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At The Money: Farmland Investing · Masters in Business

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  Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
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  Speaker 2: As ascus.
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  Speaker 1: Have you ever thought about investing in farmland? Real assets
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  Speaker 1: have become increasingly popular, primarily accessed through alternative investments like
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  Speaker 1: private equity funds. Farmland has seen broad non correlated gains,
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  Speaker 1: and they show little signs of slowing down. After all,
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  Speaker 1: they ain't making any more land. I'm Barry Ritcholts, and
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  Speaker 1: on today's edition of At the Money, we're gonna discuss
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  Speaker 1: investing in farmland. To help us unpack all of this
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  Speaker 1: and what it means for your portfolio, let's speak with
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  Speaker 1: Brandon Zick. He's chief investment officer of Sarah's Farmland Fund,
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  Speaker 1: managing about two billion dollars in ag assets. By the
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  Speaker 1: time you hear this, Sarah's will have closed their sale
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  Speaker 1: to Wisdom Tree, where they're going to continue operating as
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  Speaker 1: an independent agriculture investing firms. And full disclosure, I'm also
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  Speaker 1: an investor in Sara's through my own personal investing. So Brandon,
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  Speaker 1: let's just start with a basic question. What makes farmland
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  Speaker 1: a compelling addition to any investment portfolio compared to other
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  Speaker 1: real estate assets?
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  Speaker 3: Thanks Barry and Farmland, it provides a lot of a
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  Speaker 3: lot of different things that help in a portfolio. So
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  Speaker 3: Parmerlan will generate a good amount of income. It's positively
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  Speaker 3: correlated with inflation, and it's also non correlated with other
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  Speaker 3: things in your portfolio and becomes a diversifier, and it's
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  Speaker 3: a capital appreciating asset. It's not a depreciation play.
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  Speaker 1: So yield capital appreciation and an inflation hedge.
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  Speaker 3: That's correct. Yeah, and that's why investors have been investing
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  Speaker 3: in farm land for a long time. But it's now
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  Speaker 3: becoming more broad based to the public markets.
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  Speaker 1: So let's talk about that historical pattern. If there's rent
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  Speaker 1: and yields, is this potentially a fixed income substitute? Do
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  Speaker 1: dividends get paid out to investors?
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  Speaker 3: Yeah, that's the way that a lot of people look
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  Speaker 3: at it. It's the annual income could be paid off
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  Speaker 3: as a dividend. So you do see some public rates
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  Speaker 3: and private rates that are structured that way that would
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  Speaker 3: force that dividend out. But you can also just continue
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  Speaker 3: to reinvest as well, and you have that capital appreciation.
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  Speaker 3: And if you think back over the last seventy years
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  Speaker 3: and look at data from the Chicago Fed, you'll see
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  Speaker 3: that long term appreciations averaged about six percent annualized, and
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  Speaker 3: the components of that are really just inflation plus gains
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  Speaker 3: and productivity. So because farms these are living beasts where
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  Speaker 3: they're actually growing crops every year, and improvements and technology
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  Speaker 3: can help crop yields and increase the bottom line, you
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  Speaker 3: see a number of those benefits fall to the landowner.
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  Speaker 1: So you guys have scaled up to two billion dollars
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  Speaker 1: in farmland investing. How do you identify and source attractive
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  Speaker 1: farmland opportunities? What's the current market like?
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  Speaker 3: Yeah, so there's a number of ways to buy farms.
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  Speaker 3: So there are public auctions that exist. They're very localized
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  Speaker 3: and will attend two to three hundred of those a year,
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  Speaker 3: but the majority of farmland is done through private transactions.
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  Speaker 3: And these aren't listings. You don't see for sale signs
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  Speaker 3: on farms.
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  Speaker 1: If there's no there's no Zillo for agriculture.
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  Speaker 3: No, not yet, at least there are people trying to
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  Speaker 3: do something like that. But there are there are ways
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  Speaker 3: to source farms kind of off market, and we do
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  Speaker 3: all of that through our farm tenant network. So we're
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  Speaker 3: not even though I grew up on a family farm,
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  Speaker 3: we're not operating the farms ourselves. We're renting the properties
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  Speaker 3: to active family farmers. All of those farmers own ground.
