Episode #215: David Chan, “How Do We Make Farmland As An Asset Class More Accessible?”
Guest: David Chan is the COO and a founding team member of farmland investing startup, FarmTogether, a platform with a mission to democratize farmland investing and make it more accessible as an asset class.
Date Recorded: 4/21/2020
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Summary: In episode 215 we welcome our guest, David Chan, COO and a founding team member of FarmTogether. We discuss the FarmTogether platform and making farmland investing more accessible.
We cover farmland as an asset class, some history about the fragmented nature of farmland ownership, and the relatively small 2-3% ownership stake that is in institutional hands. We cover the broad models of farmland ownership, and a real-world example of how a deal actually works on the FarmTogether platform.
As we get deeper into the conversation, we hear some thoughts on sustainability and the role regenerative agriculture can play in reducing agriculture’s carbon footprint.
All this and more in episode 215 with FarmTogether’s David Chan.
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Transcript of Episode 215:
Welcome Message: Welcome to “The Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com
Meb: Welcome, podcast listeners. We have an outstanding show for you today. Our guest is the COO and founding team member of the farmland investing startup, FarmTogether, a platform with a mission to democratize farmland investing. In today’s episode, we discuss making farmland investing more accessible via the FarmTogether platform. We cover farmland as an asset class and some history about the fragment and nature of farmland ownership and the relatively small stake that is in institutional hands.
We cover the broad models of farmland ownership and a real-world example of how a deal actually works on the FarmTogether platform. As we get deeper into the conversation, we hear some thoughts on sustainability and the role regenerative agriculture can play in reducing carbon footprint. Please enjoy this episode with FarmTogether’s David Chan. David, welcome to the show.
David: Thanks so much for having me.
Meb: Yeah, man. We got me in Cambria global headquarters. You’re in New York FarmTogether HQ. I see you got to shift robe in the background. I’m sitting on a couch at this point but it’s great to have you. I’ve been wanting to chat with you for a while. Today, we’re gonna talk about farming. FarmTogether, give us a quick overview. What’s y’all’s story?
David: FarmTogether is made up of a team that has experience in both farmland investing and agribusiness and technology. And much of the team has long believed that farmland is a great asset class that belongs in more people’s portfolio. And so, the vision has always been how do we make farmland as an asset class more accessible beyond university endowments and large pension plans to everyday investors. That’s our goal. And so, the mission was started in late 2017 by my partner, Artem Milinchuk, and today we are now rocking and rolling and rolling out new investments. We just rolled out a new one about a week ago, [inaudible [00:02:26] here in Oregon, and we’re making it happen. So, it’s exciting.
Meb: Let’s start broad. We’ve talked about farmland a bit on the pod before, but for investors, I’m guessing 1% at most of our listeners have farmland investing in any capacity. Talk to me about why farmland is attractive as a broad asset class and then we’ll start to drill down into a lot more specifics.
David: Farmland is really a sub-sector of real estate, a real asset. And just like real estate, there’s two different components of return. So, one being the income or yield that you generate off of the property. And that can be either driven through rental income if you lease the land out to a tenant or your operating income if you directly target either yourself or through an operator. And then the other component of the return being appreciation. So, the property appreciates in value due to a number of different reasons, but those two together give you return. So, the return itself is bifurcated, which is nice. And you do have a cash component upfront.
Beyond that, farmland, if you think about it, food goes into much more than the plate at your dinner table. Corn and soy are used in so many different products from textiles to pencils and these products are just used all over the place. And so, for that reason, this is a great inflation [inaudible 00:03:43] because these broad materials are essentially used everywhere. But also, there’s a natural support on the demand side so that even in really tough times, like those that we’re experiencing right now, there is always going to be a limit. And I think of it in terms of, sort of, demand elasticity. And I would argue that food, water, and medicine are as close to perfectly inelastic as you’re gonna get.
Meb: And so, as you think about farmland, I think you hit the nail on the head and it’s a good analogy to real estate because not just the return stream but also it’s illiquid typically. Also, there’s many different flavours. The New York commercial real estate may be different from Phoenix residential and on and on and on. And so, the biggest challenge I think most people listening to this with farmland is traditionally real estate has a pretty heavy, not only institutional component, but every individual is familiar with it because they own a house. Farmland’s a little different. Talk about who owns all the farmland and how has it been managed over the past few centuries?
David: American farmland is actually quite interesting because it reveals a lot about our history. And the way land is fragmented in the U.S. often is a result of where the U.S. was 100 years ago, 200 years ago, 300 years ago. So, in the Southeast and Mississippi Delta where a lot of plantations were, there tends to be larger tracts of land and you can come across several hundreds of acres that have been in families for sometimes centuries versus when you start to head out towards the inner mountain West, you come across more ranches, you come across, I’d say, different portfolios. And so, typically you’re not dealing with true farmland in the sense of crop share, you’re dealing with a lot of grazing cattle, maybe dairy, there’s different focuses to the land.
But by and large, I’d say U.S. farmland is highly fragmented. I think 70% of our farms are under 5,000 acres, which sounds like a lot of land, and it is, but if you look at the millions of acres that we have farmed, it creates quite a fragmented picture. And so, the institutional owners and professional managers who own farmland today is actually a very small portion of the market. We typically think of it as being about 2% to 3%, largely comprised of some large insurance funds who have been in the farmland investment space for a number of years, some university endowments, a couple of nonprofits, like there’s a couple of major religious organizations that own a lot of U.S. farmland. But beyond that, the vast majority of our farmland is either owned by families or operator owner networks, almost like many co-ops that had pulled together in their assets.
Meb: Well, that’s interesting about the religious organizations. Is it the Mormon Church who owns all the farmland?
David: Yeah, the Mormon Church is correct. You’ve done your research. Yeah.
