1:02:26
  Speaker 3: the same. This is not a long term strategy. So
• 1:02:31
  Speaker 3: and so, so I'll start with them. But you know,
• 1:02:34
  Speaker 3: I had some great folks I've worked with throughout my career.
• 1:02:38
  Speaker 3: Someone at Morgan Stanley that I think really made a
• 1:02:40
  Speaker 3: difference for me was Arthur lev who had come from
• 1:02:42
  Speaker 3: front Point. He was the head of chief legal officer
• 1:02:45
  Speaker 3: there and he was probably the biggest proponent of me
• 1:02:48
  Speaker 3: going to Cyrus.
• 1:02:49
  Speaker 4: He said, you have to do this, why would you not?
• 1:02:52
  Speaker 3: And I've worked with some great people that you know,
• 1:02:55
  Speaker 3: having been at Lehman Brothers, there's a lot of people
• 1:02:58
  Speaker 3: that got vaporized that I really respect it. And you
• 1:03:02
  Speaker 3: just think, Okay, if you're going to take a chance
• 1:03:03
  Speaker 3: on something, you got to do it. And seeing kind
• 1:03:07
  Speaker 3: of what's happened over time throughout my career, a lot
• 1:03:09
  Speaker 3: has occurred. You know, it's all shaped you in a
• 1:03:12
  Speaker 3: different way. And our founder, Perry Beeth, I mean I
• 1:03:15
  Speaker 3: think about this today and five years I'll be fifty two,
• 1:03:18
  Speaker 3: and that's when he started serious when he was fifty two,
• 1:03:21
  Speaker 3: and it was completely different than being the fixed income
• 1:03:24
  Speaker 3: money manager that he was. And you know, building a
• 1:03:27
  Speaker 3: great team I think is the best thing he did.
• 1:03:30
  Speaker 4: And the people that we've been able.
• 1:03:32
  Speaker 3: To hire over time, you know, I want to be
• 1:03:34
  Speaker 3: their mentor because I know they'll be better than me,
• 1:03:37
  Speaker 3: and that, to me has been the most important thing.
• 1:03:39
  Speaker 2: Really fascinating. Let's look about books. What are some of
• 1:03:42
  Speaker 2: your favorites.
• 1:03:42
  Speaker 4: What are you reading currently?
• 1:03:43
  Speaker 3: Yeah, so a book and I mentioned Water is just
• 1:03:46
  Speaker 3: such an important thing. A book that I read often.
• 1:03:48
  Speaker 3: It's called Water, The Epic Struggle for Power and Civilization,
• 1:03:52
  Speaker 3: and it really talks through It's a history book, but
• 1:03:54
  Speaker 3: it talks through the success of civilizations around their ability
• 1:03:57
  Speaker 3: to access clean water and their ability to treat dirty
• 1:04:01
  Speaker 3: water and get rid of it. And it's just a
• 1:04:03
  Speaker 3: fascinating story of kind of the growth throughout the world
• 1:04:09
  Speaker 3: population growth. But something I'm reading now that I just finished,
• 1:04:12
  Speaker 3: and it's because I'm on the board of my high school.
• 1:04:14
  Speaker 3: They just did away with cell phones and it's The
• 1:04:17
  Speaker 3: Anxious Generation, and it's really Yeah, it's an eye opening
• 1:04:22
  Speaker 3: book about social media and when people have their phones
• 1:04:26
  Speaker 3: just how it impacts their life. And so our Jesuit
• 1:04:29
  Speaker 3: High school did away with cell phones and I think
• 1:04:31
  Speaker 3: it's the greatest thing they could do.
• 1:04:32
  Speaker 2: There's a lot of that going on these days. More
• 1:04:34
  Speaker 2: and more school districts are are forcing them the kids
• 1:04:38
  Speaker 2: to put schools and phones and lockers.
• 1:04:40
  Speaker 3: Yeah, they should do that. I mean, we have to
• 1:04:42
  Speaker 3: get them out of our house, the iPads and stuff.
