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At The Money: Monetizing Dirt · Masters in Business

• 0:02
  Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Here's to the farmer,
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  Speaker 1: the plants, the funerals, and the spring, the turn from
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  Speaker 1: the green to that harvest honey.
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  Speaker 2: Hold on all the banker downtown with the guide in
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  Speaker 2: mon Steed, with handshake the money.
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  Speaker 1: Have you ever thought about what makes land valuable? It's
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  Speaker 1: much more than just a place to build a house
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  Speaker 1: or commercial building or place a farm. Real assets have
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  Speaker 1: become increasingly popular, accessed through alternatives like private equity funds.
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  Speaker 1: I'm Barry ritholtzs and on today's edition of At the Money,
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  Speaker 1: I'm going to discuss alternative land rights investing. To help
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  Speaker 1: us unpack all of this and what it might mean
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  Speaker 1: for your portfolio. Let's bring in Brandon Zick. He's the
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  Speaker 1: chief investment officer at Sarah's Farmland Fund, managing about two
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  Speaker 1: billion dollars in AG assets. Saras not only looks at farmland,
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  Speaker 1: but a slew of additional rights that can help monetize dirt,
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  Speaker 1: as Brandon likes to say. Sarah's was recently purchased by
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  Speaker 1: Wisdom Tree Investing and full disclosure, I'm also an investor
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  Speaker 1: in Sarah's through my own personal investing So, Brandon, you've
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  Speaker 1: been investing in and around farmland for decades. You grew
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  Speaker 1: up on a farm. What makes this kind of land
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  Speaker 1: a compelling real asset?
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  Speaker 2: Well, thanks, Barry. I think when you look at farmland,
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  Speaker 2: one of the things that's so interesting is just what
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  Speaker 2: are the optionality buckets that come with land. So when
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  Speaker 2: we buy farms, generally we're thinking of this is going
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  Speaker 2: to be a farm for the long term. But when
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  Speaker 2: you own the real estate, when you own the dirt,
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  Speaker 2: you have a lot of optionality. Starting with mineral rights.
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  Speaker 2: That's something that on the family farm I grew up
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  Speaker 2: at Northeastern Pennsylvania, no one knew what Marcella a shale was.
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  Speaker 2: But over time there's been a tremendous amount of value
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  Speaker 2: created through those mineral rights, well above the farmland value.
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  Speaker 2: And when you think about other things that when you
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  Speaker 2: buy a farm, in many cases there's timber on the
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  Speaker 2: property that could be harvested selectively over time. There are
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  Speaker 2: you know, opportunities to lease outland for hunting and other
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  Speaker 2: sorts of recreation to generate revenue. And then you start
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  Speaker 2: thinking about other optionality that can come to.
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  Speaker 1: Well, before we go to other optionality, let's spend the
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  Speaker 1: little time with each of those. So when you say
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  Speaker 1: mineral rights and you're referring to Marcella shale, which is
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  Speaker 1: natural gas made accessible by fracking, you're not giving up
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  Speaker 1: the farm. Because of the fracking technology, those natural gas
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  Speaker 1: companies and oil companies can access that from a single
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  Speaker 1: point in the corner of the farm without disrupting the
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  Speaker 1: farm land. And they could go literally miles down to
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  Speaker 1: access how signa in how valuable are those natural gas leases?
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  Speaker 2: Yeah, so it depends on the area specifically. But yeah,
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  Speaker 2: the great thing is that you're not strip mining a property.
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  Speaker 2: To your point, you can access it from a corner
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  Speaker 2: of the property or even lease it without any service
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  Speaker 2: intrusion on your property. They have to access it from
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  Speaker 2: a neighbor's property who would allow that. And then in
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  Speaker 2: the Marcella's shale region, you had land that probably would
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  Speaker 2: have transacted almost any acre for fifteen hundred to two
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  Speaker 2: thousand dollars an acre and then it was generating four
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  Speaker 2: or five thousand dollars per acre and revenue per year.
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  Speaker 1: Wow, so it's a lot.
