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At The Money: Farmland Investing (Fan Favorite) · Masters in Business

• 0:02
  Speaker 1: Bloomberg Audio Studios, podcasts, radio news as have you ever
• 0:24
  Speaker 1: thought about investing in farmland? Real assets have become increasingly popular,
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  Speaker 1: primarily accessed through alternative investments like private equity funds. Farmland
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  Speaker 1: has seen broad non correlated gains, and they show little
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  Speaker 1: signs of slowing down. After all, they ain't making any
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  Speaker 1: more land. I'm Barry Richolts, and on today's edition of
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  Speaker 1: At the Money, we're gonna discuss investing in farmland. To
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  Speaker 1: help us unpack all of this and what it means
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  Speaker 1: for your portfolio, let's speak with Brandon Zick. He's chief
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  Speaker 1: investment officer of Sarah's Farmland Fund, managing about two billion
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  Speaker 1: dollars in AG assets and full disclosure, I'm also an
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  Speaker 1: 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 2: Thanks Barry and farmland. It provides a lot of a
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  Speaker 2: lot of different things that help in a portfolio. So
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  Speaker 2: parmland will generate a good amount of income, it's positively
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  Speaker 2: correlated with inflation, and it's also non correlated with other
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  Speaker 2: things in your portfolio and becomes a diversifier, and it's
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  Speaker 2: a capital appreciating asset. It's not a depreciation.
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  Speaker 1: Play, so yield capital appreciation and an inflation hedge.
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  Speaker 2: That's correct. Yeah, and that's why investors have been investing
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  Speaker 2: in farmland for a long time. But it's now becoming
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  Speaker 2: 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 putentally you fixed income substitute? Do
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  Speaker 1: dividends get paid out to investors?
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  Speaker 2: Yeah, that's the way that a lot of people look
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  Speaker 2: at it. It's the annual income could be paid off
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  Speaker 2: as a dividend. So you do see some public rates
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  Speaker 2: and private rates that are structured that way that would
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  Speaker 2: force that dividend out. But you can also just continue
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  Speaker 2: to reinvest as well, and you have that capital appreciation.
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  Speaker 2: And if you think back over the last seventy years
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  Speaker 2: and look at data from the Chicago FED, you'll see
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  Speaker 2: that long term appreciations averaged about six percent annualized, and
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  Speaker 2: the components of that are really just inflation plus gains
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  Speaker 2: and productivity. So because farms these are living beasts where
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  Speaker 2: they're actually growing crops every year, and improvements and technology
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  Speaker 2: can help crop yields and increase the bottom line. You
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  Speaker 2: 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 2: Yeah, so there's a number of ways to buy farms.
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  Speaker 2: So there are public auctions that exists. They're very localized
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  Speaker 2: and will attend two to three hundred of those a year,
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  Speaker 2: but the majority of farmland is done through private transactions
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  Speaker 2: and these aren't listings. You don't see for sale signs
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  Speaker 2: on farms.
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  Speaker 1: If there's no there's no Zillo for agriculture.
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  Speaker 2: No, not yet, at least there are people trying to
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  Speaker 2: do something like that. But there are there are ways
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  Speaker 2: to source farms kind of off market, and we do
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  Speaker 2: all of that through our farm tenant network. So we're
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  Speaker 2: not even though I grew up on a family farm,
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  Speaker 2: we're not operating the farms ourselves. We're renting the properties
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  Speaker 2: to active family farmers. All of those farmers own ground,
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  Speaker 2: they rent land from us, but they rent a real
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  Speaker 2: large preponderance of their acres from other people, and those
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  Speaker 2: other people are usually not institutional investors, their estates, trusts,
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  Speaker 2: non farming heirs, people that after two or three generations
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  Speaker 2: they will likely sell the land, and so we use
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  Speaker 2: our tenant network or our farmer network to try to
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  Speaker 2: 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 2: Yeah, we're the US only. Our mandate is really anywhere.
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  Speaker 2: We invest in twelve states, but about two thirds of
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  Speaker 2: our acres are located in Indiana and Michigan, and almost
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  Speaker 2: ninety percent of our acres are in the Great Lakes State,
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  Speaker 2: So add in Illinois, Wisconsin, Kentucky, Ohio, and western New York.
