Farmland LP: Investing In Sustainable Farmland

Adam: Hello and welcome to the Resilient Life podcast. Resilient Life is part of peakprosperity.com. It’s where we focus on practical and actionable knowledge for building a better future. I’m your host, Adam Taggart. For several years, now we’ve been keeping the peak prosperity community updated on Farmland LP. It’s a family of funds that invests in farmland taking distressed, conventionally farmed properties and repairing the soil through sustainable farming practices. Farmland LP seeks to do well by doing good specifically for delivering a positive long-term economic return for its shareholders by being a better steward to the land than conventional farmers, producing healthier foods on it, and creating more local jobs. Farmland LP now has two funds, one, a limited partnership that’s been running for nearly five years and the other a private REIT now entering its second year. Each year we check in with the management running the operation to see how they’re fairing in their mission to create an economically attractive and sustainable business model that thrives as the soil and local community does. Well, it’s that time of year again so let’s get to it. I’m speaking today with Craig Wichner and Jason Bradford, the masterminds behind Farmland LP. Craig’s the numbers guy and Jason’s responsible for land management. Each has exceptional expertise in their respective areas which I’ll let them elaborate on in just a moment. Craig, Jason, it’s great to talk with you guys again. Thanks for coming back on the program.

Craig: Great to be here.

Jason: Good to be here, yeah.

Adam: Great. Alright guys, well you heard me give the brief little intro, there. Craig we’ve had you on the program the past couple of years. I’m going to guess probably about half of the people listening to this program are somewhat familiar with you guys and half are brand new. Why don’t we start with you, Craig? Just give a really brief overview as to the mission of the fund, maybe in your own words and what lead you and Jason to commit yourselves to its pursuit, and then Jason we’ll let you contribute your thoughts, too.

Craig: Sure, glad to. So as you said very well about Farmland LP buys conventional farmland, converts it to organic, sustainable farmland and we really focus on adding value in three ways. One is converting from low value crops to high value crops, such as lawn seed to butternut squash, for example. The second way is by converting farmland to a premium priced—to access some premium prices, such as getting it certified organic and getting access to that 50 to 200 percent price premium for organic goods. And so, between the first one and the second one we’ve increased rents from—or revenues actually, per acre from around five or six hundred dollars an acre for lawn seed to over a thousand dollars an acre for just conventional butternut squash, and then upwards of three thousand dollars an acre for certified organic butternut squash. So really nice increases between those two sources of value add. And then the third way that we add value is by infrastructure investments or capital investments in the farmland such as converting it from non-irrigated to irrigated. That conversion, for example, is one of the ways that we can really add a tremendous amount of value to farmland. It’s only available in certain areas and in certain ways and we have a nice expertise at doing that. So we think that’s just—looking forward into the future, in general, buying great farmland and adding value to farmland in this myriad of ways is just a great long-term strategy for us.

Adam: Great, and Jason we’ll get to you in a moment about all the benefits to the land from the process that Craig just described. Craig, your background as a numbers guy. You’re—just talk a little bit about your background with investments that generate rents, that generate income and what it was about the farmland model that drove you to it, because for a lot of people conventional farmland isn’t necessarily a super sort of high rent, high income model, but you’ve found a really attractive way to look at things here.

Craig: Sure, so I grew up doing—my family does investment real estate, so buying apartment buildings and improving them and increasing the rents and cash flow on that and really benefiting from the long-term asset ownership and the cash flow that comes from that and then, of the things which we can talk about but really when you look at farmland, it’s really an amazing asset, but if you look at it from the lens of commercial real estate, it actually is a form of commercial real estate. So it’s a very large asset class, 2.6 trillion dollars’ worth of farmland in the US, that’s the same economic value as all of the office buildings in the US or all of the apartment buildings in the US, and 40 percent of farmland is leased. So, it really is a form of commercial real estate. The different with farmland is that it’s only one percent institutionally owned. So, one, those tenants on that land don’t really have incentive to really invest in the land, and so they just leased property for them, neither did the land lords and so those really become underutilized assets; and so with the lack of kind of competition or institutional ownership in the marketplace, it’s a really great opportunity to buy land and really add value to it. You really, though, have to do it, in our view, at scale; and so by operating at scale you really get some really great advantages and if you look at the USDA data, for example, revenues and profits correlate exactly with farm scale.

Adam: Great, and I know you feel similarly to we here at peak prosperity in terms of the wisdom of owning regal assets in terms of the macro environment that we’re living in here. I assume that’s part of the appeal for you as well, correct?