• 1:04:44
  Speaker 3: That's a bigger battle to get through. But yeah, it's
• 1:04:48
  Speaker 3: something that's just eye opening.
• 1:04:49
  Speaker 2: Let's talk about streaming. What are you listening to or
• 1:04:52
  Speaker 2: watching on Netflix or Amazon Prime? Well?
• 1:04:55
  Speaker 3: I have a lot of windshield time, so I listened
• 1:04:57
  Speaker 3: to a lot of podcasts, so you know, Investige the
• 1:05:00
  Speaker 3: best obviously, you know Med Faber, Jeremy Schwartz, Pirvorite Holts.
• 1:05:06
  Speaker 3: I listen to a lot of business podcasts. I also
• 1:05:08
  Speaker 3: love sports, so I listen to a lot of Ringer
• 1:05:10
  Speaker 3: podcasts too around sports and entertainment. On the streaming side,
• 1:05:15
  Speaker 3: you know, I rewatch The Wire every year. It is
• 1:05:18
  Speaker 3: just my favorite show ever, and so I do that
• 1:05:21
  Speaker 3: every year. I'm now watching Severance, which is an interesting
• 1:05:25
  Speaker 3: I'm not all the way done with the three seasons yet,
• 1:05:28
  Speaker 3: so it takes.
• 1:05:29
  Speaker 2: A couple of severe turns that are like where did
• 1:05:32
  Speaker 2: that come from?
• 1:05:33
  Speaker 4: Yeah? I can imagine, but.
• 1:05:34
  Speaker 2: The whole concept is kind of fascinating.
• 1:05:36
  Speaker 4: Yeah, exactly.
• 1:05:37
  Speaker 2: Final two questions, what sort of advice would you give
• 1:05:41
  Speaker 2: to a recent college grad interest in the career in
• 1:05:45
  Speaker 2: either investing alternatives or farmland investing.
• 1:05:50
  Speaker 3: Yeah, I think back to you know, building the network
• 1:05:54
  Speaker 3: is probably the most important thing you can ever do,
• 1:05:57
  Speaker 3: because there's there's so many people that are good at
• 1:06:00
  Speaker 3: Whatever you think you're good at, there's someone that's better
• 1:06:01
  Speaker 3: at it, for sure, whether it's modeling, you know, thinking
• 1:06:05
  Speaker 3: about investing, whatever it may be, someone's always better. So
• 1:06:09
  Speaker 3: to me, building that network, and you can't be full
• 1:06:13
  Speaker 3: of it, like you have to be genuine when you
• 1:06:15
  Speaker 3: when you're talking to people. But I think that's been
• 1:06:17
  Speaker 3: the best thing I've ever done, and that's the thing
• 1:06:19
  Speaker 3: I can and that's why I take a lot of time.
• 1:06:22
  Speaker 3: I mean, we get a lot of people that reach
• 1:06:24
  Speaker 3: out to us with all types of questions. And all
• 1:06:27
  Speaker 3: of the portfolio managers on our team grew up on
• 1:06:30
  Speaker 3: family farms. They all went and worked in finance. And
• 1:06:32
  Speaker 3: there's probably a lot of Wall Street people, not per capita,
• 1:06:35
  Speaker 3: but generally a lot of Wall Street people that grew
• 1:06:38
  Speaker 3: up on farms and had this great foundation of hard
• 1:06:42
  Speaker 3: work and then they figured we'll just I'll never be
• 1:06:44
  Speaker 3: able to use that again for the rest of my life.
• 1:06:47
  Speaker 3: So I think being able to build up your network
• 1:06:49
  Speaker 3: because sometimes you can pull on a thread and you
• 1:06:52
  Speaker 3: won't know where it'll go. And so that's what you know,
• 1:06:55
  Speaker 3: that idea of talking to someone at an endowment to say,
• 1:06:59
  Speaker 3: you know, kind of do a reference check for these
• 1:07:01
  Speaker 3: people I'm talking to, and they just said, well, you
• 1:07:03
  Speaker 3: should talk to this other person instead, And you just
• 1:07:05
  Speaker 3: never know what paths are going to go down to leverage.