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  Speaker 2: We think that's our sweet spot because there's a fantastic
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  Speaker 2: market for rental with farmers. It's highly competitive. It's very
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  Speaker 2: high quality soils, which are great for growing crops. We
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  Speaker 2: also have a lot of water resources, both underground and
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  Speaker 2: it rains when you're trying to grow a crop, and
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  Speaker 2: these are commodities, so low cost producer wins and being
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  Speaker 2: closer to the population centers of the East Coast and
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  Speaker 2: where all of these crops generally move is a huge
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  Speaker 2: 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 value use and investor interest.
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  Speaker 2: Farmland is positively correlated with inflation, and that comes from
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  Speaker 2: a few in a few different ways. So you know,
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  Speaker 2: clearly crop prices can increase, and you know that's one
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  Speaker 2: of the bigger things that can help drive revenue on
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  Speaker 2: farms is increase in crop prices crop yields. But over time,
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  Speaker 2: you know, farmland has a number of different uses, so
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  Speaker 2: whether it's for development or other types of things on
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  Speaker 2: top of just your typical farmland, you'll see that increase
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  Speaker 2: value over time. So even with a booming economy, you
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  Speaker 2: can see farmland values increasing as well, even if the
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  Speaker 2: actual egg production on that farm is not increasing.
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  Speaker 1: So let's talk about those other opportunities briefly. Mineral rights
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  Speaker 1: easements you mentioned hunting when we were chatting about this earlier.
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  Speaker 1: Even data warehouse and AIS are 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 2: Yeah, so there's really two different groups. I would put
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  Speaker 2: that in. You can have some of the ancillary income,
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  Speaker 2: so like harvesting select timber on farms. Typically when you're
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  Speaker 2: buying a property, it's not one hundred percent tillable, and
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  Speaker 2: even during even if it were to be one hundred
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  Speaker 2: percent tillable and growing crops, there are off seasons and
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  Speaker 2: you want to continue to manage those properties. So we
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  Speaker 2: lease out farms for hunting. We harvest select timber. We
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  Speaker 2: like oil and gas rights or other types of minerals
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  Speaker 2: that can be incremental. We've had wind turbines on properties
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  Speaker 2: and those are all kind of incremental to your farm value.
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  Speaker 2: Then there are other things like solar, where you're taking
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  Speaker 2: the majority of the farm to convert it, and in
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  Speaker 2: that case you may have a thirty year lease inflation
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  Speaker 2: hedged of course, but the income is going to be
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  Speaker 2: anywhere from three to five times the farm income, so
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  Speaker 2: you could be generating fifteen to twenty percent a year
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  Speaker 2: and gross income off of your over your cost basis
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  Speaker 2: for solar, for solar, and then there are other opportunities
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  Speaker 2: when you own real estate, when you own dirt, there's
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  Speaker 2: optionalities to your point, around concert or around easements. So
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  Speaker 2: easements can be conservation easements, which we don't really do
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  Speaker 2: much of, but they can also be easements for running fiber,
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  Speaker 2: for running power, and there's a lot of natural gas.
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  Speaker 2: There's a lot of opportunity there, and then you can
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  Speaker 2: see for manufacturing. You can sell properties for that for
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  Speaker 2: multiples of farmland value. And now in the Midwest we're
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  Speaker 2: seeing a huge demand for data center development and that's
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  Speaker 2: anywhere from eight to twenty times farmland value. Because when
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  Speaker 2: they identify a site that has great power resources, great water,
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  Speaker 2: hopefully few neighbors has fiber there, there's a lot of
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  Speaker 2: ways to be able to, you know, build these things
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  Speaker 2: that then you know they're going to be willing to
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  Speaker 2: 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 2: That's definitely an issue that's out there, and you really
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  Speaker 2: need to be within the US and areas where there's
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  Speaker 2: capacity on the grid. You certainly need favorable or favorable
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  Speaker 2: government in all these areas to be able to do
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  Speaker 2: it as well, and you will see a saturation in
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  Speaker 2: certain spots that then they have to move to others.