Meb: Interesting. The fragmented nature is also part of the opportunity, of course. The struggle for a lot of people that do own real estate is it tends to be incredibly concentrated. I mean, most people in the U.S., a big chunk of their net worth is in their house. And that’s a very specific geography type, etc. Even if they own some commercial real estate, it tends to be dotted around their own city.
But the same thing with farmland. You mentioned row crops in the Midwest, different types of cross in the Southeast or California. Give us a little overview about how to think about a farmland allocation as where it fits into a portfolio. Because we talk a lot about, on this podcast, the global market portfolio if you were to buy all the assets in the world and the biggest missing chunks traditionally because they’re so damn hard to access are farmland and also single-family homes around the world. Talk to us a little bit about where it fits in and how to think about investing in that asset class.
David: If you look at how university endowments having approached it, they’ve stuck to a rule of thumb of about 5% to 10% of your portfolio could be in something like farmland. And so, that’s one approach. And then, the next level, once you think about where is this land in terms of your overall portfolio allocation is within farmland, how do you allocate those dollars? Are you in one property? Do you do invest across multiple properties? Are you in grow crops? Are you in permanent? Are you in both? And these are all very specific questions that we need to the individual investor, what’s suitable for them, what their risk tolerance and investment horizon are.
What we tend to recommend to folks, first, any direct investment in farmland I think brings great diversification to a portfolio. Overall, there’s a lot of net positives that we see with adding farmland to a portfolio. The specifics on what exactly to add, again, really come down to risk appetite. And so on the row crop side, if cash income is a high priority and you’re comfortable with, sort of, a tenant model and a property that’s heavily rental income-driven, although cash rents have come down quite a bit in U.S. for cropland, there are still opportunities to generate 4% to 5% cash on cash annual returns even in this environment.
Meb: Explain that real quick to the listeners, what you mean by cash rent and how that actually works out in implementation.
David: The way this typically works is you will own a parcel of land, often, hopefully, in an area where there are other neighbouring farms. And so, there will be tenants or operators or farmers in that region who had invested in what we call midstream equipment. So, think holers or tractors or whatever capital-intensive equipment is needed for the operational components of managing farmland. So, from their perspective, they want to basically spread those fixed costs as much as possible in order to improve their margin. And so, the more acres that they can put under management within a given region, the more that they’re able to spread those fixed costs and improve their unit economics. And so, farmers are incentivized to manage as many acres as possible within a geographic footprint that makes sense.
So, you have a bit of a competitive environment there with tenants where they’re economically incentivized to farm more acres. The way it works for you as a landlord, you will ultimately select a tenant and agree on…you’ll have a lease agreement that stipulates how much rent income will you be collecting, will it be collected annually or semi-annually. Typically, we see these arrangements are often annual lease payments. And the beauty for the landlord is that the rental income is paid typically in Q1, right around this time of year. And so, you’re collecting your rent before planting occurs, before some risks that you often see in farmland could materialize like a really bad year for weather, rain, flood, drought, whatever it may be. And so, you’re shielded in a way from the operational results on that property. So, it’s a very de-risked formula and nice for investors who are risk-averse.
The other component of that I’d like to add is just real quick, in the U.S., we also see that vacancy rate. So, if you lose your tenant, say, for credit default or they just choose to not renew their lease, vacancy rates in the U.S. farmland market are incredibly low. A manager we work closely with who’s a strategic partner of ours, I believe 250 tenants, they saw 1 tenant ever default. And so, it’s a very healthy market from a credit standpoint as well.
Meb: So, maybe in an analogy, and you can correct me, if thinking about this for real estate is simply just finding a tenant for your house where you have a property management company, you don’t have to worry about anything. They pay the rent ahead of time. If there’s any issues, it’s kind of all taken care of. And on the flip side, because I think this is what most people struggle with when they email me, and I get emails every day about farmland now, is that the struggle of actually owning land direct and farming it. And that seems like such a massive undertaking, and it is, probably the highest return if you do everything correctly, if you own all the equipment. And the same way, if you owned a house, if you go fix the broken sink and the toilet and the black mould and everything else, but most of us don’t have those skills. Talk to us a little bit about, kind of, that model is it’s a lot harder to do all the actual farming work, maybe higher reward potentially if you have the skillset.
David: I think, ultimately, at the end of the day, my team at FarmTogether, we’re all investors and technologists. And so, if we’re doing the farming, something’s wrong. We’d hire for that talent. And there are truly skilled top quartile, top decile managers and operators out there who make a difference on the asset management side who this is a skill, farming is a skill. And it’s an expertise that’s developed over the course of a lifetime. It’s not something that you study agriculture at a big ag college. Like, I went to Cornell. I was in the ag school there. Plenty of aggies around. I guarantee you that folks who are farming for 30 years know a lot more than folks coming out of an undergraduate program. So, it is a career and we recognize that.
But to answer your question on direct-operate models, we use these models a lot because we tend to find a lot of really great opportunities on the permanent planting side. So, permanent planting means there’s a biological asset that is going to produce an economic license. Sometimes, 25 to even 50 years or beyond. Trees, vines, anything that is repurposed and produces multiple harvests. So, from the permanent side, we’ll directly operate. And what that means is we’ll do everything you’re talking about, we’ll own and farm the land, but we’re not doing it ourselves. We’ll contract out listing operators, similar to the model we just talked about on the row crop side, but instead of receiving rental income, we’re paying an operator a service fee for that service. And so, we’re paying per acre for the farming and the labour and their expertise in managing that property. But then, we capture the full upside on productivity and price. That’s the scalable way of being able to capture full economics without doing the farming yourself.
Meb: And I know the listeners would want to ask this, and I know it’s highly variable depending on farm season, what’s going on in the world, but if you could give some sort of expectation as to, “Okay. I’m just renting it out. Here’s my expected sorta yield versus we’re operating or partnering to operate.” I would assume the latter has a higher return, but is there any sort of way to, kind of, think about as the people listening to this are saying, “Is it double? Is it only 1% higher? Is it triple? How do they, kind of, compare historically rule of thumb?