Craig: I’m a big fan of real assets in an investment portfolio. In general, real assets are non-correlated to the public markets, whether those are stock bond markets, domestic or international. Everything seems to be correlated, today; and farmland is one of those asset classes that really are disconnected. It’s also an asset class that is—it basically benefits from the money printing that’s going on, and with the new administration looking like they’re going to be reducing taxes, doing more stimulatory spending, you’re already seeing the long-term interest rates go up, so it looks like we’re going back to, after 20 or 30 years of a reducing interest rate environment it looks like we’re going back to an inflationary environment, and farmland as an asset class has beaten inflation over the past 75 years, generating around a six percent return over that period. So, it’s a macro economically and over a long time period a really great asset class to be in.

Adam: Alright great. So we now have a general context for why owning farmland itself as an asset class makes a lot of sense. I think a lot of our listeners would agree, and frankly many of them have been looking for ways to buy into farmland and we’ll talk a little bit about how your funds have helped people do that. But, we’ve just gotten the numbers signed from you Craig. Now let’s get to the really emotionally fulfilling part, Jason. Craig, not that the numbers can’t be emotionally fulfilling, but about your mission is the market advantage that you’re creating here is really dependent upon using the land in a much more healthy and sustainable way than conventional big ag farming. So, Jason, can you give us a little bit of background about how you guys do that, and then I’d like to begin to get into the details with you about your actual plan and processes for managing the land.

Jason: Oh sure, yeah. Well, I got into this paying attention to things like the Crash Course and that sort of information and understanding the three E’s as Chris Martenson called them and the environment and natural resources are a big part of my lens by which I look at things; and if you look at how most farmland is managed it’s managed from sort of a process optimization on the farm that reduces labor and is not really that concerned about the inputs in terms of are they going to be there forever; is natural gas going to be cheap forever; are cheaply mined phosphates going to be available forever? So the way that most industrial farming is done is not looking at the farm as an ecosystem where nutrients are tightly cycled and you really are trying to reduce external inputs, but it’s more about maximizing short term yield but not necessarily net from an energetics or resource perspective. So, if you take the perspective that we need to, for example, reduce the pollution off farms and reduce the need to buy expensive energy intensive inputs to farms, then you need to look to natural ecosystem processes as a way to optimize for the long-term and this is, if you think about how farms were managed prior to really cheaply available fossil fuels, they were managed from this perspective because, frankly, you had to. There were long-term crop rotations. There was the rotation between the pasture with livestock and crops, and that’s what we’re really bringing back. You can think of sort of native prairies and the wealth created by those grasslands and those big herbivores that would roam around them as the original fertilizer. When you kill prairie ecosystems, grassland ecosystems, you end up sort of burning up the carbon in that soil and, along with that, releasing things like nitrogen and phosphorus that are available to crops and you can think of it like a bank account where our soils of our nation were once—had a very healthy balance sheet and through our farming practices we’ve basically depleted those accounts. And so, once you did that, which really took place early 20^th century, it was the synthetic fertilizers that really kind of rescued farms from declining yields and quality. And so, we’ve been able to ride the masking of soil and ecological deficits through these external inputs. So, what we’re really about now is managing in a way that basically adds value to the balance sheet of the soil, long-term. Yeah, I’d be happy to get into any details, but that’s sort of the big picture I came from.

Adam: Great. Yeah and our audience is familiar with folks like Joel Salatin and the approach he takes so we’ve talked a bit about that here on the program where, I think you described it really well but conventional farming has sort of exploded onto those prairie lands and was very extractive, where it just year after year, it would just grow crops, pull nutrients out, and just rinse wash and repeat and there was no period there where ruminants were coming back on and adding nitrogen and micronutrients and all that stuff to it. And then, of course, when those were depleted, they then had to bring the inputs in through phosphates and all these fossil based chemicals to get things to grow. And of course your approach is, no, let’s use more of a Salatin-esque, and I don’t necessarily mean to say you’re copying his play book, but something similar in spirit and you are growing regeneratively, really, using natural systems the way that nature did it; and just getting back to the Craig side of the ledger for a moment that then allows you to sell your products at a much higher price point because they’re certified organic, and they can demand a higher price point because they’re healthier and grow in a way that people are willing to pay a premium for. So, that being said, let’s talk about some of the actual properties that the fund has bought, which as I understand were kind of over farmed properties, potentially somewhat distressed properties that the fund’s able to buy at a discount, because they’ve been sort of over farmed and then you come in Jason and come up with a plan for the property and how over the next several years you’re going to be restoring those micronutrients and getting the property organic certified. Can you talk about kind of your approach there when you step onto that land for the first time that’s been so maltreated and think about how you’re going to heal it? What goes through your mind and what do you guys end up doing?

