Farmland Investing

[Dean Pomerleau]

Disclaimer: Please don't consider this an endorsement or investment advice. Do your own due diligence. I have no affiliation with Farmland LP.

Given the current financial climate, I'm intrigued by the idea of investing in tangible assets, and in particular farmland as a hedge against inflation and instability in the financial markets. Here is a recent NYT's article on the benefits of investing in farmland as an uncorrelated asset:

https://www.nytimes.com/2021/10/08/business/mutfund/farmland-is-valuable-but-buying-it-is-tricky-for-fund-investors.html

Fortune recently wrote:

In these times of careening stock prices, obsession with the glamour of Bitcoin, and spiking rates, farmland provides the kind of comfort food wary investors should be looking for.

As the article describes, there are several ways to purchase farmland. If you are Bill Gates, you can buy farmland outright yourself. He directly owns over 270,000 acres across 20 states (~0.04% of all US farmland). There are also a couple REIT's and on-line crowdfunding sites focused on farmland investments. But I was just "meh" when I researched them.

The investment opportunity I find most interesting is a company called Farmland LP. What makes them nearly unique is their business model. They take investment money from (accredited) investors and buy high quality, conventional farmland with good soil and good water rights that are currently growing low-margin conventional row crops like corn or wheat. They then take the property through the 3-year process of converting it to organic farmland - something most farmers can't afford to do. They then either lease the land to 3rd-party farmers at a higher rate per acre than convention farmland or farm the land themselves. In either case, the idea is to replace the commodity row crops with much higher margin, and more environmentally-friendly organic fruits and vegetables grown via sustainable, regenerative agriculture.

For example, they are in the process of converting 600 acres of a 4000+ acre farm they own in California to grow organic blueberries, which they then sell to Driscoll, who supplies Whole Foods and other high-end supermarkets:

Here is a recent Time article profiling Farmland LP and highlighting how there model seems good for investors, good for farmers and good for the environment. Last year they were rated #1 among 10,000 global corporations by a leading Environment, Social, Governance (ESG) rating firm.

Farmland LP's "Fund 1" (which includes the Burns Farm blueberries and several other properties) has been going since 2013 and has returned an average of ~9.5% per year. The big downside is the minimum investment is $50K. 

Has anyone else ever considered investing in farmland or have any opinion about it? Know of any better way to get in, with lower upfront cost?

I kind of like the idea of supporting sustainable agriculture with my investing, in the same way I do by subscribing to my local CSA. It beats the ethics of many other investments and appears to offer the potential for a competitive return and a good hedge against inflation.

But I should repeat, please do not consider investment advice and I have no affiliation with Farmland LP.

--Dean

 

[Gordo]

Yes, I looked into it, some more summary on the idea here:

https://www.fool.com/investing/stock-market/market-sectors/real-estate-investing/farm-investment/#:~:text=How can I invest in farmland%3F 1 Buy,through a crowdfunding platform focused on farming.

I think it was an interview I listened on some finance podcast with the founder of AcreTrader that got me more interested in looking into the idea.  But when I researched it a few years ago, the bottom line was that it is an illiquid investment that may return about 5-7% annually and all said and done I felt like I could do better than that with non-farmland investments.  I still like the idea of owning farmland though, maybe its just the primal instinct of owning something real and tangible that provides food, the one thing every human needs to survive, and protection from inflation.  My Dad bought a farm when he retired and still lives on it, complete with tractor and a barn that's bigger than his house, haha.  But he does no real farming 😉 

[Dean Pomerleau]

5 hours ago, Gordo said:

I still like the idea of owning farmland though, maybe its just the primal instinct of owning something real and tangible that provides food, the one thing every human needs to survive, and protection from inflation.

My feeling exactly. There is something appealing about owning fertile farmland, especially if it is growing healthy fruits and vegetables in a sustainable way. Here is a good summary of the different options for farmland investing, including some with a lower minimum:

https://www.investingsimple.com/best-farmland-investing-platforms/

5 hours ago, Gordo said:

 When I researched it a few years ago, the bottom line was that it is an illiquid investment that may return about 5-7% annually and all said and done I felt like I could do better than that with non-farmland investments.

Yes, that was my impression as well. But I've gone through the numbers for Farmland LP's project to grow 300 additional acres of blueberries via $15M in new capital investment and it looks like they check out and result in a substantially higher return than that.

Conveniently, their fundraising works out to $50K per acre (the minimum investment). According to several sources, it is possible to grow 5-20K pounds of blueberries per acre after a few years when the bushes have matured. Farmland LP's Burns farm in California has some of the best growing conditions in the country, so 10K pounds/acre/yr seems very doable.

Those same sources say farmers can sell wholesale conventionally grown blueberries for $4.50-5.50 per pound, and more for organic. So if you assume conservatively $6/lb since their blueberries will be organic, that equates to $60K in gross revenue per acre per year. In their investor material, Farmland LP projects $45-50K gross revenue per acre per year once peak production has been achieved, so right in that ballpark if not a little conservative.