David: So, we can break it up a couple of ways. Let’s think both total return and then cash versus appreciation. So, on the row crop side, annual cropland, where you’re typically leasing it out and getting rental income, right now, your best rental rates are maybe 4% to 5%. And then if you wanted, assume you can get 2% on inflation, although in this environment, that’s an assumption, and you can create value either from tiling or…there’s a digression driver there, maybe you can get another percent or two. We think that net returns of 7% to about 9%, maybe 10% on the row crop side are achievable in today’s environment. But that still requires value-buying, identifying value creation drivers, having a strong operator network there where you have your choice of tenants. So, that still requires a lot of skill on the asset management side to achieve.
On the permanent planting side, returns are certainly higher. Total net returns anywhere from 10% to 15% and cash here is a little bit more variable because it’s a result of how early you go into the orchard. And so, if you’re just planting trees or the trees are maybe one or two years old, they’re not producing a commercial yield yet. That’s gonna be lower cash upfront. Your cash yields might be 6% average over the life span, although they may be 0% for the first couple of years. But ultimately, you’re going to be compensated for appreciation because when you sell that orchard, you de-risk the equation greatly and so you’ll see a very high appreciation.
On the other hand, a lot of the low double-digit IRR permanent projects we’ve seen, so net IRRs of 11%, maybe 12% projects, these are turnkey orchards where you go in, trees are there, they’ve been at full maturity for maybe a year or two and, day one, that first year, you’re gonna get it at 9%, maybe 10% cash yield. And these are higher value commodities like almonds, pistachios, walnuts, hazelnuts. There’s a barrier to supply here because these are commodity needs that can only be grown in certain areas of the world. And so, that’s also a factor.
Meb: So, you got probably a lot of people listen and saying, “Okay, you got me sold. Good returns, low volatility, I don’t have to farm it myself.” What’s the biggest risk that you see the most traditional farm allocations? Is it spot prices of the crops going down? Is it mismanagement of the property? Is it farms traditionally getting upside down, I think, like, in the ’70s with too much debt? What’s, sort of, the main issues that listeners would say, “Okay, why wouldn’t I just put all my money in farmland? What are the risks here that I’m not foreseeing?”
David: There was certainly a crisis in the ’80s that was a result in too much leverage that interest rates spiked up and then there was an issue with Russia and the grains market that also created some turmoil. We’re not seeing that today. Today, leverage, if you look at debt activity levels and across farmlands, very low, I think in the low to maybe mid-teens at best. So, we’re not seeing a lot of leverage in the system and we actually think that there’s an opportunity to apply appropriate leverage to acquisition in this space. But I’d say the biggest risk today for a traditional manager, if you think about it, traditional managers in this space have not been around for 40, 50 years, like, if you look at some mutual funds that are even longer. Really professional investment management in farmland began in the 1990s.
So, although that’s still a good chunk of time compared with many other asset classes, it’s still pretty young. And what you’re seeing today is because of the nature of the market, because of that share of 97% or 98% in the U.S. is owned by families or potentially a private owner-operator network in which 3% is institutionally managed, the larger managers, when they win mandates to put capital to work, they have to think about efficient uses of that capital. And so, a $2 million property to them doesn’t move the needle. They’re looking at maybe a $20 million property, a $50 million property, a $100 million property. And it’s not every day in the U.S. that you see $50 million contiguous farm property come up for sale. And so, what we’ve seen materialize is that there has begun to see a bidding environment take place. And so, there’s an auction-like bidding at war that you have for these larger pieces of land where all of the larger managers want that $50 million property for their portfolio and they drive up the acquisition of price.
At the end of the day, I’d still stick with what I originally said. This is real estate. This is a real asset play. And in real estate, at least what my real estate professor taught us was that the acquisition is often the most important part of the entire transaction and you have to get the purchase price right. And so, I think that because of the nature of supply today, these bidding wars that were driving up prices and acquisition for some of the larger properties are creating challenges for larger managers. That being said, there’s a ton of opportunity for smaller managers or managers who are focusing on smaller properties, you know, between the even sub-million to maybe $10 million or $15 million range.
Meb: Let’s pivot a little bit and start to hear a little more about how you guys, FarmTogether, are thinking about this. By the way, listeners, there’s a great white paper they put together, we’ll link to it on the website, on farmland investing in general. But where do you guys get involved? The company got started in 2017. Talk to us about how you guys, kind of, think about farmland and your offering in general.
David: We think that this is very much a generational story today. The average age of the U.S. farmer is now about 60. And we receive inbound messages, emails, postcards, and letters, believe or not, and phone calls as well from farm owners who are thinking about estate planning and who are looking for basically creative capital solutions to solve a generational transfer problem. And so, it’s not as simple as it used to be where a farm owner will basically hand over the keys to the kids and the farm continues and it’s really a smooth transition. Today, and oddly enough for whatever reason, we find almost every farmer we speak to has three kids. It’s very weird, but I’d love for some stats Ph.D. to do a study on that.
But they have three kids. Two of them just want liquidity and they want to be on their way, maybe they’ve moved cities already. And then often there’s one sibling who either for operations reasons, they know how to farm, they’ve done farming or emotional reasons, that’s their home and that’s all they know and they’re tied to it. They don’t wanna see the farm outright sold. And so, we’ve been able to work with some families in these situations to use our platform and use FarmTogether’s platform to syndicate out, in this hypothetical case, two-thirds of the farm to individual retail equity investors and leave a minority stake of a third with that one heir who did not want to sell their stake.