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  Speaker 2: So some of the largest data center campuses in the
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  Speaker 2: US are outside of Chicago and Columbus, Ohio. You don't
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  Speaker 2: see much new development going on there because of lack
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  Speaker 2: of power over saturation. So we're seeing much more demand
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  Speaker 2: in places where we have a big footprint, like Indiana, Michigan,
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  Speaker 2: 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 regulation 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 2: Yeah, so when you think of the climate side, those
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  Speaker 2: are the traditional risk to farmland, so droughts and floods
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  Speaker 2: and things like that. So we prefer to invest in
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  Speaker 2: areas where you have that natural rainfall, you have strong soils,
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  Speaker 2: good drainage. You don't buy farms right next to big
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  Speaker 2: rivers because they can flood. So there's and then as
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  Speaker 2: you think over time, Okay, there's climate change, is there
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  Speaker 2: a warming happening? Is the grain belt moving farther north,
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  Speaker 2: so our position around the Great Lakes we think mutes
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  Speaker 2: 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 2: That's right. If the Great Lakes region is running out
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  Speaker 2: of water, then everyone else already did. So it's an
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  Speaker 2: interesting dynamic, and so that's where we focus our investment.
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  Speaker 2: But there's farmland all across the US that has all
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  Speaker 2: different types of values and different ways to manage risk.
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  Speaker 2: And in farmland you can do that through implementation of
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  Speaker 2: drainage structures. You can do it through irrigation to try
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  Speaker 2: to be able to have water when others don't. So
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  Speaker 2: there are ways to mitigate some risk there. To your
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  Speaker 2: other point about regulation, I mean, the history of the
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  Speaker 2: US is agriculture, so there are a lot of regions
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  Speaker 2: that agricultures encouraged, and development always brings pressure. So when
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  Speaker 2: you think about what are the issues in farmland that
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  Speaker 2: farmers face today, it's development pressure, it's labor pressure, the
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  Speaker 2: input costs and things that come in. So if you're
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  Speaker 2: in areas like California where we don't invest, there is
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  Speaker 2: a lot more regulation around water, around labor that makes
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  Speaker 2: it more difficult to be an operator when you're growing
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  Speaker 2: a commodity crop. So you know there are places that
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  Speaker 2: we move away from or we don't invest in. Generally,
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  Speaker 2: I'm not saying we never would, but we haven't yet
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  Speaker 2: 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 they're everywhere, the tomatoes
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  Speaker 1: are wonderful. They have a lot of really good local crops.
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  Speaker 1: But what I'm hearing from you is California may not
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  Speaker 1: be an attractive agricultural investment area. Is that taxes, is
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  Speaker 1: that regulation, is that water availability? What are the challenges
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  Speaker 1: of farmland in California?
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  Speaker 2: Yeah, so those local crops that are going to local markets,
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  Speaker 2: are you know, the produce you can get in California
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  Speaker 2: second to none. I would agree with that. That's not
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  Speaker 2: a scalable large business from our standpoint. Now, well, there
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  Speaker 2: are some very large owners of farmland that produce the
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  Speaker 2: California qt oranges, the big pistachio growers and almond growers.
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  Speaker 2: They're all large corporate groups that this is the only
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  Speaker 2: spot to grow that the avocado. So that makes sense.
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  Speaker 2: But from the row crops standpoint, there's a lot of
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  Speaker 2: water being used to grow crops that you kind of
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  Speaker 2: have this misalignment of incentives longer term around use it
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  Speaker 2: or lose its strategies around water. So you'll see a
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  Speaker 2: lot of cotton and rice grown in California that I
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  Speaker 2: would probably say that's not where you should be growing
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  Speaker 2: that and using that water. But you know, we look
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  Speaker 2: at regulation. It's coming everywhere around water because water will
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  Speaker 2: be the next big battle that's out there, and restriction
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  Speaker 2: is going to come right after regulation. So as things
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  Speaker 2: get restricted, we think it's more prudent to be in
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  Speaker 2: areas where there's an abundance of water or an aquafer recharge,
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  Speaker 2: as opposed to California where you have no new infrastructure
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  Speaker 2: being built to capture water, no 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 2: Well, you for municipal that actually might make sense at
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  Speaker 2: some point. I mean the cost is significant, the energy
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  Speaker 2: costs are significant. As those costs come down for the
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  Speaker 2: highest and best use of water, municipal that would be
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  Speaker 2: the right answer. And then industrial agriculture is a low
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  Speaker 2: value use of water. It doesn't mean in areas like
• 12:49
  Speaker 2: California that they don't have senior water rights. Agriculturecally does
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  Speaker 2: have senior water rights in parts of California and Arizona
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  Speaker 2: because the farmers were the first to settle out there,
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  Speaker 2: so they're actually ahead of cities. In Arizona, farmers are
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  Speaker 2: 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 2: That's right, and then you just have this the actual
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  Speaker 2: climate is not it's not recharging aquifers, and if you're
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  Speaker 2: not going to build infrastructure to take advantage of when
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  Speaker 2: it does rain, then that's an area that we don't
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  Speaker 2: 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 2: That's an interesting question because you know, wine consumption's gone
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  Speaker 2: way down, and the same for craft beer. You know,
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  Speaker 2: people have moved a non alcoholic, they've moved to Seltzer's
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  Speaker 2: high noons, et cetera. So from that standpoint, it's a
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  Speaker 2: little challenged. On the macro level, the idea of investing
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  Speaker 2: in vineyards. Actually, one of my brothers went to Cornell
• 14:00
  Speaker 2: and he ran vineyards in California and other parts of
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  Speaker 2: the country, and he would tell you it's just very
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  Speaker 2: difficult with labor. You have to be able to sell
• 14:08
  Speaker 2: the bottles for a very high price. If you're just
• 14:10
  Speaker 2: producing grapes and then selling them someone else that's selling
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  Speaker 2: the retail product, that's a difficult business to be in.