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  Speaker 2: So that's completely changed. So even with within our portfolio,
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  Speaker 2: you don't see any farms purchased in Pennsylvania because of
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  Speaker 2: the Marcellus and Utica shale, there's so much cash flowing
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  Speaker 2: around that land just isn't available at an attractive price
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  Speaker 2: from a farmland investment.
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  Speaker 1: Let me ask you a naive question about this. How
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  Speaker 1: do I, as a farmer maintain my mineral rights if
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  Speaker 1: the adjacent farm is sucking the natural gas out of
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  Speaker 1: the ground, doesn't mind natural gas then flow into that vacuum.
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  Speaker 1: How do you manage around that?
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  Speaker 2: Yeah, so they try to put them together into units
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  Speaker 2: so that that doesn't happen. And there are rules around
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  Speaker 2: what you can and can't do, especially with these as
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  Speaker 2: opposed to vertical wells that would be on one property,
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  Speaker 2: and depending on where it was on the property, you
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  Speaker 2: might actually be extracting from the neighbors without paying them.
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  Speaker 2: With these horizontal wells to go underneath, there are requirements
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  Speaker 2: that you have to be paid. You do see an
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  Speaker 2: interesting dynamic in Pennsylvania and New York where it's not
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  Speaker 2: allowed in New York State, but if you own a
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  Speaker 2: farm on the Pennsylvania side of the highway there that
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  Speaker 2: you're definitely generating a lot of revenue. And there could
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  Speaker 2: be an argument that maybe some of that's coming from
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  Speaker 2: across the way, but that's where regulation probably doesn't really
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  Speaker 2: meet up with the reality.
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  Speaker 1: So let's talk about some other sorts of leases that
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  Speaker 1: farmland can generate revenue from. You mentioned hunting. What do
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  Speaker 1: you put up a gate and charge people on the
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  Speaker 1: way in? How do you charge fees for hunters and
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  Speaker 1: other recreational users if you own a couple hundred or
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  Speaker 1: a couple of thousand acres of prime land?
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  Speaker 2: Yeah, so usually typically it's in the off season when
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  Speaker 2: the crops are off the field. But hunting in the
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  Speaker 2: Northeast and the Midwest is something that I didn't grow
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  Speaker 2: up doing, but you know, it's a way of life
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  Speaker 2: for a lot of people. And everyone wants to have
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  Speaker 2: a specific place that they can go to to hunt,
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  Speaker 2: their own land, a private place to hunt. And if
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  Speaker 2: you don't own land, that comes through the rental market,
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  Speaker 2: and there is a robust rental market. When you drive
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  Speaker 2: through rural areas, you'll see posted signs on trees saying
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  Speaker 2: this is like you're not allowed no trespassing. Typically it's
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  Speaker 2: landowners or hunters who are paying for those rights who
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  Speaker 2: are posting that. And yeah, we go through third parties
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  Speaker 2: that will require insurance. There's a lease being paid, and
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  Speaker 2: once someone's paying and paying for the insurance, they're enforcing
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  Speaker 2: the boundaries such that we don't have to which is great.
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  Speaker 1: Let's talk about other leases renewable energy. I know you
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  Speaker 1: guys are big with wind turbines. The President may not
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  Speaker 1: love those, but farmers sure hacks seem to like it.
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  Speaker 1: What are the economics of putting up a wind turbine
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  Speaker 1: on a farm?
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  Speaker 2: So wind has been around now for quite a while.
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  Speaker 2: You've seen thirty years worth of wind farm construction, and
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  Speaker 2: it's very incremental in nature to the farm, but it
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  Speaker 2: could add anywhere from twenty to forty or fifty basis
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  Speaker 2: points of income depending on the property, which and it
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  Speaker 2: takes up a very small footprint.
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  Speaker 1: So you're still farming. You just have a couple of
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  Speaker 1: big turbines in the corner.
