A New Opportunity For Investing In Productive Farmland

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Over the past few years, we've tracked the success of Farmland LP, a fund created to increase the economic yield of farmland through sustainable farming practices.

Their approach is notable in a number of ways. It seeks to improves the quality of the underlying land. To avoid use of fossil inputs. To increase the yield per acre. To enable the production of vegetables, grains, and meats on acreage that before was monocrop. To employ more farmers per farm. To be more profitable than conventional farming. To improve the food resiliency of the local community. To reduce its dependency on liquid fuel transport by serving local markets. To generate annual returns for its shareholders, plus appreciation on their share of the underlying farmland.

The team believes there is an arbitrage in value that can be unlocked by reversing the damage modern farming has done to the land. After visiting their largest property this spring, I put together a detailed write up of how exactly they're pursuing this, which can be read here.

Today's big news is that, while the initial LP fund closed to new investors last year, the same management team has just launched a new fund, this time structured as a real estate investment trust (REIT).

This is notable for several reasons. It's a larger fund, which should enjoy greater economies of scale than the original one. And, the new REIT structure will eventually enable the fund to become publicly-traded (likely in 5 years or so, depending on key milestones). Once this happens, much smaller investors will be able to purchase shares -- finally making the dream of participating in productive farmland an option for all.

Those who would like to learn more about Farmland's operations and/or new REIT should contact the fund directly. Note that their REIT is available to accredited investors only and that Peak Prosperity has an existing business relationship with Farmland (full details will be provided when opening an account with the Fund or at any time upon request.)

Click the play button below to listen to Chris' interview with Craig Wichner (24m:50s):

This is a companion discussion topic for the original entry at https://peakprosperity.com/a-new-opportunity-for-investing-in-productive-farmland/

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Someday hopefully all farming in the country will be done this way.  It is amazing how animals actually help farmland become more productive, but it just makes sense when you think about how the natural environment itself actually works, with plants and animals working together.
This does sound like where we want everything to go.

As a trader, my question is always, "is this a decent time to make this trade?"  (Am I about to say "there is no Santa Claus?"  Hmm…)

I took a timeseries from the Kansas City Fed on change in farmland values year over year, and plotted it against the %change in the Case Shiller 10 RSA, just to get a sense.  Home prices did a lot better during the bubble years, but boy, did farmland do well after the pop.  It rose, while home prices shrank.

But percent change charts are always a little bit funky to understand.  How does farmland compare to home prices right now?  To do this, I constructed an index that starts in 1980 with a value of 100, and then I multiplied each quarter's value by the % change year over year.  Its not 100% accurate because of initial value issues, but its pretty close.

Farmland does not look cheap.

My guess is, Big Money already spotted the opportunity three years ago - a couple of years after our guest did.  What looked to be an awesome deal in 2008 (certainly better than buying houses) looks to be substantially less of a good deal at today's index price.

Buying farmland through this REIT is probably much better than buying conventional farmland, given the improvement in the land itself over time - almost guaranteed growth of 100% in value.  But looking at the timing of farmland pricing overall, farmland right now looks overpriced.  And notice how the Farmland Index line is looking a bit like the Case Shiller line from around 2006.

So I am torn.  This seems like a good plan to me, and it will probably hold its value much better than conventional farmland over time, and the project overall is nicely aligned with what our values are here, and the whole plan will only do better over time as inputs become more expensive - but it seems like the timing in the property price cycle could be better.  The chart suggests we're buying at the top.

And this actually makes sense.  People everywhere are reaching for yield, and so a lot of money has managed to find its way into farmland - conventional farmland - along with everything else.

There is a nifty "lottery ticket" element here if inputs really rise in price.  And if you think of this as a really long term investment that avoids the whole issue of bank runs, defaults, etc, and gets your money more or less off the grid, you can hopefully wake up in 10 years and find yourself having preserved your wealth rather than losing it somewhere else.  As long as you don't look too closely at farmland values between now and then, I think it will turn out all right.

Just some thoughts from your friendly chart guy.

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I "invest" in my local CSA for much the same reasons discussed here.  I am protecting farmland, supporting farmers and encouraging organic conversion.  I suppose the potential to invest in local agriculture caps out below the threshold discussed here of institutional investors, but I would encourage people to look for options to invest locally too.