Jason: Yeah. Well, we take a battery of soil tests and figure out if there’s some basic amendments and in organic systems you have—you can still use lime and compost and manures, and so a lot of what we do is just try to see if we can move things a little bit if soils are depleted. In California there’s a lot of ground that’s been in alfalfa hay and hay is one of the most nutrient removing crops. You’re basically taking very vigorously growing young plant material and harvesting it, and exporting it and that’s what sells good hay is a lot of nutrients in it. Well, that’s coming out of the soil. And so we may need to add some mineral wealth and then usually the best thing we can do is put it into a pasture and then stock that pasture really well. So, the pasture is, that we install is plant are a mix of species, usually there is a complement of grasses and clovers and then some forbs. So a forb would be a non-grass non-legume like a plantain or chicory and the idea…

Adam: Okay good, clarified it for me.

Jason: What’s that?

Adam: I said I’m glad you clarified for me.

Jason: Yeah. The idea being that each of these is providing some element of productivity and it may have a different peak in productivity. So, grasses tend to peak in the cool time of year and have a big spring flush but they tend to slump in the heat of summer. These forbs and legumes really come on strong in the summer. So, you’re adding diversity. It’s like adding a diversity to portfolio. You’re not exactly sure what’s going to do best in a particular year or a particular season but you may have ideas and really that diversity helps you even out the productivity. It also, with pasture what you have is you have a perennial plant system and so the difference I would say that’s really important to understand is that perennial plants are alive for 365 days a year and they can live for year after year. By contrast, most cropland in the United States is grown in annual crops which every year are planted, every year they are harvested, usually it’s a single harvest and then you have to turn the field over again and replant. So, there’s a period where the plants are senescing or dying down, meaning they’re not growing anymore and there’s a period usually where the field is fallow,  and so it’s not covered and the soils not being protected and you’re not feeding the soil and the soil biota. So, with the perineal system you have very little risk of erosion and usually you’re building soil and you can do that for many years with a single planting. So, that’s probably the biggest contrast is our system really focuses on making sure that we have years and perennials to counterbalance the fact that we will rotate out of perennials into high value annual crops like the butternut squash that Craig mentioned.

Adam: And because you’re bringing a mixture of animals and plants, and doing it all on rotation on these properties, you’re also involving a lot more farmers in the process than traditional, conventional farming. Is that correct?

Jason: Yeah, this is really interesting, and this is part of what Craig was mentioning that it’s a real estate portfolio perspective on things or, I think of it as sort of a land management perspective rather than a farmer perspective. So, most farmers tend to have a certain bag of tricks. So, they like doing certain things, they have equipment sets that they’ve invested in that sort of cater to certain things and they know a certain set of markets. So, that specialization is really important for economy’s scale and that’s sort of what’s been driving agriculture. However, for the land that’s really poor; the land like diversification and rotation. So, the problem is if you look at any particular farm it tends to be rented or owned by the same farmer for a long time meaning that it will get out of balance, because that farmer only has so many tricks up their sleeve and most farmers grow annual crops year after year. What we do is, by saying well wait a second, we’ve got a portfolio of land and our job is to enhance the value of that asset over time, to build the balance sheet in the soil. We can decide that for this period of time this field is going to be in a perennial pasture, and we’ll work with a certain set of tenants or clients; and then we’ll rotate it, and someone who’s a great vegetable grower will get to have that field for a certain number of years and if they’re our long-term partner, then they know, even though they’re not going to have that field forever, they’ve got tenure with us and they can rotate onto another field. And this is really important to understand that these farmers do better when they partner with us and understand the value of this rotation. A good example, if you look at one of the big problems with growing, say vegetables year after year is weeds and the weeds evolved to thrive in cultivation, the intensive cultivation of vegetables. If you put a field into pasture, in about three years the weeds have died, almost all the weeds have died out, all the seeds. So there’s a seed bank of these weeds that builds up and you just fight them and fight them, and at about three years 95 percent of that seed bank is dead. So, really coming out of pasture into vegetables, that farmer’s getting a field that is likely very low on weed pressure, very low on any diseases that would affect their vegetables, and has all this fertility built up from the pasture program.

Adam: Right, that’s a great example and what I’ve seen happen on some of your properties, I’m thinking about the Burns farm in particular where there’s—I’m going to miss use the term here but there’s sort of the tragedy that commons, where if you’re just doing one thing you may not invest in certain types of infrastructure that would benefit other farmers who want to use the land or, in the case of—what I think was happening on Burns farm, is there might have been a couple of people farming parts of that farm land, but they were just sort of operating independently, if you will, where the fund Farmland LP can actually come in and put in state of the art irrigation systems and then amortize that over the course of the future of the fund, and of course the tenants love that because they’re basically getting the best system. I think you guys also did…

Jason: Yeah, we did drip system.

Adam: Yeah, you put in the drip system. I think you put in a pump there that had been needed for years and years, but no individual farmer there wanted or probably could afford the price of the pump, but you were able to do that and amortize that across all the tenants you brought onto the property.