And being able to bring a creative solution like that to a seller, it’s huge. It’s allowed us to win deals that otherwise probably would have been won by someone else because of maybe a just higher price or whatever the component may have been. I think ag, in general, has been one of the sleeper industries and just now we’re seeing tech really be not just embraced because I think farmers are very technologically savvy, but I think made accessible, cheap enough tech that can be used in an operational manner on the farm. And the same goes on the FinTech side. We need to be able to bring creative loan products, step products, creative equity products to farmers the same way we do with every other business and industry that’s out there. And so, FarmTogether today is doing that and we’re proud to be doing that and we continue to see any strong interest from farmers who are thinking about estate planning and looking for a partner and transitioning over to the next owner.
Meb: So, maybe walk me through an idea from inception to putting it together and raising the funds for, you can do a hypothetical or you can do a real farm you guys have done to date on, kind of, how it would have worked from everyone’s standpoint, the farmer, the investor, the platform, everything.
David: I can talk about a couple but a farm that we just closed, Chester Farm, located in Tulare County in California. It is dual commodity, so there’s tree nuts on this property as well as citrus. And the family, they’re looking to sell the farm, have immediate cash needs and short-term motivation but may ultimately decide to buy back in the future at some point. But we worked with the seller to figure out the best arrangement in terms of creating a capital structure that made sense for them. And what we do then is similar to the real estate, we’ll issue an LOI or essentially indication of interest, letter of interest that shares what we think the valuation has and where we’d like to proceed.
And then, once that’s agreed upon, we’ll start a diligence period where we go through…so, it’s financial diligence and full commercial due diligence and confirmatory diligence on the property itself. This involves running soil tests, water tests, and other environmental tests, looking at past historical data and production data, price data, yield data, looking at the marketing programs, who have been the marketing partners in the past, and where [inaudible 00:23:27] sold? So, it’s a full deep dive. While we’re doing that deep dive, we’re simultaneously syndicating the deal. And so, we’ll go to our FarmTogether investor community and share details on where we have underwritten the deal, what we believe the net IRR or the project can achieve when we expect to exit the property, and all the value creation components that make us excited about and the reason we decide to choose this property to bring to the platform.
Once we syndicated the deal, well, then, it’s kind of a seesaw, but sometimes diligence isn’t done yet. So, if diligence isn’t done yet, we’ll continue to focus on closing out diligence, tying all the loose ends there. And then once both those processes are done, we’ll move forward to close on the property. And then, from a legal structure, the way it works is that all the equity funding that we raised in that syndicate is raised in a special purpose vehicle, which is a separate LLC. And so, this is the LLC that will ultimately acquire the deed to the property and then our investors will own a proportional stake in that LLC that’s commensurate with their investment. And then all distributions as well as the net proceeds from sale when we exit the property, all reflect whatever their proportional share of ownership in that LLC is.
Meb: And so, the investor then, is this an indefinite life? Is there a set timeframe for this property? How does it work if they want liquidity? How’s the kind of day-to-day expectations go on that?
David: These are all set time horizons. So, we’ll share with our investors that this is a five-year project or an eight-year investment. I think all of our investments to date have been between five and, I think, eight years on the higher end of the timeline. And then, we have a portal available where we’ll share updates, typically not on a daily basis, but also maybe on a quarterly basis updates from the orchard. That’s where we show all our projections and what we believe yield will come in at. When actually yield is reported, we’ll post that there as well. So, for [inaudible 00:25:23], which is an almond property in California, both yield and price beat our expectations, which was good news to share with our investors.
And so, we share that through the portal so that you can see essentially how your investment is performing over time and if it’s in line with what we believed it could achieve at underwriting. K1s, all docs, information, distributions, everything is done through the portal. We’ve put in a lot of work to try and make it streamlined and seamless. And so, as the investor, our goal is that although you’re always happy to give me a call and I’m always happy to speak with you, all the information that you would need is available in that portal.
And then, in terms of liquidity, we are very excited about opening up a secondaries market this September to our first group of investors in that almond deal. We tell all of our investors, both before and during the investment process, you shouldn’t be going into farmland if you expect to be looking to exit in a year. This is not a get rich quick type of asset class by any means. This is for long-term ownership. But life happens, situations happen. And so, of course, we’re gonna be cognizant of that.
And the beauty of having these crowdfunded equity syndicates that have dozens of individual owners in the deal is that we have higher numbers of investors. So, an auction environment is much easier to create than it would be in a closed-end fund structure. And so, as soon as one year has passed from close, we’ll open up a secondaries market that we support. And should someone who owns a stake in the deal be looking for a purchaser to purchase their stake, we’ll try to be a matchmaker and bring those two parties together and facilitate that secondaries transaction.
Meb: As far as investors, has this gotta be accredited? And if so, what’s the minimum, maximum chunk that people can invest and how do you see people typically go about it?
David: Right now, we are serving the accredited community and we are looking at ways to serve the non-accredited investor group, and happy to share when that day comes, but we are still researching that. Although I will say that the SEC is potentially revising their definition of accreditation and bringing in a knowledge component for the first time.
Meb: God bless them if the SEC gets this right. This has been on my list of SEC boner moves. And I love the SEC, if you’re listening. They eventually get things right. They just cleaned up my space, which is the ETF world, with this new ETF rule. God bless them. It took a while. The accredited thing has long been a thorn in my side. And like you mentioned, if they just…in my mind, if you just went to almost a driver’s test model, be like, “Hey, take this test online, study for it, you pass it, you can go light your money on fire as you see fit,” but the fact that people can already do it with cryptocurrencies and penny stocks but don’t have access to something as boring, no offence, or exciting as farmland.
It can be exciting like when my combine caught fire and burned down my entire field a few years ago. Listeners got to hear that story. And so, it can be very exciting in the wrong way. Okay. So, accredited, is there minimums? How do people typically do it? Is it mostly individuals? Is it advisors, family office? What’s the kind of breakdown?
David: We see all the above. Minimums for our platform are typically $10,000 to $20,000 per property. It depends on the property. So, for the [inaudible 00:28:38] field that closed a couple weeks or two ago, Chester, that minimum was $10,000 for our current deal, which is the [inaudible 00:28:44] hazelnut orchard, that minimum is $15,000. We do have many, many, many individual investors both from the U.S. and abroad in our deals. We also have registered investment advisors or RIAs and family [inaudible 00:28:56].