Those same sources say the amortized cost of harvesting and marketing blueberries is about $20-25K/acre/yr, leaving a gross margin of ~$25K/acre/yr. Farmland LP projects $28K gross margin per acre per year once peak production is reached, so again very close to what other sources say is accurate, even for conventional blueberries. 

A net revenue stream of $28K/yr on an initial $50K investment seems like a pretty good deal, even with a delay of 3-4 years while the fields are converted to organic and the plants mature. I'll spare you the net present value calculation, but suffice it to say it equates to a yearly rate of return significantly higher than 10%. Plus, once the initial bushes wear out (6-7 years), the fields can be replanted to repeat the process (which is Farmland LP's plan) or the (now more valuable) land can be sold off.

It is quite startling how much more favorable these numbers are than the P&L for conventionally grown row crops. For example, conventional corn yield is about ~$750/acre/yr and non-land costs to farm that acre of corn are about ~$500/yr, leaving a margin of just $250/acre/yr. Sadly, that same resource says farmers pay about $275/acre/yr in rent or mortgage costs for the land, leaving them $25/acre in the hole before federal farm subsidies.

No wonder that a) it sucks to be a traditional row crop farmer, b) conventional farmland is a low return investment, and c) converting fertile land from conventional row crops to high value organic niche crops like blueberries is pretty attractive if you can afford to make little revenue during the years it takes to make the switch. 

Again, not investment advice. Just calculations I've done for my own due diligence.

--Dean

[drewab]

Just curious, why is farmland not subject to inflation? 

[Dean Pomerleau]

6 minutes ago, drewab said:

Just curious, why is farmland not subject to inflation? 

Tangible assets like real estate generally rise in value with inflation. The value of farmland in particular tends to go up in step with inflation because its value is tied to the value of food that can be grown on it, which in term is one of the core components of inflation. Everybody has to eat!

Here are a couple useful graphs showing the return of farmland relative to other asset classes (left) and the returns vs. volatility of farmland vs other asset classes (right):

Part of the reason is that they aren't making any more farmland. In fact, the number of acres of farmland has been steadily declining for nearly 100 years as former farmland is converted to residential land or becomes exhausted due to soil depletion:

--Dean

 

[drewab]

That's a fascinating explanation that makes perfect sense - it is as simple as "everyone has to eat!" I also did not know that the amount of available farmland had decreased so substantially. If I had to guess I would have assumed it would be the opposite. It does make me wonder if it's possible to reach some sort of equilibrium in terms of preserving nature and having enough land to sustain humanity. Though the rate at which deforestation is happening in places like the Amazon stands in stark contrast to that. 

[Dean Pomerleau]

Here is an additional calculation I did as part of the due diligence on Farmland LP. 

Here is the announcement of the purchase of the 4200+ acre Burns Farm in the San Joaquin Valley by Farmland LP in 2013, which forms the bulk of the land that the Farmland LP fund I owns:

https://news.theregistrysf.com/the-burns-tract-in-stockton-sold/

They paid $32M for it, which works out to ~$7500/acre. Fast forward to last year, when this 500+ acre parcel of comparable farmland in the San Joaquin Valley sold for $10.2M, or $20,625/acre:

Note, these parcels of land that formed the 500 acre transaction are not contiguous, while Burns Farm's 5000+ acres are. In addition, 60% of Burns Farm has now been converted to organic farmland, which rents for (and therefore probably costs) 26% more per acre than conventional farmland, which the 500 acres probably is:

http://le.uwpress.org/content/97/1/80.refs

Not to mention Burns Farm borders the Middle River, which it has senior riparian water rights to pump for free. 

The website that showed the sale price for the 500 acres estimates that farmland in the San Joaquin Valley sells for an average of just under $26k/acre:

https://www.acrevalue.com/map/CA/San-Joaquin/?lat=37.92833&lng=-121.35329&zoom=12

But even if we assume conservatively that the Burns Farm land is only as valuable per acre as the 500 acre sale last year, that would mean that the value of the land alone has gone from $7500 to $20,625 per acre in 8 years, which is an annual rate of return of 13.5%. And that rate of return completely ignore the revenue stream the farm has produced in the meantime and continues to ramp up as more of the land is converted to organic. 

The current offer at Farmland LP when fully funded will bring the total capitalization for Fund I to ~$107M. It now owns ~5200 acres of 60% organic / 40% conventional farmland, which means new investors are paying ~$20,575/acre, remarkable close to the sale price per acre of that 500 acre plot of farmland in San Joaquin Valley that sold last year, and well below what the land alone would seem to be worth. 

--Dean

 

[Gordo]

Looking into this again... Dean did you actually make an investment?  If so, did you go with Farmland LP?   I have recently diversified a bit into passive residential real estate investments. Still don't own any farmland.  Those numbers you mentioned for blueberries seem a bit pie in the sky to me (I just saw pints of blueberries at Aldi for $1.69 retail) but maybe organic is triple? Still the wholesale has to be way lower than retail on produce.   Buying farmland at 20k+/acre also seems sus to me and more like speculation on being able to flip it to a developer rather than having a true farm investment.  Cost of operating farms is also soaring (fuel, fertilizer, and especially labor) I doubt the economics are better with organic despite the claims I see from FarmlandLP.