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  Speaker 2: That's exactly true. So you know, I think when people
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  Speaker 2: started doing it, they thought, well, this is essentially free
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  Speaker 2: money as long as you're fine with looking at wind turbines,
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  Speaker 2: which some people like, some people don't. But it was
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  Speaker 2: incremental and it was meaningful enough to farmers because they
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  Speaker 2: were still farming those properties. The thought process around that
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  Speaker 2: has changed a little bit. They're much more difficult to
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  Speaker 2: permit now because not only do they take up a
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  Speaker 2: huge footprint, A large wind farm could take up a
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  Speaker 2: very large footprint, so anywhere from twenty to thirty thousand acres.
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  Speaker 2: There's a lot of neighbors involved there, and there's also
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  Speaker 2: people who fight those wind farms on behalf of migratory birds.
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  Speaker 2: So I think they're much more difficult to permit now.
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  Speaker 2: What you tend to see on the solar side, which
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  Speaker 2: is significantly different, is much higher impact on the land,
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  Speaker 2: So they're taking up the majority of the footprint, so
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  Speaker 2: you're not continuing the farm, so the revenue has to
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  Speaker 2: be not just incremental, has to replace the farm income
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  Speaker 2: and be transformational. So what you tend to see on
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  Speaker 2: the solar side is revenue that could be anywhere from
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  Speaker 2: three to five times the total return of farmland plus wind,
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  Speaker 2: so it's much more meaningful, and you can also do
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  Speaker 2: it on a much smaller footprint. So whereas you might
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  Speaker 2: need those twenty or thirty thousand acres for wind for solar,
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  Speaker 2: you can do it on fifteen hundred to twenty five
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  Speaker 2: hundred acres, so many fewer neighbors, maybe just one landowner.
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  Speaker 1: Huh really really interesting? Another naive question migratory birds and
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  Speaker 1: wind turbines. How hard would it be to embed you're
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  Speaker 1: generating electricity, to embed some form of light, even something
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  Speaker 1: in a range that's specific to birds that maybe doesn't
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  Speaker 1: disturb humans or planes, or even just put a little
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  Speaker 1: high frequency sound c you know, you're spinning these blades
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  Speaker 1: through the air. Should be interested easy to generate some
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  Speaker 1: sort of noise, and I know there are lots of
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  Speaker 1: frequencies that don't disturb humans. The dogs aren't gonna like it.
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  Speaker 1: But is that really that difficult of a problem to solve.
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  Speaker 2: It seems like it hasn't been solved yet, so someone
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  Speaker 2: might be on it. But this could be an idea
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  Speaker 2: for you.
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  Speaker 1: That's my gift to the wind farming and land owning community.
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  Speaker 1: Just put a couple of reflectors up on the edge
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  Speaker 1: of the blades and the birds will be able to
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  Speaker 1: be able to see it. So we've talked about solar,
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  Speaker 1: we've talked about winds. What about projects like biogas? Is
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  Speaker 1: that a significant source of potential revenue.
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  Speaker 2: As a landowner? Maybe not as much, but we have
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  Speaker 2: farm tenants that own dairy farms that they have anaerobic
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  Speaker 2: digestors that are great for them. They can use some
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  Speaker 2: of the waste product from the cows and turn it
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  Speaker 2: into green energy, so that's and sell it back into
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  Speaker 2: the grid. So that's something we've seen a lot of
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  Speaker 2: in states like Wisconsin, Ohio, Michigan, New York State. And
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  Speaker 2: I think that'll continue to grow because it seems like
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  Speaker 2: the dairy industry is continuing to grow. More cows means
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  Speaker 2: more opportunity.
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  Speaker 1: And this is a very heavy protein cycle of how
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  Speaker 1: people are consuming food, less sugar and carbs, a whole
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  Speaker 1: lot more protein, or at least that's what it seems like.
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  Speaker 1: You mentioned timber. I know that there's a very specific
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  Speaker 1: form of agricultural husbandry with harvesting trees, planting. It's a
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  Speaker 1: very long term process. You're thinking in cycles of ten, fifteen,
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  Speaker 1: twenty years. How significant is timber.
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  Speaker 2: So, timber is a huge asset class, specifically you know
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  Speaker 2: in parts of Canada, northern Michigan and then in the southeast.
