Craig Wichner: A New Model for Investing in Farmland

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At Peak Prosperity, we talk a lot about the need for new models of doing business that will comport well within the growing economic, energetic, and environmental constraints of our global system.

Today, Chris talks with an entrepreneur attempting to do just that: Craig Wichner, the Managing Partner of Farmland LP. Craig and his team have developed a model that is designed 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:

People have a mistaken understanding of corn. They think it's incredibly productive.

The fact is, if you have a farmer who farms an acre of land in Iowa and then ships off all the corn, does all the work, puts in all the fuel, and the fertilizer, and the pesticide, and harvests all that corn and ships it to a feedlot. That feedlot will produce around 1,500 pounds of meat from the corn on that acre of land.

If, however, that farmer planted a pasture in that land and put a cow on it, and they owned the cow, they would also produce 1,500 pounds of meat from that grass. However, instead of just getting the value of the feed, they would also get the value of the cow. And that is really how agriculture used to be, for as long as agriculture went on.  Agriculture was having livestock and vegetable crops in a rotation on the land.  Unfortunately, over the past 60 years, we have geared towards this monocropping system of corn and soy. And we have really destroyed a lot of the soil fertility. We've reversed basically 8000 years of agricultural progress over the past 60 years.

And they strive to unlock this value by reverting to the land to its best natural state using sustainable agricultural best practices:

We buy conventional farmland and convert it to organic, sustainable farmland as an investment fund.  It’s very similar to a REIT, a real estate investment trust.  So as we raise capital, we buy farmland, and the investors have the benefit of owning this tangible, appreciating asset over a long period of time.  And farmland, like other forms of real estate, generates cash flow.  And that cash flow can be delivered in perpetuity over time, if it is managed sustainably, and that is what we specialize in.  So we specialize in buying great farmland at great prices that is generating good cash flow, and then adding value to that farmland to increase the cash flow.  And we add value in two primary ways:  by converting it to certified organic farmland and  using sustainable agriculture best practices. 

We will buy 1,000 acres of land that may be growing corn today. And then my business partner, Jason, develops a land management plan, a sustainable agriculture management plan for that land.  If you've been growing corn year after year on ground, it is really the worst thing for the land.  You end up spending a tremendous amount of money on inputs on fertilizers, and pesticides, and you are losing topsoil and you are spending a lot of money irrigating. And after about five years of doing that, you're spending a lot more money on the inputs to grow than crops than you were if you had just managed it sustainably.

And so we take it through that conversion process -- a kind of detox -- wean it off of the chemical dependency that it is on and restore the soil carbon, restore the soil fertility. And we do that by planting perennial forages, basically pasture, on corn-quality land, and then bringing in expert sheep farmers, cattle farmers, and pasture poultry producers who grow eggs and meat. And we actually get great economics, even during the conversion period to it becoming certified organic farmland. And we're also restoring the soil fertility naturally. And then once that soil fertility has been restored over three to seven years, then we rotate it into vegetable farmers. After two to three years, they have used up that soil fertility and we rotate them onto the next piece of pasture and bring in either a grain farmer or put it back into pasture. So in this scenario, we are acting as the land managers. We are creating a tremendous amount of jobs for farmers to grow locally grown, organic, healthy food. And we're making better revenues. 

So by bringing in these diversities of farmers, what we are doing is we are making sure that our agricultural practices and the farmers on the land are maximizing the soil fertility from a biological standpoint. By doing that, you are starting out with the returns on conventional farmland, growing commodity crops, basically crops that compete solely on price -- and we're adding premiums to that. So, by getting it certified organic, our farmers are able to make extra revenue and we have profit sharing relationships with them. So we participate in that.  Instead of just growing one crop, we grow, we have a sheep farmer, and a chicken farm, basically on the same piece of land, very similar to how Joel Salatin does it. That generates extra returns.  And the fertilizer that they leave behind is a really big benefit to the vegetable farmer, and they generate additional revenues and cost savings from that. At the end of the day, we generate a premium cash flow from the same acre of land simply by using much more sustainable practices. It really is a case where you get premium returns for doing the right thing.

