As the rising sun takes the chill off an early autumn morning, the new daylight illuminates the fields of two Oregon farms. A quick glance at each farm reveals clear differences. Several hundred head of sheep roam one farm’s lush, green pastures along a riparian corridor of big leaf maple and white oak trees. These sheep are all ewes, putting on weight and gaining strength for the upcoming breeding season. The other, a conventional farm, bears the signs of heavy machinery — tractors have pulverized the soil into fine bits and spread a batch of synthetic fertilizer after a recent wheat harvest. A breeze kicks dust into the air as a wheel line crawls across the field’s surface to irrigate the bare dirt in preparation for next year’s crop.
The differences between these two farms run much deeper than what’s readily visible. The sheep pastures on the first farm provide only a small indication of Farmland LP’s model of farm ownership and management — a model that stands in contrast to the soil depletion and importation of chemical inputs on conventional farms. Investors, the broader business community, scientists, and proponents of sustainable agriculture are taking notice.
Farmland LP (www.farmlandlp.com ) is an investment fund that buys conventional farmland, converts it to organic using a pasture and crop rotation, and then manages the farmland for an optimal mix of environmental health, food production, and financial returns. It’s a surprisingly simple model with far-reaching effects. The Fund began in 2009 and purchased its first property in 2010, starting with a 150-acre farm in Oregon’s Willamette Valley between the Cascade and Coast Range Mountains. The fund quickly attracted interest, and today owns and manages a $50 million portfolio of farms with 6,750 acres in both the Willamette Valley and the Sacramento Delta fifty miles east of San Francisco. Craig Wichner, one of Farmland LP’s two cofounders, says, “Our first step was to scale up to a size where we could generate higher returns from using sustainable farming best practices.” With proof-of-concept in hand, the fund is taking the next step—a much bigger step—by establishing a $250 million real estate investment trust (REIT).
A REIT is an innovative structure that lets investors own part of a portfolio of professionally managed properties in the same way that investors buy shares of a company. REITs have achieved a solid financial track record over the last 35 years, consistently outpacing the S&P 500. Historically REITs have targeted commercial real estate, such as office buildings, but the structure works equally well with agricultural properties. Farmland LP has applied know-how from the commercial real estate business not only in using the REIT structure, but also in its overall approach to managing land. For example, a company that needs office space today doesn’t typically purchase its own office building. Instead, it leases space in a building owned and managed by a professional real estate company. The real estate company brings in the best combination of tenants to ensure full utilization of the building, generating solid returns for the investors. Similarly, Farmland LP acts as a professional real estate manager, entering into leases with a variety of farmer-tenants who produce food in rotations of organic pasture, livestock, specialty crops, and grains. These rotations, which are designed to enhance soil fertility and ecological health, also produce more revenue and profits per acre than conventional mono-cropping practices. Both farmers and investors prosper from improved farmland management.
Sheep and cattle may not care about REITs or financing mechanisms, but they’re direct beneficiaries of Farmland LP’s choices. The pastures owned by the fund provide a healthy habitat. As ruminants, sheep and cattle have guts designed to digest a variety of grassland plants, rather than the diet of grain pellets they might get on a feedlot. But the pastures do more than produce sustenance; they offer livestock the space to live natural lives. Lambs and young cattle often behave like hyperactive children at recess, sprinting, bucking, and jumping across fields. And for food connoisseurs, the first bite of grilled lamb or beef instantly reveals another benefit of pasture.
Just as pasture is a key to meat quality, it’s also a key to Farmland LP’s organic conversion process and long-term management strategy. According to Jason Bradford, Farmland LP’s other cofounder who holds a Ph.D. in Biology, the perennial plants that make up a pasture build long-term soil fertility. Plants such as red and white clover, forage plantain, chicory, and assorted grasses, when cultivated together, can achieve impressive results. For starters, a healthy pasture lasts between 4 and 7 years, meaning that once planted, the soil experiences less disturbance than conventionally farmed land that is tilled, planted, and harvested annually. Conversion of conventional cropland to pasture also adds key nutrients to the soil, both from nitrogen-fixing plants and from the manure of grazing livestock. Bradford says, “In natural ecosystems, perennial plants tend to dominate annuals. Their deeper roots give them an advantage, and the deep root structures help build soil.” Farmland LP leases its organic pasture to farmers and ranchers who raise premium livestock. At the end of a pasture’s life cycle, the land will have stored enough nutrients so that it can be planted in specialty crops, such as organic squash, without the need for expensive fertilizer inputs. After growing specialty crops for two or three years, the land is replanted in a pasture mix to continue the process of regenerating fertility.