Jason: Yeah, that’s right. I mean, a lot of what I’m very interested in is reducing the energy required to farm, and one of the best things you can do now a days if you think about your refrigerators, refrigerators now are twice as efficient as they were ten years ago. There’s been incredible gains in electronics and the ability to regulate power supplies and that’s true for the irrigation pumps and control systems, too. And so yeah, if you’re a tenant farmer you’ve got to if you’re going to do this you have to negotiate with the landlord and decide if they’re going to reduce your rent or whatever to make it pay or get a long-term lease. We can in many cases say, hey no it’s really important to be efficient and to reduce our electricity bills and so, yeah, we can do those sorts of things.

Adam: Great. Now help me understand this Jason, so I get you buy the farm land, it’s been distressed it takes I think three years to get to organic status by not spraying and what not and, of course, you’re outing in lots of the immediate infrastructure that the property might not have; but let’s say you’re four years, five years down the road, does it just become kind of a tenant management game at that point in time for you or are there longer term ecological initiatives that you’re putting in place that may take five, ten, 15, 20 years to play out over these properties?

Jason: Well that’s a great question. And I think it’s both. I think that as we mature as a fund and get to know the properties and get to know the tenants that work well with us that things settle a bit and you understand your relationships and so, that’s nice, but I also agree that there’s something that we’re doing that are really looking long-term. I think you were on a tour of Brentwood, where we showed you these hedgerows and those hedgerows were—we had the USDA help pay for them and, really, the idea is that you can get ecosystem services from having non-farmed areas provide benefits and one of these benefits is the habitat for other critters and these are usually insects but it might also be birds and frogs and these sort of things; and what those animals will do is, for example, provide pollination services. So if you’re growing tomatoes or squash or cucumbers or peppers in a nearby field, it’s very clear that having a robust native set of pollinators will increase your yields and might decrease your crops if you were planning to bring in honey bee hives, which are very expensive nowadays. The other things that those hedgerows do is reduce pest pressure; so if you have aphids on your plants and you’re worried about those and you may think you need to spray, well your need to spray may be mitigated by things like ladybugs or parasitoid wasps that will go out and eat the pests on your crops, and these have been well documented. But those are things that take time, again, like the hedgerow take a while to grow and it takes a while for the fauna to sort of reside there and then benefit those crops. But we can do that at a landscape scale, and think about areas of our farms that are on the periphery, let’s say, or air as it may be, flood prone that don’t do well for cropping but would be a great little patch of wetland that could provide similar benefits to a hedgerow from ecosystem services point of view. So, those are some of the most interesting things that I like to think about as well on the farm.

Adam: Yeah, and what I love from that example is that that’s again I think another example of an investment that an individual farmer or tenant farmer just would not have either the time horizon or the capital or the patience or whatever to out in that type of investment but you guys are doing that with a long-term view of the property and of course those pollinators and other benefits etcetera are going to benefit anybody who’s going to be growing on that land in the future. So, I love the model you’ve created has provided an incentive for you guys to take that really long-term view on what are the installations we can put in here that’s going to improve the ecology of the land.

Jason: That’s right.

Adam: Craig, did you have a point there? It sounded like you were going to jump in.

Craig: Yeah. I was just going to add to Jason’s point, which is great, which is that over this ten year scale and longer there’s really a revolution happening that the technology revolution is just getting to the farm now, and a lot of farmers are still managing the farm life on pencil and paper and spread sheets and the advent of satellite technology, drone technology, soil sensors, land analysis; they are—and on the biological side, on the crop rotation side, tremendous advances are happening that really we can do again, because of that economy of scale that an individual farmer who’s focused on still a large scale growing two or three hundred acres of tomatoes or another crop; they’re going to be focusing on the tomatoes, we’re really able to focus in that large scale rotation. We’re able to invest in a half a million dollar tractor that’s really maximally efficient and operates very well on that scale, but that individual farmer may not necessarily be able to invest in. So, that’s where we’re kind of bringing back the partnership with the farmers, where we’re proving really great support services in a lot of ways for them to be better at growing the crops that they’re growing, all in the context of sustainable land management.

Adam: Yeah. I love that the whole mutual beneficial goodness of all that and I’m glad you drove home the point about the technology revolution. That’s just really beginning to become underway. It’s very exciting and just one example that I saw when I was at the Brentwood property Jason, was you talking about the irrigation system that you put in and the capability of that system and you’re much better to describe it than I, but I remember that you can kind of deliver the optimal amount of water and the optimal depth given the plant and what’s going on on that particular day weather wise and soil condition wise. Do you want to elaborate on that just for a moment to kind of bring this technology point home to the listeners?