Farmland LP's first fund is still in its early stages, but we're excited that there are entrepreneurs like this team out there pioneering creative new models. It's innovation like this that will counter the fear many feel about the coming low-growth future and will enable us to step into it with optimism and grace.

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

IMPORTANT NOTE: This is NOT personal financial advice. The above information is shared for education purposes only.

As always, we recommend working with a professional financial adviser to build an investment plan customized to your own needs and objectives. 

Suffice it to say, any investment ideas sparked by this report should be reviewed with your financial adviser before taking any action. Am we being excessively repetitive here in order to drive this point home? Good...

Click the play button below to listen to Chris' interview with Craig Wichner (36m:21s):

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

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This is the kind of article that goes a long way in counter-balancing all of the negative news re what is not working. It provides some hope that we may yet muddle through this crisis.
I would love to be able to participate as an investor in something like this, but do not have the big bucks to do it. What is out there, similar to this, for the small investor???

Jan

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Great idea in normal times (I would invest).  In a war the first thing the government will do is commandeer the food supply: the government will dictate how you can sell farm product under threat of confiscation or worse (i.e. jail).  Law and the Constitution?  Ha!

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Well, it all sounds good but I know of a number of farmers around here who happen to have the land and are trying to do the same things for themselves but they're not exactly flush with cash.  Granted, we're in an area that is not an optimal agricultural area but I have an innate distrust in any entity that enters into a business endeavor that is marginally profitable, becomes a "middle man" in that endeavor (so that even more wealth is extracted, further compromising profitability), and claims that everyone wins: farmer, investor, and administrator.  We saw this happen with HMOs.  The Wall Street types who set them up and administered them made a killing.  The medical staff and the patients were less fortunate and although the realization was slow to dawn on them, eventually they recognized that they were taking it in the neck, at the expense of the Wall Street types.
I think a more direct way of running this type of operation is for an individual to partner with someone with farming experience and know how and work on developing a small plot of land (5-10 acres) with a focus on high density production of high value agricultural items.  I've seen it work in NJ with an organic mini-farm that supplied the NY restaurant trade and I've seen it work in Massachusetts with a greenhouse system that supplied the Boston restaurant trade.  It's also working in our area for one particular flower mini-farm where the couple are retired and only need a part-time income stream in the summer.  If I were to get involved in this type of  venture, this is the approach I'd take.  YMMV,

 

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If I had an acre of corn producing feed stock that made 1500 pounds of meat, and instead I put a cow on it, I would have a dead cow. It depends on the soil and water content but cows need a certain amount of land per cow, in my area about 6 acres per cow to stock them all year round without feeding them anything other than the grass growing. If I had one cow per acre I would need to buy suplemental feed. I've seen it drop on flood plain and river pasture to about 1 cow per 2 acres but that is the exception not the rule. I've also seen it much worse, as in same pasture that held 1 cow per 6 might need 1 cow per 10. This will happen in a drought. One farm I am thinking of is 2800 acres in size and runs 350 head. Thats 8 acres to a cow. Another is 276 acres and runs 45 head. That's 6 acres to a cow. This farm has 3 (approx) die a year because of starvation/eating noxious weeds. Note: these are beef cattle, not fed hay (maybe 2 bales a fortnight), run year round without any additional inputs. Mixture of Angus, Hereford, Brahmin, Short Horn, Limousine.
Dairy farms are much more efficient and can have cows on way less land, but that is because they really work the land. Massive irrigation cost, massive fertilizer costs, massive supplemental feed costs and so on.

There will always be a year where you can run double the amount, gentle summer, good rain, soft winter, and so on.

So I think the figures in the talk are just plain wrong. Haven't checked the corn figures, I only ever grow about a quater acre of corn, and then sweet corn not feed corn.

 

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per acre   http://www.gov.mb.ca/agriculture/crops/forages/bjb00s17.html. in central va with the only input being imported hay (i rent land for haying, often free because its maintained, and bring the hay,aka nutrition to my land and feed it) the cattle,sheep,goats,pigs,chickens,horses are our manure spreaders. we recieve approx 30" of rain/year and are zone 7. this is a 500acre operation  robie

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Getting more profit when the farmers pay their rent.  It involves the farmers investing in livestock.  
As a sharecropper's grandaughter this sent chills up my spine.