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  Speaker 2: It's huge in terms of hardwoods and pulp woods that's
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  Speaker 2: been in an institutional asset class or investment class for
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  Speaker 2: a long time now. And you tend to see these
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  Speaker 2: really large owners owning hundreds and hundreds of thousands of
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  Speaker 2: acres selling to those very large end users. So that
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  Speaker 2: is a little bit of a different beast, and it's
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  Speaker 2: a very well developed investment structure where you tend to
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  Speaker 2: see maybe a little more nuances around some of the
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  Speaker 2: very high value hardwoods, so black walnuts and things like that.
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  Speaker 2: But that's something that I don't think is really scalable
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  Speaker 2: the way that some of the large timber investments currently are.
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  Speaker 1: What about various conservation programs and things like carbon credits,
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  Speaker 1: how significant are those?
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  Speaker 2: Yeah, So, I mean there was a lot of noise
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  Speaker 2: around carbon sea questration and credits associated with that maybe
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  Speaker 2: two or three years ago, and we took a hard
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  Speaker 2: look at it because we own so much real estate
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  Speaker 2: and the idea of regenerative ag being great for the
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  Speaker 2: land and being able to benefit from that with a
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  Speaker 2: payment cycle was very interesting to us. What we found
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  Speaker 2: was the strings attached, and in many cases farmers were
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  Speaker 2: already doing a lot of these practices. The people that
• 11:26
  Speaker 2: we worked with, they were already using cover crops. The
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  Speaker 2: question is can you get paid for that in a
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  Speaker 2: way that doesn't attach strings that jeopardize things later on.
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  Speaker 1: What are cover crops.
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  Speaker 2: Cover crops would be so once your crop is harvested,
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  Speaker 2: you're planting a second crop there to prevent erosion, to
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  Speaker 2: maintain nutrients in the soil. So winter wheat. When people
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  Speaker 2: plant wheat, generally that is a cover crop that they're
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  Speaker 2: deciding in the spring. Did it winter over well enough
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  Speaker 2: that they're going to harvest it or are they going
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  Speaker 2: to just leave it there and then eventually kill it
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  Speaker 2: and plant another crop into it. But it helps prevent erosion.
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  Speaker 2: Soil erosion helps maintain nutrients and moisture in the soil.
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  Speaker 2: So cover cropping is a great form of regenerative egg
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  Speaker 2: or sustainable agriculture that's been around for a long time.
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  Speaker 1: And if they don't harvest it. And we talked to
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  Speaker 1: earlier about some of the shows I watched, like Clarkson's
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  Speaker 1: Farm and Harry's Farm, they just essentially run the combine
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  Speaker 1: through a ShredIt and then.
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  Speaker 2: Yeah, they can till it under put it right in there, and.
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  Speaker 1: That becomes a resource for the next crop.
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  Speaker 2: Yeah, exactly, more nutrients in the soil. So when we
• 12:34
  Speaker 2: looked at those carbon credits, we thought, well, the land
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  Speaker 2: is the only means of production for generating this credit,
• 12:41
  Speaker 2: the landowner and the farmer should probably get a bigger
• 12:43
  Speaker 2: portion of the credit than the person who's transacting, and
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  Speaker 2: in a typical Wall street where that's not how it works.
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  Speaker 2: So we have not been a big mover on the
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  Speaker 2: carbon sequestration side because we don't think it's a real
• 12:56
  Speaker 2: benefit to landowners financially. Now maybe from an agronomy standpoint,
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  Speaker 2: but if they're doing it anyway, you don't need to
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  Speaker 2: sign a contract. So as we think about that, you know,
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  Speaker 2: conservation in terms of payments, you need a special structure
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  Speaker 2: to really benefit from that. There are folks that sell
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  Speaker 2: conservation easements. That's not something we do, but there is
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  Speaker 2: a group around that. One of the things that we've
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  Speaker 2: taken a harder look at is wetlands banking because when
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  Speaker 2: there's development going on, specifically in the Midwest, a lot
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  Speaker 2: of industrial development, Departments of transportation, as they expand highways,
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  Speaker 2: there's always wetlands to mitigate. So there are a number
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  Speaker 2: of developed markets for creating a wetlands bank and then
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  Speaker 2: selling credits into that for development, and that's something we've
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  Speaker 2: been taking a hard look at. In states like Michigan,
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  Speaker 2: and Wisconsin.