Jason: Yeah. We’re really finding that there are these small sensors that can be inserted into the soil profile and they can then broadcast what’s going on. So you could have a sensor a half mile away from any kind of power source and it’s running on batteries, but these will allow you to see what’s happening at, say six inches below the soil surface, a foot, two feet and really understand how the plants are drawing down the water in the soil, and you can look at these graphs and say, hey we better get on there in a few days with irrigation because we might get some plant stress; and a lot of what it does though is you’re not going to put these—we’ve got five thousand acres, let’s say, of farmland in California. You’re not going to put these in every field. What you’re going to do is you’re going to learn from these and provide feedback to the irrigation crew about, hey in these sorts of conditions we better irrigate a little more or we can afford to irrigate a little less. So, they’re kind of sometimes used for very precision, if someone’s really following and has a drip system, where they can turn on and off very precise, but in other systems where it may be a broadcast sprinkler or maybe flood irrigated what you’re using them for is really kind of training your crews to manage more tightly, and not over irrigate or under irrigate.

Adam: What’s great is that the benefits come on both ends. You’re able to maximize crop yields because you’re irrigating at the right times and the way the plant needs it and you’re minimizing your input costs like water and what not, you’re not over watering exactly and of course all that also happens to be the best thing for the land at the same time. So, that’s just one example but to Craig’s greater point, it’s exciting to think that we’re kind of just on the cusp of this same type of explosion of—a lift from technology in this field that we’ve seen in other industries beforehand. Great, so switching to Craig just for a moment, but Jason, you can chime in on this if you can elaborate further. Another thing I’ve enjoyed following the story here with farmland as an investor is, not only do you guys have the incentive to improve the farmland because that’s what the business models’ based on, but of course by doing so it increases the underlying value of the farmland; and I know that it’s appreciated fairly well so far since the inception of at least fund one. So Craig, you’ve shared with me that there are federal programs and Jason just mentioned one of them that helped fund the hedgerows that they put in at Brentwood; but whether it’s land trusts that you can sell the development rights to the land to whether it’s grants to put in better irrigation systems and things like that, because water management is, no surprise, it’s a huge issue in California and out west, but there seems to be a number of programs out there that are willing to give very low cost or sometimes free money to the farm because it’s doing things that the country wants done with its land which just seems to add additional tail winds to your model in returns for investors. Can you comment on that for just a minute?

Craig: That’s great, so one example is actually a grant that we got last year from the USDA to work with two other research groups to quantify the environmental benefits that are generated from our crop rotations on our land. I’ve put them into a database that already exists, so that we can quantify the amount of environment benefits and its economic value. So, how much soil carbon is actually being sequestered on our soil rotation based on scientific literature and then quantified the value of that, same with water, same with the other environmental benefits that we provide. Just as a backdrop, we do find it funny that the commodity crops get a lot of crop subsidies and generally cause the environmental problems that we associated with agriculture, while we do regenerative agriculture and don’t get crop subsidies, and don’t get many subsidies at all. So, we actually found that the current slash previous administration was actually very friendly and progressive in its programs and so, we’re watchfully waiting for the new administration to see what they’re going to do.

Jason: Yeah, I just tag on to that, we’ve gotten grant from the county level, the state level, and the federal level for a number of programs; and they range from taking a degraded river front and getting trees in that will help protect the banks to that hedgerow you saw at Brentwood, to upgrading irrigation pumps and controllers to make them more efficient, to a cost share on putting in a very large drip system; and then the one Craig talked about was really interesting. It’s called the Conservation Innovation Grant or CIG from the USDA and that one really I think it’s got a cutting edge on really understanding ecosystem services and potential monetary value of those to the farm. I’m pretty excited about all this grant work that we’ve been able to do. It is quite a bit of work and our main mission is really focusing on managing the farmland and getting good returns, but, like you said, this does help nudge us and add value where we can.

Adam: Yeah well that’s—don’t always approve where the governments putting its money but as an appreciator of the land and selfishly as an investor in the fund I’d love to see government money being put to this type of use.

Jason: Yeah, it’s an interesting thing, because what the government helps us do in many cases is to co-invest in the commons. So, if you think about the water—if we can make the water on our land come off cleaner, cooler and cleaner, less nitrate pollution, the stream temperatures are going to be lower; that helps say, a city downstream have lower water treatment costs and so, this is why the government often wants to invest with private landowners is, because they’re actually trying to solve this problem that is of the commons and it’s very hard for all the farmers to say, hey, planting these trees is going to add huge value to our farms, really it’s going to add value to our farms to some extent, but really also going to help the society in general because you’re assisting the broader environment to function better.

Adam: Great, well again one more reason to love the model you guys have built here that it plug nicely in there in terms of improving the commons. Getting to the kind of heart of the investment opportunity; so, you had talked about—at the very beginning about how your mission here is to produce higher end produce and meats on this property then was available beforehand and, from what I understand looking at the data, there’s just an insatiable demand right now for organic produce and sustainably raised meats and what not and, as an investor, I look at the fund enjoying this real imbalance of huge demand and supply just doing its best to keep up. I know in the past you’ve had some pretty big players begin to come sniffing around trying to see if they could lock up at least chunks of your supply and what not. I’m not asking for specifics, but can you guys update us into from a market opportunity standpoint how things have evolved over the past years, and is my description accurate in terms of just an increasing line of suiters up there to take the product that’s coming off the farm?