Farmland investing has drawn my interest lately, but this model bothers me.  Why is the investment company buying the land and renting it out?  There is nothing new here making this attractive to me.  Why not put farmers on the land and pay them a salary plus bonuses - tied to their ability to involve the community in the model?  As an employee they could be rotated around to the farms where their expertise is needed.

I don't want to give my children the lifestyle my grandparents lived through.  It was horrific and backbreaking. 

There are other farmland investment groups out there, this one bothers me.

The carpetbaggers are back.  What was old is new again.

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I disagree with the approach to farmland reclamation from a scientific point of view. If anyone is really interested in this topic check out Steve Solomon's new book, "The Intelligent Gardener."
I also disagree that any kind of farming could make the kind of profit that an investor would be interested in. Farming is a losing proposition under current economic conditions. Ask any farmer who isn't getting a government subsidy.

If a farmer has a great piece of land such as the Class I farmland found in the Connecticut River Valley and works hard and doesn't have a mortgage, then I think he might make a living. Then there are other farmers on Class II land who take their food in trucks to farmers markets in high priced urban areas. They say they make some money but I wonder how they pay the big mortgages that the USDA gives them. I worry about them especially as the price of gas goes up and the rich get poorer.

I am a commercial real estate appraiser specializing in farms. I see that farmland is holding up in this market but it stil doesn't compare, on a per acre basis, with the prices that we used to see for developable residential land. If you are trying to build a fund that is speculating on increases in the price of farmland I would be very careful. Most land in New England is totally depleted and will require huge inputs of things like phosphorus (some say at peak already) in order to produce healthy food.

This is an interesting conversation. I hope that someone will follow up on the soils science part of it because what is being suggested is overly hopeful, IMHO!

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I tend to agree with a few of the comments here about the "value" of a middleman in this equation.  I grew up on a farm, and now have some farmland being "sharecrop" leased, and know someone in the area that is organic farming, and considered doing it for my own land.  So maybe I have some qualifications to weigh in on this one.
First, an acre of good farmland will produce 100 - 200 bushels of corn (depending on rainfall, etc.).  A beef cow typically will "range" and eat grass and hay until they're about 500 lbs.  To take them up to "market weight" of 1250 - 1500 lbs will take about 50 bushels of corn (2800 lbs).  So, that acre of ground would produce enough corn for 2 - 4 cattle, but they needed some range or hay before that.  So, in aggregate, maybe an acre could raise a cow, but not as a single acre.  So farming becomes "specialized" just like everything else - range land in North Dakota that won't grow good corn is used to bring them up to a point, and then feedlots bring the corn from Iowa and Illinois to take them up to market weight.

The economics on organics is OK, but no one is getting rich at it.  It's hard work, with much lower yields.  Prices for organic produce are higher, which mediates the yields and allows the farmer to make a profit, but only a minority of farmers are making this leap.  And arguably, when people start getting hungry, they won't care if the label says "organic" any more.  Plus, I think I saw an article in Time (?) about a month ago that opined that humans really didn't benefit much from eating organic, nor are they "damaged" from eating non-organic (NOT that I want to start that debate - just saying what I read).

As far as other ways to "invest" or get involved, here's a website you may want to investigate.  I know the woman that started this and her siblings are part of the organic movement in Illinois.  If you peruse this site you can find links to farmers that are looking for land, and land owners looking for organic farmers.  Enjoy! www.thelandconnection.org

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Since I am simply a backyard gardner not a farmer can't make useful suggestions except to say I am all in favor of more organic farming.
This is an excellent site: http://www.bigpictureagriculture.com/

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Rhial,

There are other farmland investment groups out there,
This piques my interest.  What are the models of these other groups?  Can you provide pointers?
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Chris,
We've seen some folks with farm experience weigh in on this topic.  Would/could Mr. Wichner join the dialogue, based on his experience?  In particular, thinking of Rhial's comment, I'd be interested to hear how the farmers in the scheme make out.  My sense is that for true long-term sustainability (not to mention basic fairness), a system must benefit all parties.