I would say the other component I’d like to share is that it’s not just folks investing out of checking accounts or brokerage accounts or anything like that. We also support qualified funds, which I find very exciting and I’m very proud that we’ve spent time to integrate with a number of different qualified fund custodians. Often, these are in the form of either self-directed IRAs or solo 401(k)s and they allow you to invest qualified funds into our farmland products. And in my personal view, this is not me speaking for the firm, but in my personal view, I think the match between qualified funds and a long-term asset like farmland makes a ton of sense. And so, I often recommend to folks, if they are looking to invest in our products, if you do have qualified funds to put to work, often it makes good sense.
Meb: I think you guys got a shout out. We did one with Alto IRA. You guys plugged into those guys? I think you guys came up in that podcast.
David: Yeah. Alto was our first integrated partner there on the self-directed IRA front. They’ve really been doing a lot to innovate the self-directed IRA industry. And it’s been around for years, probably decades, but has not seen much innovation until recently. So, they’re a great partner.
Meb: And so, you guys, the business model, the fees, is it annual management? Is it carry? Is it sort of commission-based? How’s it work?
David: To date, we have no carry in our deals. We want to give the upside to the investors and we think that’s important. But we also think it’s really important to have a simple and understandable fee structure. I know a lot of the investments I’ve been in, fees can be convoluted and you find out about fees you didn’t know existed. We do not believe in any of that. So, we charge an upfront administrative reimbursement fee at the time of close, and that’s typically about 1%. And then our annual management fee often reflects the complexity of the deal. But for more simple deals where we’re able to pass on savings to our investors, we do. So, for our hazelnut deal, the annual management fee is 50 basis points. But for more complex deals, our annual management fee could go up to about 1%.
Meb: Talk to me a little bit about what is the pipeline, either historically or in the future, what are you looking at right now as far as geography and type? Because I imagine that most of the investors that are gonna be your big fans are not just gonna allocate to one farm. They’re gonna end up allocating to two, three, four, five, six, seven, build a diversified portfolio across geography and types of farms. Will you ever do any livestock? And we would also be curious…this is a multipart question, sorry. What else would be curious is to if any of the farms are doing any sort of alternative yield, whether they’re maybe doing solar energy when they’re not farming, maybe they’re doing wind farm, whatever it may be. How do you look at, sort of, the pipeline of all the different types of farms, what’s in it, what’s most attractive, etc.?
David: So, I think we certainly see investors who are doing exactly what you say and looking to geographically diversify and [inaudible 00:31:54] multiple offerings, which is great because, of course, we can then build even more meaningful relationships and have a better understanding of that investor’s needs and what their investment goals are. And we tailor our approach around that. And so, when we build out our pipeline, I think we currently have $500 million of farmland that we know of that we could acquire tomorrow. In theory, if the capital was there, we will take geography into account and think about how do we prioritize our existing investors and maybe we’ll bump something up, if all else is equal, that’s just as promising of a property as another one. So, we do think about that.
Currently, we’re seeing a lot of great opportunities in the Pacific Northwest and on the West Coast. And so, a lot of our properties are in California and Oregon. We’re actively looking at properties in Washington State and the State of Arizona as well. And so, by and large, that’s where our historical properties are found. We also are very excited about sustainability and agriculture. And this is something I’ve been working on for a while, but looking at an emerging field coverage [inaudible 00:32:58] of agriculture where through the land management principles that you’re employing, you’re actually sequestering carbon from the atmosphere and bringing in more nutrients to the soil and replenishing the soil versus depleting the soil and its nutrients through farming.
So, we are working with the Terraton Initiative, which is an initiative that’s being led through Indigo Agriculture based out of Boston, Massachusetts. And through this Terraton team, they essentially host a global challenge called the Terraton Challenge. We’re a proud semifinalist. I’m continuing to work through that challenge to help sequester a trillion tons of CO2E from the atmosphere through this form of farming. And right now, we are looking at a couple of different potential projects to serve as our first crowdfunded regenerative property.
And [inaudible 00:33:44] the sense that, often, we have more either livestock components or some ancillary components like you mentioned. Step one would be a regenerative cow grazing opportunity, maybe Kansas. And the other one that we actually just recently learned about and we’re exploring right now is actually a dairy operation in Colorado that’s looking to increase their geographic footprint. And so, they need a partner to help them acquire more nearby land, also for regenerative purposes, also for grazing. And so, we think that there’s tremendous opportunity there.
And the ancillary income there would be through the creation of carbon credits. And we see the likelihood of a carbon credit market developing to be high. We think that there is increasingly high demand from states and from corporates who are making commitments to be either greenhouse gas completely free of GHG emissions by a certain year or to decrease their emissions by a meaningful amount. And we know that that can’t be done entirely through operations. And so, these corporates and these states are gonna be buying carbon certifications and credits from projects like regenerative agriculture, which can prove to sequester CO2E from the atmosphere.
Meb: And that’s not something yet that has, like, the organic stamp of approval. I mean, it’s not, or maybe it is, I don’t know. Is it? Because that’s…organic seems a little established at this point. Is regenerative still sort of in the philosophy kind of phase? Where kinda is it?
David: So, there is a label that is now, I believe, as of this year will be used, which is regenerative organic certified, ROC. And so, it’s still frontier, but you will start seeing it more and more hopefully on products in the grocery store. And this is being led by a couple of different thought leaders in the regenerative states. So, believe it or not, Patagonia, the apparel company, has a [inaudible 00:35:29] arm called Provisions. And Yvon Chouinard, the founder of Patagonia is an incredible leader in conservation stewardship and has been very vocal in encouraging the ag industry to be more regenerative in its practices. And so, Patagonia has been able to leverage their position of brand awareness and their platform to put a spotlight on regenerative agriculture. And they actually serve on this regenerative organic agriculture certification board. And so, they helped shape this label, which is going to be out this year and used on different products.