Craig: The demand for organic food continues to increase, and the supply of organic farmland that is needed to grow that organic food is not nearly keeping up. There’s a big gap. We roughly estimate out of the 2.6 trillion dollars’ worth of farmland, there would be another 80 to a 100 billion dollars’ worth of farmland that we need to convert over in order to meet the current market demand and you have people like the CEO of Costco. So, 40 billion dollars a year of consumers’ money is spent on organic food or about five percent of the US food budget and Costco now sells ten percent of that, about four billion dollars’ a year worth of organic food. They’re the largest organic seller and the CEO of Costco at the beginning of this year told the shareholders that they could not get enough organic food to keep them in business day after day. So, with the size of the market it is completely constrained by the availability of organic food; and you have a lot of firms, a lot of food companies talking about growing their business, growing their organic food business literally doubling and tripling their organic businesses over five plus years but they all recognize when their CEOs make these claims about the growth in the organic food markets, their people responsible for sourcing are sitting in the back going, oh my goodness where are we going to get this organic supply? They’re already maxed out and it takes three years to get land certified organic. So, even if you started today it wouldn’t come online for three years. So, actually the supply demand imbalance continues to get worse, and there are a lot of—there’s just really a lot of interest in really finding the right ways to convert land, to in essence lock up supply, and there’s good stuff going on. No news or anything to report.

Jason: Yeah, I can give you a little perspective in this too is if you think about it let’s say you’re a vegetable company and you see the market demand for organic vegetables, but you’re hesitant because you don’t see the land supply going up fast enough. So, you’re unlikely then to invest in the infrastructure that would be required to be an off taker, a significant off taker. So, it’s this conversation you have to have with the potential buyers is that it’s not just about the land but it’s also about regional infrastructure that’s shares. So a processing facility is not something that a single farm necessarily is going to drive. So, for example, in California there’s a very healthy organic produce industry. In Oregon it’s not quite as developed; so one of the limitations for organic vegetable production in Oregon is really not the land or the climate or the soil it’s really, hey, do we have a processor who’s able to take this on. And so we have conversations with them and they know of our land bases growing and so they may be able to adapt over time to that. It’s very complex. One of our partner groups, Ecotrust in Portland, did a really interesting set of reports on sort of gaps in regional food infrastructure, and highlights that a farm’s not going to solve this and there’s a lot of stuff in the middle that needs to happen in terms of infrastructure delivery systems and financial systems.

Adam: Seems like a place where, again, government can play a helping hand in terms of offering incentives, grants, etcetera to try to provide more reasons for people to take on that risk. But that’s a conversation for a different day. I do think probably around this topic, and you guys tell me whether I’m digging too much here or not but I would think that given that imbalance that Craig described that in the just growing demand for it that people are desperate to lock up supply. I mean, do you have people coming to you and I assume you might have people coming to you and saying, look can I just lock you guys up for the next five or ten years and I’m not necessarily sure, while that might be economically attractive, it might not be mission attractive for you guys. How do you try to think through those types of decisions?

Craig: We wouldn’t do that. There’s the importance of having diversity, just from a business standpoint but the thing that we really do have is scale. So we manage about 13 thousand acres right now. We own ten thousand acres. We have about two thousand acres already certified organic, and a lot more coming online on a very specific schedule. So, we can really talk to a number of the buyers out there about a very predictable source of organic crop land to grow certain organic crops for them. And so it’s actually building that portfolio for us—building a buyer portfolio for us and providing long-term security for them. That really makes it win-win for everybody.

Adam: Alright, so you guys are actually looking out to future viewers and making some decisions, at last like we’re going to sell to you over this period year which of course reduces your risk because you know in three years you’ve got a buyer for at least X percent of what’s coming off the land. Is that accurate?

Craig: Yeah and it’s a mix because we also—we work with a number of farmers who they have their own relationships that they have supply agreements for; but in the areas that we can add value and get that long-term stability, some of the farmers love that. They might have their own contracts but also of you can provide them with another nice long-term contract, they’re really excited about that. Most of the farmers really just love to grow… [Cross-Talk]…

Jason: One of the issues is—one of the complexities is there’s not a big future market for organic food and so long-term agreements are tricky to get into unless you know your partner really well, and you work together on how to juggle potential changes in monetary policy and interest rates and how that might affect the value of the food and the markets; so, those are some of the dynamics that make it difficult to say, yes, I’ve got a five year agreement with you as an off taker.

Adam: Interesting. Do you see it evolving that way though as supply comes online?

Jason: Yeah, I’ve started to have conversations with people like that, but we haven’t gone really far yet but people recognize that this is something that should be thought about.