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I'd guess (as one with absolutely no farming experience) that there's another aspect of sustainability for farmland: the degree to which those who work the land are personally invested in it, and empowered to act on their knowledge and intuition.  They'd be the ones to notice subtle changes that indicate problems developing, to evaluate how a new idea might work out in practice in this little ecosystem, etc.  If I'm right, it'd be important to find, enable and reward such people.

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With all due respect I would suggest that the corporations are war profiteering entities who have commandeered govt. Agri-business fits under the general rubric. I wonder what set of dynamics would alter  a system that is firmly in place?  I would think another war for profits would exaggerate the phenomenon rather than change it. 
 
 

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While I think "Food" is an attractive investment area, I think affixing the label "new model" to this fund  may be a bit misleading. When I think of a new model I think of entities with differing notions of the relationship between capital and labor; two areas that have grown to disparate ends these days. Not models that reward first, best, and foremost the securitizers.
Because one is applying a sustainable and high value bias to conventional ag seems to me, from the surface, to be  no more different than a PE Fund that specializes in turn-arounds or management restructurings.

I also noticed that the fund seems to share in multiple facets of potential "upside".

To be a new model, the first thing I would look for is the abscence of an intermediary.

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[quote=Dwig]Chris,
We've seen some folks with farm experience weigh in on this topic.  Would/could Mr. Wichner join the dialogue, based on his experience?  In particular, thinking of Rhial's comment, I'd be interested to hear how the farmers in the scheme make out.  My sense is that for true long-term sustainability (not to mention basic fairness), a system must benefit all parties.
[/quote]
Good question…let me see…I agree there are some very good points being made in this thread and I'd love to see them fleshed out a bit.

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[quote=Rhiahl]Why is the investment company buying the land and renting it out?  
[/quote]
I can provide a Central California perspective to your questions.  The majority of local farms are family farms - not corporate farms.  Land is very expensive, especially 20 to 40 acre parcels.  Equipment, which has a finite life, is even more expensive.  Recent laws have changed and no longer allow tree crop prunings to be burned.  They are shredded in place by equipment that costs $300,000 and is used 6 weeks of the season.  Likewise, harvest equipment is used for 6 to 8 weeks and is extremely expensive.  Having investors purchase the land and rent it allows operators to expand their the land they farm at a small cost and pay for their equipment.  Remember, it this doesn't work for both parties it doesn't happen.  (the local land is too expensive to make Wichner's beef program work)

Local dairies, the largest local farmers, are in trouble.  A typical 1000 cow dairy is losing $20,000 / month.  Every month more herds are being liquidated.  The alfalfa we grow goes to a local dairy and this operator is 1 year behind on his payments.  This dairymans son went to study ag at Cornell - these aren't stupid people.  Farming is a no to low profit margin activity and a tough business.  Clearly their hired milker is making more than they are.
Let's view this from 30,000 feet.  What % of Americans income goes to food?  Where does this place us on this planet?  If ALL farm laborers were paid a fair, living salary, we would have riots in the streets.
 
 

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Hi Dwig,
Thanks, we'll respond soon. We just completed a large acquisition on December 31st so we've been fully occupied for the last few weeks.  I will respond to these questions over the next few days.
Best regards,
Craig