Meb: Interesting. That’s good to know. One of the things I wanted to talk about, and I think this is public, so cut me off if it’s not, you guys also have a program where like, look, I’m a family office. I’m super-rich. Not me, my listeners. I got $10 million, I got $50 million, I got $100 million, whatever. I don’t want to mess around with a bunch of other investors I don’t know. Can I just give you guys, like, a million bucks or five million bucks and you go build me a portfolio? Is that something you guys could do?
David: Yeah, absolutely. So, it’s called our bespoke account program and that’s exactly what it’s for. It’s for either higher net worth individuals or sometimes family offices or RIAs who are looking to develop a customized portfolio or sometimes they’re looking for a sole property, a larger property that ultimately [inaudible 00:36:48] whatever their unique investment objectives are on the profile. So, we are just now in confirmatory diligence on our first bespoke offering and so, we expect to close on that later this spring. And that is a large hazelnut orchard in Oregon. It was about a $3.7 million deal and it’s just the sole owner who is looking at this as really generational investments and largely an estate planning investment. And so, we were happy to help an investor like that who understands why farmland could be a great long-term generational transfer versus handing over a portfolio of random ETFs and stocks, which requires a lot more maintenance and also has more volatility.
Meb: I mean, this is my two cents input that I think that, to me, for y’all’s business is a massive opportunity because there’s so many people that want to be involved in this asset class but the biggest problem is they don’t have that value-added fiduciary that could assist them. It’s not like they can call up their broker at Morgan Stanley or UBS and be like, “Hey, bud, can I go buy some farmland?” Usually, they have no idea. Or even if you do, you then gotta run it. It’s just a problem. Most likely, they’d say, “Go invest in this fund,” but that’s not really the same thing. So, to me, that’s a really, really cool idea. What tends to be the minimum? Is it a million? Is it just dependent? You guys still working through it? Or if someone who says, “I want it bespoke, start to allocate,” is there a target?
David: I would say the stated minimum, I believe, is $750,000. But we’ve worked with folks and we’re working with folks to have a little bit less than that. I think the assets, sort of, got close to half a million to make it work. It’s really hard to find a good property that’s gonna be below that range. But I think once you get to that half-million-dollar mark, you can start to look at single ownership properties. And the one that I was describing just before is actually going to be a 1031 exchange as well. So, that’s another value aspect that we see for investors who are real estate investors and have real estate investments for some time that are looking to roll, but for whatever reason, maybe they’re not excited about their particular market. And rather than find another market or venture out of commercial into residential or whatever the tradeoff may be, this is an asset class, a branch of real assets that qualifies for the 1031 exchange and often brings great diversification to their portfolio and still is an effective role for their tax considerations.
Meb: And for the most part, and you can correct me if you know, opportunity zones don’t really play into farmland, or maybe they do, I’m not sure. But if I was to say I just sold my tech company, I got 20 million bucks, I want to try and put it in some opportunity zone funds but everyone is just real estate or some sort of weird opportunities, is farmland a possibility? Because in general, you have to improve the land. I wonder if regenerative would fall under that category. So, taking a farm and moving it from traditional to organic or regenerative, if that would be considered. Anyway, any thoughts there?
David: We have what they call [inaudible 00:39:57] opportunity zones and there are some areas in the country where it could make sense for farmland. More often than not, if you’re looking at opportunity zones in ag, where you do see them quite often is more on the vertical farming side. So, there are plenty of vertical farming qualified opportunity zones out there. I think that’s a different beast entirely and requires a different skillset. So, it’s not something that we looked at actively but, yeah, that’s what we’ve seen so far.
Meb: There’s no developed, and maybe there is, as far as vertical farms. Is that traditionally just companies that do that? I mean, there’s no single owner vertical farms out there, or are there? I have no idea.
David: There are…I mean, there’s plenty. The large ones.
Meb: Just greenhouses?
David: Yeah, exactly. Or you’ll see aquaculture, aquaponics, hydroponics. There are plenty of sole entrepreneurs running a hydroponics farm. There’s actually quite a few of them in the Southeast, which is interesting. But we do see that. And there are some hotspots around the country. Detroit actually is a hotspot for a lot of these ventures. And then, like I said, the Atlanta area, the Carolinas, the Southeast, we know the number of entrepreneurs working on these ventures there too.
Meb: What’s the impact been of this pandemic? Anything, bad, terrible, increased interest? What’s your thoughts?
David: It has been a wild couple of weeks, months. It is now April. March felt like an eternity, of course. And so, first and foremost, the safety and health of our team has been our top priority. Fortunately, so far, everyone has been able to stay in good shape. I’d say the impact on investor appetite that we’ve seen, I think this has served as a reminder that equity markets don’t always go up. We’ve seen tremendous volatility in the equity markets and public equity. And I think equity is always front and centre. But if you look at it, and I know you do, fixed income yield, I mean, my gosh, the 10-year [inaudible 00:41:45] March has just been incredible volatility.
And I think that’s has been a bit of a clarion call for investors that uncorrelated, diversified, that real assets like farmland do have a place in most folks’ portfolio. And so, for us, we have seen an uptick in demand and interest. But again, it’s certainly not something that we’re celebrating because the impact on the world, of course, is serious. But I do think these events serve as a reminder that public markets don’t always rule.
Meb: Yeah. And I mean, and on top of that, I mean, the nature of private markets, you don’t have the daily quotes staring you in the face, up-down, 5%, 10%, red, green, and the emotional temptation to behave poorly. Farmland, for the most point, you couldn’t even price it if you wanted to on a day-to-day basis. Certainly, you could, but in a pretty wide band. So, there’s benefits to the illiquidity. By the way, I forgot to mention it. As far as benefits, do the investors get any perks? Do they get a bag of citrus or almonds every Christmas or they get to go visit the land or what?