Adam: Alright. Well guys as is true with every great conversation I’ve got a thousand questions I’m not going to get to, and Jason it’s great to have you on here and really begin to peel back what’s happening on the land management side. I’ve got a couple quick questions for Craig as we begin to wrap up here, because I’m assuming there’s some people that have been really inspired by this and want to learn more about you guys. So Craig, just in terms of how well the model has fared, because you and I talked initially five plus years ago when you guys were just beginning to get this off the ground. You now have two funds out there. One is closed, that’s fund one and then you have the private REIT which is still taking in capital, I believe. I guess, what can you tell our listeners about—I know you can’t get to specifics but given your vision, given your general plan are things relatively on course, did you have to pivot in any way, are thing largely headed in the direction that you’ve been hoping for with the initial vision?

Craig: Yeah. I mean, Jason and I started this in 2009 when we drove up to Oregon to look at buying farmland for ourselves and it was really the combination of seeing that farmland was a great undervalued asset that was really, in essence poorly managed under modern crop management practices, and that we could really add a lot of value by using sustainable agriculture best practices on the land as a mechanism for both delivering environmental benefits and increasing the financial performance of the farmland, as well. And the strategy that we’ve had of buying great farmland close to cities with strong demand for locally grown organic food has really—we really haven’t pivoted at all. It’s really been doing that and it’s actually worked out very well. The farmland is appreciated very nicely. As we get that land certified organic, we’ve demonstrated the good increases in revenue per acre and the first—so it’s going well. We’re very happy with it. We have about 20 percent—18 percent of our land was certified organic for fund one last year. This year it’s about 33 percent certified organic. So, that’s really the thing that it cleared demonstrable milestone for us in terms of adding value for the whole portfolio is getting that land certified organic and through that transitional period.

Adam: Right, and you were giving some numbers earlier but you’re going from the prices you can get for the traditional stuff and then once it goes to organic that price goes up by a couple of multiples right? You were giving us probably an extreme example, but when you were getting 500 an acre and now sometimes getting upwards of one, two, three thousand an acre. It’s that conversion to the organic that makes that possible, right?

Craig: Talking about the gross revenue generated on the land or from the crop on a per acre basis, and one of the nice things just like in any form real estate; the value correlates with the value of whatever you can produce on that land. So as you increase the revenue per acre the rents also increase, which is how we generate our cash flow.

Adam: Great. Yeah, I just wanted to underscore the importance of the organic migration time table because that’s really when those margins really begin—the increase in margin is tied to that migration plan.

Craig: That’s right and they are separate things. So, one is that we generally believe that farmland is underutilized. The farmers are really—they’re making crop decisions based on the equipment that they have, or the amount of labor that they want to put into it, it’s very operational based decisions. We look at farmland from the standpoint of how do you get the most biological productivity from that land; and that’s more complex rotations, pasture with livestock vegetables, grains, back to livestock. That’s really challenging for one farmer to do but as we work at a large scale we can make those determinations, we can make the investments where they’re required and manage that conversion process. So, that’s really how we’re creating value; really by fundamentally just maximizing the productivity off of that farmland.

Adam: Okay. So as an investor you’re really buying in financially for two things. You’re buying in for the appreciation of farmland over time and the advantage of it being a real tangible asset versus a paper based asset and all that type of stuff we talked about earlier; and then you’ve got the appreciation on one hand, and then in the other hand you eventually have your share of the income that’s coming off the property and the long-term profitability of the fund is dependent in large part by that conversion that you were talking about. So, I guess one, am I still describing the investment opportunity very simplistically but is that simple description still quite accurate and, again, I know you can’t necessarily share tons of specifics right now but as you look to your projections does this still pencil out in the future as an income producing operation in the long-term?

Craig: Yeah. So there’s two sources of returns from farmland in general is appreciation and cash flow from the farmland. If you’re going out and buying commodity crop land today, you’re generally buying it at around three and a half to four percent cap rate or cash return to the asset rate; and as we put it into the transition period the expenses go up a little bit ad the revenue goes down a little bit during that transition period, and then after that land gets certified organic then we get the demonstrable clear price premiums for the crops that are grown out of the land. And so, and that’s what we’re seeing as the portfolio converts over so that acre that’s certified organic has—we’ve shown large increases in the rents per acre, and that’s worked out pretty nicely.

Jason: To give you an example the time frame. So, we acquired a large portion of fund two in June of 2015 and so, by this fall, we have a large portion of that now in organic transition. The part of the thing that happens is you have this rolling time frame where you may have certain—you’re not necessarily going to transition everything—as soon as you buy a farm it may  not all go into organic transition for logistical reasons, existing crops on the field. And so, it may take three years, let’s say, before every single field has entered organic transition and so that’s really what I’ve been trying to work on is accelerating a rate of our conversion. So then, we get to that cash point sooner.