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Hi Rhiahl,Sorry about your grandfather.  Agriculture is hard work, and there have been problems across many economic and political systems.
I hope you take time to learn more about us.  Independent third parties have done extensive due diligence on us and have given us the highest socially-responsible ratings of any company, including B-Labs (who gave us the highest B-Score ever), Spring Creek Foundation and others.  Our 69 investors are people like you, and they care about the farmer we work with, as well as our land practices.   We started doing this because we wanted to have a positive impact on the environment, on social issues, and to help investors and farmers have a good retirement, and so all our children could grow up in a world that works. 
We buy land because that is how we can be certain it will always be managed using sustainable agricultural practices.  The current system, just looking at the data, results in farmers using un-sustainable practices.  This way we can be certain the long view is always present.
We help young as well as experienced farmers get access to sufficient amounts of already-organic, sustainably managed farmland.  While we could hire the farmers to do what we tell them to do, we’d rather use our farmland as a platform for entrepreneurial farmers who want to grow healthy, sustainably produced food for quality-aware buyers.  This is consistent with our view of the value of diversity, rather than us thinking we have the one monoculture/commodity solution – the farmers are all smart and will come up with new crops and markets better than we could.  We do one thing well, which is managing farmland using sustainable agriculture best-practices.
On the retirement side, both farmers and investors need diversification in their investments, however farmers can be over-invested (and over-leveraged) in farmland, and investors under-invested.  We help balance that and bring everyone closer together, helping farmers get access to enough farmland to operate at good economies of scale without going into debt. With long-term profit sharing, everyone benefits when times are good, and when times are bad it’s the investors who lose cash flow, rather than a farmer loosing land to a bank on a bad loan.
To us, sustainable agriculture is a team sport. It takes great farmers who understand sustainable agriculture practices;  land managers who manage rotations based upon the best rotation for the land, not one individual farmer; investors who have a long-term view (rather than banks who will foreclose on the land if there is a bad season); and customers who want high quality, healthy, safe food grown in responsible ways.
The proof is with the farmers we work with.  Mac Stewart is a 4th generation shepherd, and was managing a blueberry operation when we first got together. We helped him get back into managing sheep, and he is now producing lamb for premium restaurants up and down the West Coast. Neal and Karen Wells worked for three years to get a pastured poultry operation running, and now they live in a house on one of our properties with their kids and are raising 2,500 chicks right now, growing to 4,500 laying hens soon.  We work with Bill Niman as well, founder of Niman Ranch who now runs BN Ranch.  These relationships are fundamental to what we do. They happen with people.  There are no sharecroppers or carpetbaggers here.  This is a team sport, and everyone has an important position to play.  Is this old?  Is this new?  I’m not sure, but it works, and it leaves me inspired and hopeful for the future that our children are growing up in.
 

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Hi Nigel,We use diverse crop and diverse livestock rotations, so for your (and the cow's) sake please don't put one cow on one acre and fence it in.
The purpose of the example of meat produced per acre is for people to do the math, looking at the agronomy of meat production, separate from the economics. The economics of meat production have been affected by subsidies on corn, and corn has been a nearly free source of feed for beef producers resulting in enormous feed lots and cheap beef in the U.S. But corn is no longer cheap due to increased input costs (fertilizers, pesticides, herbicides, GMO seeds, and fuel costs) and 40% of the U.S. corn crop going to Ethanol, so at what point does it make sense to emphasize pasture-based systems? To do that calculation, you have to know how much meat you can produce per acre of farmland if it is growing corn or a diverse pasture including legumes.
Of course farmland has different quality levels, and cropland is different than rangeland, so the point of the example is to hold all other factors constant and look at a single acre of high quality irrigated corn land, and compare that to that acre's ability to produce dry matter tons per acre. Grain conversion is more efficient metabolically than rumination, but more solar energy is captured in a pasture system (corn need to dry out in late summer, while irrigated forage crops can continue to convert that sunshine to sugars). Net it all out, with good rotational grazing, and it is about equal. And for high quality irrigited corn land, the number is about 1,500 lbs of meat per acre. Depending on the quality of soil, water, weather, etc your actual livestock carrying capacity will vary, just as the Corn Suitability Rating varies over land in the midwest.
A quick example table is below. (Again, this is an illustrative math exercise and does not reflect either seasonal productiity nor our extensive land and crop diversity and rotaitions. Our actual ruminant allocaton, land rotation and forage management is done with our team which includes multi-generational pasture and livestock experts, scientists, and business people.)
 
Meat produced per acre
tons dry matter/acre
corn bu/acre
 
8
180
lbs of feed
16000
10080
growth conversion factor
10.5
6.7
lbs of gain
1524
1504
By the way, corn is a fine crop, for many many reasons…just in moderation. I wouldn't want to see cows, sheep, goats or bison covering 30% of U.S. cropland year after year, just as I'm not a fan of having 30% of U.S cropland in corn year after year. The natural capacity of any system will balance out economics over time – and the economics says we’re past that time.  We’re just so heavily invested in today’s dominant system that its hard for people to convert to other systems…or even remember what other systems might be.