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  Speaker 3: They rent land from US, but they rent a real
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  Speaker 3: a large preponderance of their acres from other people, and
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  Speaker 3: those other people are usually not institutional investors. They're a
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  Speaker 3: states trust, non farming airs, people that after two or
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  Speaker 3: three generations they will likely sell the land, and so
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  Speaker 3: we use our tenant network or our farmer network to
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  Speaker 3: try to source some of those opportunities privately.
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  Speaker 1: And you guys mostly invest in the US. What regions
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  Speaker 1: or sectors do you find most attractive.
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  Speaker 3: Yeah, we're the US only. Our mandate is really anywhere.
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  Speaker 3: We invest in twelve states, but about two thirds of
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  Speaker 3: our acres are located in Indiana and Michigan, and almost
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  Speaker 3: ninety percent of our acres are in the Great Lakes States,
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  Speaker 3: So add in Illinois, Wisconsin, Kentucky, Ohio, and western New York.
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  Speaker 3: We think that's our sweet spot because there's a fantastic
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  Speaker 3: market for rental with farmers. It's highly competitive, it's very
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  Speaker 3: high quality soils, which are great for growing crops. We
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  Speaker 3: also have a lot of water resources, both underground and
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  Speaker 3: it rains. When you're trying to grow a crop and
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  Speaker 3: these are commodities, so low cost producer wins and being
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  Speaker 3: closer to the population centers of the East Coast and
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  Speaker 3: where all of these crops generally move is a huge
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  Speaker 3: benefit as well.
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  Speaker 1: You mentioned inflation earlier. How does inflation and just general
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  Speaker 1: macroeconomic trends affect farmland values and investor interests.
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  Speaker 3: Farmland is positively correlated with inflation, and that comes from
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  Speaker 3: in a few different ways. So you know, clearly crop
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  Speaker 3: prices can increase, and you know that's one of the
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  Speaker 3: bigger things that can help drive revenue on farms is
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  Speaker 3: increase in crop prices crop yields. But over time, you know,
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  Speaker 3: farmland has a number of different uses, so whether it's
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  Speaker 3: for development or other types of things on top of
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  Speaker 3: just your typical farmland, you'll see that increase value over time.
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  Speaker 3: So even with a booming economy, you can see farmland
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  Speaker 3: values increasing as well, even if the actual agg production
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  Speaker 3: on that farm is not increasing.
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  Speaker 1: So let's talk about those other opportunities briefly. Mineral rights easements.
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  Speaker 1: You mentioned hunting when we were chatting about this earlier.
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  Speaker 1: Even data Warehouse and AI they're looking for property in
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  Speaker 1: those spaces. How significant add on, so those to basic
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  Speaker 1: value of farms.
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  Speaker 3: Yeah, so there's really two different groups. I would put
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  Speaker 3: that in. You can have some of the ancillary income,
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  Speaker 3: so like harvesting select timber on farms. Typically when you're
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  Speaker 3: buying a property, it's not one hundred percent tillable, and
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  Speaker 3: even during even if it were to be one hundred
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  Speaker 3: percent tillable and growing crops, there are off seasons and
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  Speaker 3: you want to continue to manage those properties. So we
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  Speaker 3: lease out farms for hunting, We harvest select timber. We
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  Speaker 3: like oil and gas rights or other types of minerals
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  Speaker 3: that can be incremental. We've had wind turbines on properties
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  Speaker 3: and those are all kind of incremental to your farm value.
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  Speaker 3: Then there are other things like solar where you're taking
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  Speaker 3: the majority of the farm to convert it. And in
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  Speaker 3: that case you may have a thirty year lease inflation
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  Speaker 3: hedged of course, but the income is going to be
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  Speaker 3: anywhere from three to five times the farm income. Wow,
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  Speaker 3: so you could be generating fifteen to twenty percent a
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  Speaker 3: year in gross income off of your over your cost
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  Speaker 3: basis for solar. For solar, and then there are other
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  Speaker 3: opportunities when you own real estate, when you own dirt.