• 1:07:09
  Speaker 2: That really really interesting. Our final question, what do you
• 1:07:12
  Speaker 2: know about the world of farmland investing today that might
• 1:07:16
  Speaker 2: have been useful fifteen years ago or so when you
• 1:07:19
  Speaker 2: were first diving into the space.
• 1:07:22
  Speaker 3: Yeah, I think when I think about it now, there
• 1:07:25
  Speaker 3: are very few farms we missed on that I wouldn't
• 1:07:27
  Speaker 3: love to own today. And you know, being able to
• 1:07:30
  Speaker 3: look back in the rear of your mirror and say
• 1:07:32
  Speaker 3: that would have been a great purchase.
• 1:07:35
  Speaker 4: You know, that's always interesting.
• 1:07:37
  Speaker 2: Is the regrets more the things you did and shouldn't
• 1:07:40
  Speaker 2: have or but the thing or the things you missed
• 1:07:43
  Speaker 2: and wish you did.
• 1:07:44
  Speaker 3: No, it's the things we missed that we wish we
• 1:07:46
  Speaker 3: had done. But today we're in a position that we
• 1:07:48
  Speaker 3: use no leverage when buying properties. They're all cash purchases.
• 1:07:52
  Speaker 3: You know, you can never say your bulletproof, but we
• 1:07:54
  Speaker 3: have a great balance sheet. But over time, we were
• 1:07:58
  Speaker 3: we were still doing missionary work in terms of telling people,
• 1:08:00
  Speaker 3: this is a real asset class. So we were using
• 1:08:03
  Speaker 3: leverage to purchase properties just when we didn't have new
• 1:08:05
  Speaker 3: money coming in. So we've always been very conservative, and
• 1:08:09
  Speaker 3: in farmland, leverage is a different beast.
• 1:08:11
  Speaker 4: You know, you can't buy.
• 1:08:12
  Speaker 2: It not twenty x.
• 1:08:13
  Speaker 3: No, you can't buy a farm with five percent down.
• 1:08:15
  Speaker 3: You need fifty or sixty percent down to buy a
• 1:08:17
  Speaker 3: f So it's.
• 1:08:18
  Speaker 2: Hodest leverage and unless there's a disaster.
• 1:08:21
  Speaker 4: Yeah, and it's all fixed straight mortgage debt.
• 1:08:24
  Speaker 3: But we were just always very conservative, and I think
• 1:08:27
  Speaker 3: some of that conservatism now you'd say, well, maybe that
• 1:08:29
  Speaker 3: was overly conservative, but you know, we also didn't get burned.
• 1:08:34
  Speaker 3: And you don't move from thirty million to two billion
• 1:08:36
  Speaker 3: by being overly aggressive, or you don't do it all
• 1:08:38
  Speaker 3: at once, you have to do it over time, and
• 1:08:41
  Speaker 3: that's kind of how what we've focused on.
• 1:08:43
  Speaker 2: Brandon, this was absolutely fascinating. We have been speaking with
• 1:08:47
  Speaker 2: Brandon Zick. He is the chief investment officer of Sarah's
• 1:08:51
  Speaker 2: funds now owned by the time you're seeing this by
• 1:08:55
  Speaker 2: Wisdom Tree Asset Management. If you enjoy this conversation, well,
• 1:09:00
  Speaker 2: be sure and check out any of the five hundred
• 1:09:02
  Speaker 2: and sixty nine episodes we've done previously over the past
• 1:09:06
  Speaker 2: eleven years. You can find those at Bloomberg, iTunes, Spotify,
• 1:09:10
  Speaker 2: and here at YouTube. Be sure and check out my
• 1:09:14
  Speaker 2: new book How Not to Invest The ideas, numbers, and
• 1:09:19
  Speaker 2: behaviors that destroy wealth and how to avoid them How
• 1:09:22
  Speaker 2: Not to Invest at your favorite bookseller. I would be remissified,
• 1:09:26
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• 1:09:29
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• 1:09:33
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  Speaker 2: Barry Ridholtz. You've been listening to Masters in Business on
• 1:09:45
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