Farmland LP’s management methods make ecological sense, but they also make financial sense. Farmer-tenants who can lower their input costs and get price premiums for pastured and organic food are able to pay higher lease rates to the landlord. And as the landlord, Farmland LP strives to align its goals with those of its tenants by cultivating close relationships and establishing revenue-sharing leases. This model is proving to be especially effective because of what’s happening in the organic food market.
The $35 billion-per-year organic market has grown by an average of 14 percent each year since 1990, and now represents about four percent of the U.S. food budget. The main factor holding back this market from even more rapid growth is the limited supply of land used to produce organic food. Only one percent of U.S. cropland has been certified organic, and the pace of conversion is only eight percent per year, meaning there’s a substantial shortfall. Farmland LP has estimated that the supply gap equates to $80 billion worth of U.S. farmland, far exceeding the REIT’s initial fundraising goal of $250 million.
The shortfall of organic land in the U.S. has arisen at a time when concerns are mounting about environmental problems caused by conventional management of farmland—problems such as loss of soil fertility, impaired water quality, and emission of greenhouse gases. The Union of Concerned Scientists and researchers at many universities have reported the need for agriculture to adopt sustainable practices. Scientists and the market agree: more land needs to be converted to organic, but two high hurdles stand in the way. First, the average commodity crop farmer owns $4 million to $8 million in land, equipment, and structures — any new or expanding farmer needs access to some serious capital to compete. Second, it takes organic farmers three years to convert conventional farmland to organic, creating a large financial disincentive and slowing down their ability to respond to increased demand. Farmland LP addresses both obstacles by raising the capital to purchase farmland and infrastructure, managing the organic conversion process with perennial pastures, and providing affordable leases to access organic land.
Bill Niman is a rancher and a pioneer in the business of humanely and sustainably raised meat. His company, BN Ranch, grazes Angus beef cattle on Farmland LP’s pastures to produce premium meats. Niman says, “My life’s work has been to change the way food is produced and animals are treated in our country. Through partnerships like the ones between Farmland LP and the farming and ranching communities, we can restore a more sensible way of feeding people and help preserve our nation’s most precious natural resources — water and topsoil.” Maintaining two-thirds of its acreage in pasture may have a calming effect on Farmland LP’s lands, but it has an energizing effect on business. Companies such as BN Ranch can expand operations and meet the market demand for organic and pastured meat without having to find the considerable capital needed to buy land. Niman found the Farmland LP model so sensible that he became an advisor to the fund.
Just as Farmland LP’s model provides BN Ranch with access to raise cattle on organic farmland, the REIT structure provides investors with unique access to own high quality, sustainably managed farmland. The average age of farmers in the U.S. is 58 years old, and as they retire an estimated one to four percent of farmland is expected to change hands each year over the next decade. Based on these estimates, $240 billion to $1 trillion worth of U.S farmland (out of a total of $2.4 trillion) will be sold in the next ten years. This massive transition provides an unprecedented opportunity for the REIT to acquire farmland and manage it for long-term financial and ecological health. Although the REIT will initially be private and require investments from accredited and institutional investors, Farmland LP plans to take the REIT public as soon as revenues and distributions reach a sufficient scale. Such a public offering would open access to people of all income levels who are interested in owning shares of sustainably managed organic farmland.
The business community is taking notice of the fund’s combination of financial returns, environmental benefits, and social impacts. Fast Company named Farmland LP one of “The World’s 50 Most Innovative Companies.” ImpactAssets named it one of top 50 fund managers worldwide who create positive social and environmental impacts while generating strong returns. B Corp, the organization that certifies Benefit Corporations, has awarded Farmland LP “Best for the World” status two years in a row.
Farmland LP is sowing the seeds of an agricultural system that builds soil fertility and supports ecosystems while providing farmers with access to in-demand organic land and consumers with access to premium local food. It’s a unique model that cares for people and planet while generating profits. What could be a better investment than that?