David: Absolutely. So, our [inaudible 00:42:51] almond investors did receive, I think it was five pounds of California almonds right around the holidays.
Meb: That’s legit. That’s no joke.
David: Yeah, no, they’re right in time for…Actually, you know, I’m in New York, we have a lot of folks who use almonds, big Italian heritage here. And so, a lot of almonds were put to use over the holidays. No, they go to good use. But we look forward to hopefully being able to host our first [inaudible 00:43:11] tour later this year. We were aiming to try to get one in over the summer and now because of COVID, we have to see how the world looks. But we certainly would love to have an opportunity for our investors and prospective investors to come and see a farm. That’s the best part of a real asset. You can feel it, see it, touch it. It exists, and so we wanna bring our investors to the asset.
Meb: As you guys look to the horizon, new decade, the 2020s, you’ve only been in business for a few years and hopefully the future is very bright, what does the future look like for you guys? Is there a vision 1, 3, 5, 10 years where, sort of, you guys would like to be or your kinda milestones, your trajectory as far as the company? Or is there anything kicking around in the back of your head that you’re thinking about in the coming years? Or is it just kind of expanding all the offerings? What’s it look like for you at FarmTogether?
David: So, when you look at the U.S. market, it’s about just shy of a $3 trillion market. That’s farmland. Globally, it’s about a $10 trillion market. You look at the U.S., maybe $50 billion is professionally under management. That’s on the high end. We just see so much opportunity for professional management of land that’s gonna bring in just improved operations, improved techniques, improved stewardship, consideration of ESG, consideration of long-term ownership.
Not that current owners don’t all consider these things, but the mindset is different when you’re investing over the horizon of a decade or several decades. It’s a different mindset. Ownership mindset’s very different. And so, we think that we have an important role in continuing to be there to help make this market more accessible to more and more investors, not just a couple of university endowments or pension plans where they belong in almost every portfolio. We want to do it in a cheap way. We want to use technology to bring down the cost, bring down the cost from servicing and diligence and pass those on to our investors. And so, we’re hoping to continue to bring our costs down now and pass those savings along to our investors.
And I think personally, for me, the thing that brought me into ag in the first place, I studied atmospheric science in college so I’m a meteorologist by background. I think this is an asset class that can do tremendous good for our efforts in combating climate change. And, no secret, that was why I’m excited about regenerative agriculture. But I think beyond just regenerative, but just proper land management practices, being an efficient steward with your water, being an efficient steward and monitoring nitrogen and different various nutrients in the soil, they have profound impacts on our environment.
And so, I think there’s an opportunity in the 21st century, and it will ultimately be a decision that’s made by landowners on whether we want to have farms sustainably and consider other aspects of the world when we are operating and managing our farms. And I think FarmTogether is certainly excited about the prospects of our ability to increase the number of acres in the U.S. that are being farmed sustainably.
Meb: That’s interesting. You talked about tech earlier and I remember riding around in a tractor 10 years ago and being in awe about how developed and amazing the tractors were. Me and my relatives watching TV and hanging out and it’s air-conditioned and certainly nicer than the car we were in. But even thinking about why, you know, as the world with automation and drones and everything else about how much more improvements can be made with tech.
And we did a fun podcast with Joe Davis, who’s the chief economist from Vanguard and he mentioned that they did this study about innovation and how, not necessarily with patents, but with white papers and academic articles in the citations cross-linking that ended up leading to, it was actually predictive of a boom in innovation. And he said the four…I’m gonna forget them, but the four areas right now that they were seeing it, it was like, particularly bioinformatics with regards to cancer, particularly materials, other being like logistics with obviously self-driving cars and drones or anything else. But the other big one was AgTech, and he said, with agriculture, which obviously would have a big impact too. So, it’d be interesting to see how all of it works out.
But you guys have been doing this only for a few years now, so it’s still in startup mode a bit. How did you guys do this? Did you bootstrap it? Did you partner with venture capital? How was this getting funded in the early days?
David: So, we are, I’d say, a mix of all three. But early days, was a bit of bootstrapping and also, we are fortunate to have a great VC partner and we’re also funded by a number of angels. And between our angels and our VC partner, I think we get the full 360 of what the market is thinking of when they look at our asset class. Some folks, especially on the angel side and if you look at some of our board advisors, we have the former CEO [inaudible 00:48:09], the former CEO of Centerra, which is the largest dairy company over in Australia, and he comes to the table with a very deep expertise in the industry and understanding how the dairy markets work and how raw commodities work.
And then we have other folks at the table like our venture partner who aren’t necessarily experts in ag but understand finance and understand FinTech and understand many of the tools that we’re using to make the investment process easier. And so, seeing the confluence of those two worlds come together has been really special for us and has led us to, I think, being very thoughtful in our product development.
And it’s also indicative of the client base and the investors that we reach out to every day. Sometimes we speak with investors who grew up on a farm and understand ag very well. Sometimes we speak to an investor who’s never stepped foot in the Midwest or California in the Central Valley, has no idea where U.S. ag happens, how it happens, but is interested in learning more. And so, being able to understand the different perspectives that folks require based on their experience, I think is important. And fortunately, we have a diversified board that allows us to understand that.
Meb: What’s kind of been the biggest challenge for you guys as you’re getting started up? Is it educating the investor space? Is it sourcing the deals, which doesn’t seem to be a problem at this point? Is it structuring, getting everything structured? Anything particularly memorable or any comments about how building this company, anything that’s been just, you’re like, “Oh my God, that was just a big struggle.”
David: So, I think with any marketplace, you’ll always face a circular issue of sorts where it’s a chicken and egg problem. Folks want to see a ton of deals and their track record before they’re comfortable investing but you’re young and you’re just holding the platform. And so, it ends up being a little bit of the chicken and an egg. So, for us, I think it’s been really proving ourselves and showing our legitimacy and our experience from our prior worlds and how they prepared us to serve investors today. The beauty is that gets easier with time. So, the more deals you do, the more reps that investors see and the more you’re able to share your expertise and your experience through different forms of engagement, I think you start to whittle down that barrier.