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  Speaker 1: Huh. Really interesting. Let's talk about the use case for farmland.
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  Speaker 1: That is the single biggest shocker to me. Artificial intelligence.
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  Speaker 1: What's going on with these big data centers that seem
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  Speaker 1: to be popping up everywhere.
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  Speaker 2: Yeah, I mean they seem to really be targeting areas
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  Speaker 2: with great power resources and capacity on the grid on
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  Speaker 2: the electric side, natural gas lines or natural gas fired
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  Speaker 2: power plants close by, fiber optic networks that are close by,
• 14:14
  Speaker 2: and then access to water for cooling, whether it's groundwater
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  Speaker 2: or otherwise. And it seems like in the Midwest there's
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  Speaker 2: been a huge push into this. So the old rust
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  Speaker 2: belt is done and there's new manufacturing coming in, and
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  Speaker 2: data centers seem to be the highest value that's being built.
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  Speaker 2: And it's being built at scale by a number of
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  Speaker 2: different players out there now. And it just seems as
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  Speaker 2: though land that you might have said ten years ago,
• 14:40
  Speaker 2: well that was not the best land because it has
• 14:42
  Speaker 2: a transmission line running through it. Now that's like being
• 14:45
  Speaker 2: right next to the exit on the interstate. It's a
• 14:48
  Speaker 2: huge bonus for that land.
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  Speaker 1: And when you say big players, I'm thinking Microsoft, Google, Amazon,
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  Speaker 1: who are the big players in this space?
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  Speaker 2: Yeah, those are the groups as well as meta that
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  Speaker 2: they have a seems like a real thirst for these
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  Speaker 2: single user data centers, and they tend to target the places.
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  Speaker 2: Those groups tend to target the places that are the
• 15:07
  Speaker 2: most attractive, and they're the most aggressive and trying to
• 15:10
  Speaker 2: put them under contract. Even where we're based in South Bend, Indiana,
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  Speaker 2: there's two very large data center projects going on now,
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  Speaker 2: one by Amazon one by Microsoft that are transforming the area,
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  Speaker 2: and I don't think they'll be the last ones.
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  Speaker 1: So there are a variety of different land use options
• 15:26
  Speaker 1: that can either generate revenue or drive appreciation. Did I
• 15:30
  Speaker 1: forget any do we miss anything? Those are a lot
• 15:32
  Speaker 1: of different things.
• 15:33
  Speaker 2: Yeah, those are the big ones. And traditional manufacturing distribution centers.
• 15:38
  Speaker 2: These are things that have been happening at least in
• 15:40
  Speaker 2: the Midwest now for generations and it just continues so
• 15:44
  Speaker 2: the more that the economy continues to grow. That's one
• 15:48
  Speaker 2: area where maybe farmland is a little more levered to
• 15:50
  Speaker 2: the economy for some of these non farm uses because
• 15:53
  Speaker 2: of that, and these tend to be multiples of anywhere
• 15:56
  Speaker 2: from five to ten to twenty x farmland value, so
• 16:00
  Speaker 2: it can be very meaningful in the market.
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  Speaker 1: So to wrap up, there are a number of things
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  Speaker 1: that make land valuable. Sure, it's a place to build
• 16:09
  Speaker 1: a house or a commercial building, or to farm to
• 16:12
  Speaker 1: grow crops, but real assets have become increasingly valuable due
• 16:17
  Speaker 1: to things like water rights, solar winds, mineral rights, and
• 16:23
  Speaker 1: now artificial intelligence data centers. It's a fascinating development and
• 16:28
  Speaker 1: they ain't making any more land, so this is likely
• 16:31
  Speaker 1: to keep staying popular in the future. I'm Barry Ritolts.
• 16:35
  Speaker 1: You've been listening to At the Money on Bloomberg Radio
• 16:40
  Speaker 2: Farmable