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  Speaker 2: So we don't get excited about investing in vineyards, although
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  Speaker 2: in Michigan we do have one juice grape farm and
• 14:22
  Speaker 2: I think Welch's will continue to produce grape juice for
• 14:25
  Speaker 2: 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
• 14:37
  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 2: That's really the benefit of farmland is you can you know,
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  Speaker 2: if we look at our return series over time, in
• 14:48
  Speaker 2: areas of strong commodity prices, you tend to have much
• 14:51
  Speaker 2: higher land appreciation and then an in cycles the parts
• 14:55
  Speaker 2: of the cycle with low commodity prices, income comprises a
• 14:58
  Speaker 2: bigger point, a bigger portion of your retail and that
• 15:01
  Speaker 2: high income actually mutes volatility over time, because you're going
• 15:04
  Speaker 2: to generate that four or five percent income every year,
• 15:08
  Speaker 2: and that can really across cycles dampen the volatility you
• 15:12
  Speaker 2: might see from changes in commodity prices. Now you would
• 15:15
  Speaker 2: think if commodity prices are changing, your rents are materially changing.
• 15:19
  Speaker 2: All of our leases. We like multi year leases that
• 15:22
  Speaker 2: are negotiated kind of three years at a time, so
• 15:24
  Speaker 2: even if commodity prices are moving down, our rents aren't
• 15:28
  Speaker 2: really moving down, or only a portion would be negotiated down,
• 15:31
  Speaker 2: and then as they go up, we try to build
• 15:34
  Speaker 2: a call option into the lease that we can benefit
• 15:36
  Speaker 2: somewhat along the way.
• 15:37
  Speaker 1: Final question, what are the most significant challenges emerging in
• 15:41
  Speaker 1: farmland investing looking forward?
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  Speaker 2: Yeah, I think there's going to be a lot more
• 15:45
  Speaker 2: competition because historically there really hasn't been much institutional investment
• 15:50
  Speaker 2: in this space. Only about three percent of US farmland
• 15:53
  Speaker 2: is institutionally owned, and some of that is weighted much
• 15:56
  Speaker 2: more heavily toward permanent crops like vineyards orchards. Areas of
• 16:02
  Speaker 2: the country where you can put larger dollar amounts to work,
• 16:05
  Speaker 2: so the southeast or the West. But I think a
• 16:08
  Speaker 2: lot of people are identifying farmland as a great asset,
• 16:12
  Speaker 2: especially for long term oriented investors. This is an asset
• 16:15
  Speaker 2: you can hold for thirty, forty fifty years with some
• 16:18
  Speaker 2: of that optionality around solar, wind, timber, even selling into
• 16:25
  Speaker 2: manufacturing or data center construction. Infrastructure funds should have a
• 16:29
  Speaker 2: lot of interest in this because it's a long term asset.
• 16:32
  Speaker 2: You compare with these long term goals and liabilities really fascinating.
• 16:36
  Speaker 1: So to wrap up, if you're looking for a non
• 16:39
  Speaker 1: correlated investment class, an alternative that's a little different than
• 16:45
  Speaker 1: multifamily or office space or other traditional real estate investing,
• 16:50
  Speaker 1: consider farm land. You get regular income, appreciation of the
• 16:54
  Speaker 1: underlying land, and you're somewhat hedged against rising prices and inflation.
• 17:00
  Speaker 1: I'm Barry Ridolts. You've been listening to Add the Money
• 17:03
  Speaker 1: on Bloomberg Radio.