Adam: Got it, and to your point the transition itself takes potentially upwards of three years right?

Jason: Yeah, always three years.

Adam: Yeah. So it may take you three years to put an acre in transition then you’ve got three years still in transition so it might be six years until it actually can grow organic crops.

Craig: It’s three years from the last date of that nonorganic fertilizers or chemicals were used on that land. So, in some cases we can actually buy land that hasn’t had a chemical treatment for six months; and in that case we can actually get that land certified in less than a three year clock period for our ownership.

Adam: Right. Yeah, I just want to dig in this a little bit because Craig, you had mentioned  earlier that your supply is so constrained. Even if you went out there tomorrow and bought a farmland, you’d have to go through that three year conversion but as Jason’s saying, well it’s not that simple, because it’s not like in most cases you can just convert all the acreage starting day one, it actually, for lots of many different reasons you may have to sequence that out over the course of years. So, while that’s sad from one large perspective it’s a very attractive one for the funds that you’re building because it just makes it even harder for competitors to come in and do what you’re doing quickly.

Jason: Yeah, there’s no pathway to catch up to this.

Adam: Yeah, we’d love other competitors out there because we think this is the right way to use the land but yeah it just as a specific business advantage, it certainly gives you that. Alright, so you guys have been super generous with your time. I’m going to need to wrap up here. In the commentary along with this podcast we will provide clear links on, if you want to contact Farmland LP, they have a whole data war room where they can send you all sorts of approved documentation about the fund, answer any questions you have. So, in closing here Craig, it sounds like you guys—the fund that currently is open to investors is fund two which is the private REIT. Really quickly, last time we talked you shared the long-term vision is to eventually at some point in the undetermined future convert that to a public REIT. That has some advantages for people that become investors now, but what I love about that is the reason why we talk about Farmland LP is we have so many readers that so desperately would love to become owners of farmland, but they don’t have a way to access that, short of actually buying a farm; and for a lot of people that’s not a realistic reason. Now you’re providing an opportunity to do that. Your current funds have only been able to accept accredited investors, which are people who have a certain amount of assets or income. When you move to a public REIT though, then you’re sort of democratizing the opportunity. Then anybody who’s got enough money to throw in to buy a share whatever the share price is can be, in part, an owner of farmland. So A, did I just describe everything accurately and B, is there anything else that you’d like someone listening to this to know who is contemplating potentially becoming an investor either today or in the future and what you guys are doing?

Craig: Yeah, that’s great. So, the spirit of what you’re saying is right on a couple specifics. It’s not a REIT. Today it was structured so that we could convert it into a REIT and that’s just checking an IRS box and you just do that right at the time that it’s most beneficial to do it. And so, we’re not there yet and the use structure of the second fund is just this—it’s a ten year fund. We are managing—our dream, our goal is to get the land—wouldn’t it be wonderful to have a publically traded sustainably managed farmland REIT that people can really support the farmland that’s growing food that they eat, as well; and it’s organic and sustainable and everything that we want. That in a lot of ways we do farmland as a common. It’s a common benefit. Everyone benefits when it’s managed well and really everyone’s harmed when it’s not managed well and people can reconnect with farmland by buying locally and by going out to the local farms and to have a way, at some point, where people could connect financially with that, and really tie together their sustainable future with their financial future. That’s just—it’s where we would like it to go. It’s where we think it should go.

Adam: Okay great. Well, we’ve in the past had a lot of people express interest. I think a number of people have actually become investors for all the right reasons. Certainly, I’m saying that with a strong bias, because I’m an investor myself but if you’re listening and want to learn more we’ll provide links along with this podcast and if you’re somebody who loves the opportunity and maybe doesn’t have the capital right now, just hang in there and eventually, hopefully the team will be as successful as they’ve been to date and get that public REIT out there and then with almost any amount of money you can become an investor in farmland. Guys, thank you so much for your time. Jason, in wrapping up anything else you’d like interested folks to know from your side of the story?

Jason: Just that I’m really—I really appreciate your listeners and the folks that have invested enough. They are our partners and we have investor tours and one of the biggest joys for me is meeting the people and showing them the land. So, I want to thank you for coming out on the last one in California and I sort of think of this podcast as sort of a surrogate for that. We’re not on the land, but I really love telling people about what we’re doing and I really appreciate people who are listening to this because they’re obviously—we probably think a lot alike and care about a lot of the same things.

Adam: Fantastic. Well guys, thanks so much for taking the time out of your schedules, look forward to doing this again next year. I’ll definitely see you guys at the California investor day next year, and I had just missed being able to make the Oregon one, but I will go in 2017, I pinky swear, and I’ll do another write up of that one too with pictures so that folks can really get a sense for what’s happening up there too.

Jason: Great, thanks a lot Adam.

Craig: Sounds great.

Adam: Alright guys.