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  Speaker 3: There's optionalities to your point, around concert or around easements.
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  Speaker 3: So easements can be conservation easements, which we don't really
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  Speaker 3: do much of, but they can also be easements for
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  Speaker 3: running fiber, for running power, and there's a lot of
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  Speaker 3: natural gas. There's a lot of opportunity there, and then
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  Speaker 3: you can see for manufacturing. You can sell properties for
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  Speaker 3: that for multiples of farmland value. And now in the
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  Speaker 3: Midwest we're seeing a huge demand for data center development
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  Speaker 3: and that's anywhere from eight to twenty times farmland value.
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  Speaker 3: Because when they identify a site that has great power resources,
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  Speaker 3: great water, hopefully few neighbors has fiber. There there's a
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  Speaker 3: lot of ways to be able to, you know, build
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  Speaker 3: these things that then you know they're going to be
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  Speaker 3: willing to pay a strong price.
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  Speaker 1: And this administration has been urging the owners of these
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  Speaker 1: or builders of these to focus in the US. They're
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  Speaker 1: not comfortable with the servers overseas, even if it's cheaper
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  Speaker 1: to operate.
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  Speaker 3: That's definitely an issue that's out there, and you really
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  Speaker 3: need to be within the US and areas where there's
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  Speaker 3: capacity on the grid. You certainly need favorable or favorable
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  Speaker 3: government and all these areas to be able to do
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  Speaker 3: it as well, and you will see a saturation in
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  Speaker 3: certain spots that then they have to move to others.
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  Speaker 3: So some of the largest data center campuses in the
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  Speaker 3: US are outside of Chicago and Columbus, Ohio. You don't
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  Speaker 3: see much new development going on there because of lack
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  Speaker 3: of power over saturation. So we're seeing much more demand
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  Speaker 3: in places where we have a big footprint, like Indiana, Michigan,
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  Speaker 3: parts of Kentucky, parts of upstate New York.
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  Speaker 1: So what are the risks unique to farmland investing? How
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  Speaker 1: much of this is climate change and weather, water access
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  Speaker 1: and just government relation and nimbiism. What do you have
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  Speaker 1: to think about when you're considering risky business.
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  Speaker 3: Yeah, so when you think of the climate side, those
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  Speaker 3: are the traditional risks to farmland, so droughts and floods
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  Speaker 3: and things like that. So we prefer to invest in
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  Speaker 3: areas where you have that natural rainfall, you have strong soils,
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  Speaker 3: good drainage. You don't buy farms right next to big
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  Speaker 3: rivers because they can flood. So there's and then as
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  Speaker 3: you think over time, okay, there's climate change, Is there
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  Speaker 3: a warming happening? Is the grain belt moving farther north.
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  Speaker 3: So our position around the Great Lakes, we think, mutes
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  Speaker 3: a lot of that risk.
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  Speaker 1: In other words, this is an area that's only going
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  Speaker 1: to become more attractive for farming.
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  Speaker 3: That's right. If the Great Lakes region is running out
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  Speaker 3: of water, then everyone else already did. So it's an
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  Speaker 3: interesting dynamic, and so that's where we focus our investment.
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  Speaker 3: But there's farmland all across the US that has all
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  Speaker 3: different types of values and different ways to manage risk.
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  Speaker 3: And in farmland you can do that through implementation of
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  Speaker 3: drainage structures. You can do it through irrigation to try
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  Speaker 3: to be able to have water when others don't. So
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  Speaker 3: there are ways to mitigate some risk there. To your
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  Speaker 3: other point about regulation, I mean, the history of the
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  Speaker 3: US is agriculture, so there are a lot of regions
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  Speaker 3: that agricultures encouraged, and development always brings pressure. So when
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  Speaker 3: you think about what are the issues in farmland that
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  Speaker 3: farmers face today, it's development pressure, it's labor pressure, the
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  Speaker 3: input cost and things that come in. So if you're
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  Speaker 3: in areas like California where we don't invest, there is
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  Speaker 3: a lot more regulation around water, around labor that makes
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  Speaker 3: it more difficult to be an operator when you're growing
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  Speaker 3: a commodity crop. So you know, there are places that
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  Speaker 3: we move away from or we don't invest in generally.