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EcoReality Co-op is seeking funding members who wish to invest in their sustainable future. We have a diverse product line of niche sustainable agriculture products and agri-tourism and sustainability education services, and have been "in the black" for the last three of our eight years.
There are two ways to get involved:

 

  1. We are interested in new member-funders who wish to live here and participate in our sustainable agricultural and energy production activities.
  2. We are looking for a private-party mortgage investor who is willing to take a bit more than home mortgage rates, because our bank is jerking us around, inching us up into commercial rates.
Sound interesting? Drop us a note, saying a bit about your needs and expectations, and perhaps we can work together for a more habitable planet!
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Chris,  I do enjoy your podcasts and appreciate the work Peak Prosperity does informing the public.  I was disappointed listening to your guest as he continued to use the word "premium".  I'm sure it was hard to refrain from actually saying the "premium price" this endeavor will charge to consumers seeking organic food items.  While key words were woven into the narrative like sustainability it did not camouflage the fact that this endeavor is motivated by maximum profit that can be squeezed from the consumer.  In addition, it seemed obvious that this endeavor is designed for the privileged investor…aka, "accredited investors" who will extract the lion's share of the initial profits until the average investor can join the "club" after five years or so.  Anyway, I saw right through this feel good endeavor for the true lets jump on the organic bandwagon and extract max profits while we can project it really is.  Thanks for the space to make my opinion known.

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[quote=gilbrechb]While key words were woven into the narrative like sustainability it did not camouflage the fact that this endeavor is motivated by maximum profit that can be squeezed from the consumer.[/quote]There need not be a "premium" for "local and organic." I don't think modern agriculture is particularly efficient, with corporate executive salaries, greedy shareholders, near-monopoly seed and input suppliers, and multiple levels of mark-up.
Our local farmers market did a survey, and found that the local organic farmers market prices were at or below the supermarket prices for the same items!

It is amazingly difficult to get through a public offering. It can cost six figures. By focusing on "accredited investors," one can bypass most securities hurdles that would apply to a public offering of "reasonably priced" offerings.
To avoid the onerous requirements of a public offering in British Columbia, your investors must be family, friends, or business associates, or be an employee, director, or officer, or you have 49 or fewer investors, or invest $150,000 minimum, or be an "accredited investor."
So while I sympathize with your disdain at what might appear as a "get rich quick" scheme, there are reasons one cannot sell shares to the public in small amounts. These laws were put in place because unscrupulous investors robbed common people of their savings!
(Given such constraints, I don't understand how crowd funding avoids the scrutiny of securities regulators.)
That said, I've grown to think investment for passive income is a major part of the pickle human civilization finds itself in these days. I got rid of all my "investments" and started a co-op where we guarantee that you will never get more than the rate of inflation in return! (Talk about shooting oneself in one's foot.)
The "return" that we offer investors (we prefer to call them "member-funders") is clean air and water, healthy food, and an opportunity for "right livelihood," rather than a financial return that is based on a house of cards, anyway.

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I second the opinion of Mr Bytesmith.
If you've ever tried to raise money for a startup, you know why entrepreneurs go for accredited investors - because if you don't, you break the law.  Going public is just not an option for a company with no profitability and just a dream like this one.  Its also a very expensive process too.

If you really think this is some horrible scheme, then ask for the PPM and try to figure out what fees are paid to management under this program.  Thats where the dirt will be.  How will the managers be comped, and what does that fee structure look like.  Likewise, ask these managers if they will be participating in the investment on the same terms as the investors, and at what level.  Lastly, ask if there is anticipated to be a stock options (or stock grant) program for management.  That's always a good one too.

With VC firms, there is usually a "lead investor" who sets the price and drops a large amount of money on the company, with many other smaller investors coming in at that same price.  The lead VC will make sure that management doesn't run amok and enrich itself to the detriment of the shareholders.  Asking how the price was set, and who was the lead investor can also be revealing.

FWIW, I do not think this will be a get-rich-quick scheme.  The conversion of conventional farmland to more highly productive mixed-use organic farmland will take many years.  Its a get-rich-slow scheme.

Capitalism, at its best, is a way to allocate savings to productive use.  If we can use that system to allocate resources to things we believe in, then why on earth not do it?

The temptation to use "command economy" methods works great for the big stuff like high speed rail, etc.  But it works terribly for innovation.  Committees do a very bad job at fostering innovation.  LIke convoys, committees operate at the speed (and intelligence) of the slowest ship in the group.

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