At the same time, I think it’s a seesaw in many ways, let’s call that demand the other side being supplied. Right now, we know of a ton of acres that are for sale in the U.S. and we have a really deep pipeline. But over time, the seesaw is gonna go the other way and supply is gonna become the more challenging aspect. And so, we certainly are planning for that and building out a number of tools that will help us when that day comes.
Meb: We mentioned your white paper, again, which we’ll link to and also the website FarmTogether. Any other resources that come to mind? I mean, there’s no like intelligent investor of farmland investing that’s like the definitive book or website in my mind. Maybe there is. Anything that comes to mind as a good resource for people that wanna get educated on the space. Any thoughts?
David: So, there is a professor who I followed his work for years and I’m a big fan, and I think he understands this asset class better than anyone. And his name is Professor Bruce Sherrick. He’s at the University of Illinois at Urbana Champagne. And he has been following U.S. farmland and largely has been at the forefront of formalizing the professional management of U.S. farmland through these various market players. And so, I definitely recommend folks check out his work. Again, that’s Bruce Sherrick. That’s S-H-E-R-R-I-C-K. I think some of the larger asset managers who’ve been in the space for several years have done really great work as well.
So, I was previously at Prudential or PGIM. PGIM has done really, really thorough work in understanding California’s water rights and SGMA, which is the Sustainable Groundwater Management Act. And my colleague actually [inaudible 00:51:53] is our director of investments, was the author of that white paper during his time at PGIM, so we’re lucky to have him. But if you are going to invest in California today, you need to understand SGMA and you need to understand riparian rights. And so, I would point folks towards Prudential and PGIM for some of their research and work on that. And Nuveen, under TIAA, has been in the space for a number of years as well and they manage a substantial portfolio of farmland investments across the U.S. and their group has published really sound research as well. So, I think those are a couple of great places to learn more.
Meb: Great. It’s an area that people are starving for info, if measured by my inbox, that’s still a bit fragmented. Personally, David, what’s been your most memorable investment throughout your career? Good, bad, in between, anything come to mind?
David: That’s a tough one. I’d say…I’m gonna be annoying and give you two answers but…
Meb: Give me five. I love these stories. These are usually the best stories.
David: I still remember in high school we had a simulation trading game. I think I bought Chipotle back then at, like, I don’t know, like, $8 a share or something stupid. And I still, like, every now and then, I’ll look back and just check out the share price and be like, “Wow.” I didn’t know anything back then. I just knew I was 15 and I really liked fast food, Mexican food, and so Chipotle was, you know, the next frontier. So, that’s a silly one.
But I think a meaningful investment, I think, the most precious resource any of us has is our time. And so, I think where you choose to invest your time was indicative of your investment rationale. And so, for me, it’s joining FarmTogether and building out this team and building out this venture. And I’m just excited about this asset class. I think it’s starting to get the attention it deserves. Something that I long think about, and I was previously at an alternative asset manager called AMERRA Capital Management working on agribusiness product there. And one stat that we always talked about there was that agriculture is I think about 10% of global GDP and 1% of private investment dollars. And energy is 1% of global GDP and 10% of private investment dollars. And so, the disconnect…
Meb: Is that today or six months ago?
David: That was definitely six months ago. And maybe they’ve come closer now. But the disconnect is there and I think macro events like COVID serve as a poignant reminder to folks that industries like food and agriculture are vitally important to wellbeing and national security and many important aspects of life. And that’s what makes them defensive industries and places you wanna be during turbulent times like these.
Meb: All right. The next question is…I’m not gonna hold you to this, I promise. FarmTogether is resolved any liability whatsoever. David’s gotta go buy one farm in one part of the country doing one crop for the next 10 years, what’s it gonna be?
David: That’s a tough one. Again, this is another one where I have, like, 20 answers, but I’d say I’m tied between two. So, I’m gonna have to give you two. But we continue to think that tree nuts are just wonderful investments. They serve as alternative protein. There’s a natural supply barrier because many of these trees cannot be grown in most parts of the world. And so, we see a lot of promise in hazelnuts. Our current deal is a hazelnut deal. We’re working with a partner who has taken a very long-term deal in the hazelnut industry.
Turkey produces, I believe, close to 70% of global production for hazelnuts. And they’re being faced with a number of different supply headwinds from climate change to Lira currency issues. And so, we think that the industry, and so, if you think of the hazelnut industry, it’s a lot of the large candy companies like Ferrero Roche and Mars, they are looking for alternative suppliers and there aren’t many places in the world where you can grow industrial and commercial yields of hazelnuts. So, Oregon is unique. And so, I think Oregon hazelnuts show a lot of promise and we’re excited about them.
The other area I would say would probably be pecans. Again, similar story. Great nutritional profile, great protein content. We are seeing that there are pecan orchards in Arizona and the Southwest that show great promise. And from an environmental standpoint as well, pecans are a little bit less water-dependent than some other tree nuts. And so, we think that in a couple of years, we’ll be having pecan milk and pecan butter and pecan skin products and you name it. So…
Meb: Interesting. All right. I love it. I mean, with hazelnuts, I mean, Nutella is hazelnut, right? You can’t be bearish on anything that’s got hazelnuts as an ingredient. I think we mentioned that, David, what’s the best place for people to find out more of what you guys are up to, follow along with your company and updates?
David: Yeah, farmtogether.com. You can learn plenty there. We have a white paper there, we also have a blog, and you can see our latest offerings.
Meb: Awesome. David, please be safe, to you and all yours, and thanks for joining us today.
David: Thank you so much, man.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us firstname.lastname@example.org. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. My current favourite is Breaker. Thanks for listening, friends, and good investing.