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  Speaker 3: I'm not saying we never would, but we haven't yet
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  Speaker 3: because we just don't think it's an attractive.
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  Speaker 1: So let's talk about California for a second. Every time
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  Speaker 1: I'm on the West Coast, I marvel at how local
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  Speaker 1: and fresh the food is. Avocados are everywhere, Tomatoes are wonderful.
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  Speaker 1: They have a lot of really good local crops. But
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  Speaker 1: what I'm hearing from you is California may not be
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  Speaker 1: an attractive agricultural investment area. Is that taxes, is that regulation?
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  Speaker 1: Is that water availability? What are the challenges of farmland
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  Speaker 1: in California?
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  Speaker 3: Yeah, so those local crops that are going to local markets, are,
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  Speaker 3: you know, the produce you can get in California second
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  Speaker 3: to none. I would agree with that. That's not a
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  Speaker 3: scalable large business from our standpoint.
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  Speaker 2: Now.
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  Speaker 3: While there are some very large owners of farmland that
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  Speaker 3: produce the California QT oranges, the big pistachio growers and
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  Speaker 3: almond growers, they're all large corporate groups that this is
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  Speaker 3: the only spot to grow that the avocado. So that
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  Speaker 3: makes sense. But from the row crops standpoint, there's a
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  Speaker 3: lot of water being used to grow crops that you
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  Speaker 3: kind of have this misalignment of incentives longer term around
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  Speaker 3: use it or lose its strategies around water. So you'll
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  Speaker 3: see a lot of cotton and rice grown in California
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  Speaker 3: that I would probably say that's not where you should
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  Speaker 3: be growing that and using that water. But you know,
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  Speaker 3: we look at regulation. It's coming everywhere around water because
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  Speaker 3: water will be you know, the next big battle that's
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  Speaker 3: out there, and restriction is going to come right after regulation.
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  Speaker 3: So as things get restricted, we think it's more prudent
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  Speaker 3: to be in areas where there's an abundance of water
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  Speaker 3: or an aquafer recharge, as opposed to California, where you
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  Speaker 3: have no new infrastructure being built to capture water, no
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  Speaker 3: new reservoirs.
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  Speaker 1: What about desalination, You would think there's the Pacific Ocean adjacent,
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  Speaker 1: they should have all the water they want.
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  Speaker 3: Well, you for municipal, that actually might make sense at
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  Speaker 3: some point. I mean the cost is significant, the energy
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  Speaker 3: costs are significant. As those costs come down for the
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  Speaker 3: highest and best use of water, municipal that would be
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  Speaker 3: the right answer. And an industrial agriculture is a low
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  Speaker 3: value use of water. It doesn't mean an area is
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  Speaker 3: like California that they don't have senior water rights. Agricultureally
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  Speaker 3: does have senior water rights in parts of California and
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  Speaker 3: Arizona because the farmers were the first to settle out there,
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  Speaker 3: so they're actually ahead of cities in Arizona, farmers are
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  Speaker 3: ahead of cities like Phoenix in terms of where they stack.
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  Speaker 1: And hence the water issues in places like New Mexico
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  Speaker 1: and Arizona.
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  Speaker 3: That's right, and then you just have this the actual
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  Speaker 3: climate is not it's not recharging aquifers, and if you're
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  Speaker 3: not going to build infrastructure to take advantage of when
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  Speaker 3: it does rain, then that's an area that we don't
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  Speaker 3: find an attractive investment opportunity.
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  Speaker 1: Let me ask another California investing farm and land question, vineyards.
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  Speaker 1: Are these an investable asset or is that essentially a
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  Speaker 1: sort of vanity project that all these separate vineyards are running.
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  Speaker 3: That's an interesting question because you know, wine consumption's gone
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  Speaker 3: way down, and the same for craft beer. You know
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  Speaker 3: people have moved a non alcoholic they've moved to Seltzer's,
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  Speaker 3: high New etc. So from that standpoint, it's a little
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  Speaker 3: challenged on the macro level. The idea of investing in vineyards. Actually,
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  Speaker 3: one of my brothers went to Cornell and he ran
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  Speaker 3: vineyards in California and other parts of the country, and
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  Speaker 3: he would tell you it's just very difficult with labor.
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  Speaker 3: You have to be able to sell the bottles for
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  Speaker 3: a very high price. If you're just producing grapes and
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  Speaker 3: then selling them someone else that's selling the retail product,
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  Speaker 3: that's a difficult business to be in. So we don't
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  Speaker 3: get excited about investing in vineyards, although in Michigan we
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  Speaker 3: do have one juice grape farm and I think Welch's
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  Speaker 3: will continue to produce grape juice for a while.
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  Speaker 1: Really interesting as an investor in farmland, how do you
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  Speaker 1: balance the two different forms of gains annual income from
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  Speaker 1: rent and crops versus just long term appreciation of the
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  Speaker 1: underlying land.
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  Speaker 3: That's really the benefit of farmland is you can you know,
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  Speaker 3: if we look at our return series over time, in
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  Speaker 3: areas of strong come prices, you tend to have much
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  Speaker 3: higher land appreciation and in an are in cycles, the
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  Speaker 3: parts of the cycle with low commodity prices, income comprises
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  Speaker 3: a bigger point, a bigger portion of your return, and
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  Speaker 3: that high income actually mutes volatility over time because you're
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  Speaker 3: going to generate that four or five percent income every year,
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  Speaker 3: and that can really across cycles dampen the volatility you
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  Speaker 3: might see from changes in commodity prices. Now, you would
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  Speaker 3: think if commodity prices are changing, your rents are materially
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  Speaker 3: changing all of our leases. We like multi year leases
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  Speaker 3: that are negotiated kind of three years at a time,
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  Speaker 3: so even if commodity prices are moving down, our rents
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  Speaker 3: aren't really moving down, or only a portion would be
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  Speaker 3: negotiated down, and then as they go up, we try
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  Speaker 3: to build a call option into the lease that we
• 15:46
  Speaker 3: can benefit somewhat along the way.
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  Speaker 1: Final question, what are the most significant challenges emerging in
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  Speaker 1: farmland investing looking forward?
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  Speaker 3: Yeah, I think there's going to be a lot more
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  Speaker 3: competition because historically there really hasn't been much institutional investment
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  Speaker 3: in this space. Only about three percent of US farmland
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  Speaker 3: is institutionally owned, and some of that is weighted much
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  Speaker 3: more heavily toward permanent crops like vineyards or orchards. Areas
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  Speaker 3: of the country where you can put larger dollar amounts
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  Speaker 3: to work, so the southeast or the west. But I
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  Speaker 3: think a lot of people are identifying farmland as a
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  Speaker 3: great asset, especially for long term oriented investors. This is
• 16:26
  Speaker 3: an asset you can hold for thirty, forty to fifty
• 16:28
  Speaker 3: years with some of that optionality around solar, wind, timber,
• 16:34
  Speaker 3: even selling into manufacturing or data center construction. Infrastructure funds
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  Speaker 3: should have a lot of interest in this because it's
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  Speaker 3: a long term asset you can pare with these long
• 16:43
  Speaker 3: term goals and liabilities.
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  Speaker 1: Really fascinating. So to wrap up, if you're looking for
• 16:49
  Speaker 1: a non correlated investment class, an alternative that's a little
• 16:54
  Speaker 1: different than multifamily or office space or other traditional real estate,
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  Speaker 1: consider farmland. You get regular income, appreciation of the underlying land,
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  Speaker 1: and you're somewhat hedged against rising prices and inflation. I'm
• 17:11
  Speaker 1: Barry Ridholts. You've been listening to Add the Money on
• 17:14
  Speaker 1: Bloomberg Radio.