[Dean Pomerleau]

2 hours ago, Gordo said:

Looking into this again... Dean did you actually make an investment?  If so, did you go with Farmland LP?   I have recently diversified a bit into passive residential real estate investments. Still don't own any farmland.  Those numbers you mentioned for blueberries seem a bit pie in the sky to me (I just saw pints of blueberries at Aldi for $1.69 retail) but maybe organic is triple? Still the wholesale has to be way lower than retail on produce.   Buying farmland at 20k+/acre also seems sus to me and more like speculation on being able to flip it to a developer rather than having a true farm investment.  Cost of operating farms is also soaring (fuel, fertilizer, and especially labor) I doubt the economics are better with organic despite the claims I see from FarmlandLP.

Yes we did invest in Farmland LP. Just completed signing the papers. We also have diversified real estate investments, including both residential and commercial.

Regarding blueberries. I got more details on their modeling and assumptions. Last year they got ~$3.5/lb and this year they averaged over $5/lb. Because of the good weather and early spring in California's San Joaquin Valley where their main blueberry farm is located, their blueberries ripen in May, before most other areas of the country. As a result, they get a premium price, on top of the extra they get because they are organic.

This year, on their 4 year-old field of blueberries, they averaged ~6500 lbs / acre. They expect to get ~11-12K lbs per acre in a couple years when the bushes are fully mature. At a sale price of $4/lb, that's a revenue of $44-48K/acre/year. They confirmed they expect it to cost about $18K/acre/year to cultivate, harvest and market the blueberries, for a net income of $25-30K/acre.

Regarding farmland value in the San Joaquin valley. In 2018, a 362 acre parcel of land bordering on the Middle River directly across the river from Farmland LP's Burns Farm growing almonds and olives (similarly high value crops to Burns Farm is now transitioning to) sold for $5.9M.  That is an average of $16.3K/acre. [Farmland LP paid $6666/acre for Burns Farm in 2013 ($28M/4200 acres)].

If we assume the land has appreciated 10% per year in the four years since the sale, it would be valued at $23.8K/acre today. Right in line with what Acrevalue.com says land is worth in the San Joaquin valley. That 362 acre property was likely non-organic farmland, so Burns Farm would likely be valued higher per acre.

Total capitalization for Farmland LP Fund I after this round (est. ~$17M) is about $112M for 5500 total acres, or $20,300 per acre. At $20,300 per acre that is at about a 17% discount relative to its estimated underlying value.

My final reservation was water. They have very senior, riparian water rights. But they could be restricted in their water use if the drought gets bad enough. I talked to them directly about it. They confirmed they use water very efficiently, using exclusively drip irrigation and covering all of their rows of blueberry bushes with black plastic to retain water. They confirmed that if the amount of water they can draw from the river gets reduced, they can cut back on watering other, less valuable crops on the other 3600 acres of land under cultivation at Burns Farm to keep the 600 acres of blueberry bushes watered.

If worse comes to worst, and they are totally curtailed in their water use, they said the penalty for violating the curtailment is $2500 per acre-foot of water. Curtailment wouldn't happen until after the May blueberry harvest (June when it really starts to get dry), but when it did, they could keep the blueberry bushes happy until the falling rains with a single acre-foot of water per acre given how efficient their irrigation is. Given the high profit margin on an acre of blueberries outlined above, an extra $2500/year for water could pretty easily be absorbed while still remaining quite profitable.

But please don't invest if you harbor any suspicions or reservations about these projections and estimates. I don't want to feel even a bit responsible if someone else invests the substantial amount required and the operations goes south.

I doubt you could get in at this point anyway. They are planning on closing to new investors at the end of the month, and already have $15-20M in new investor capital commitments, quite a bit above their original target of $10M.

--Dean

 

[Dean Pomerleau]

On 7/21/2022 at 7:40 AM, Gordo said:

Cost of operating farms is also soaring (fuel, fertilizer, and especially labor).

Fertilizer is also an interesting point which Farmland LP specifically mentioned in their latest quarterly report to investors:

Natural gas prices were up 50-80% in Q1/2022 versus the first quarter of 2021 and with it, conventional 
fertilizer prices (which is made from natural gas) have quadrupled since 2020...

Fortunately, with our organic and regenerative focus, we don’t use natural gas-based fertilizers, and the chickens continue to produce manure, so the cost impact on our Funds was lessened with compost only increasing from $100/ton to $108/ton. 

Here are some nice photos of the Burns Farm blueberry operation. You can see the two lengths of drip tubing for irrigation and black plastic ground cover in this field being prepared for planting:

Here is a 1-2 year-old field of blueberry bushes. Between ever seventh row they plant wildflowers to help with pollination and support a diverse ecosystem:

They use state-of-the-art harvesting equipment to keep labor costs down and to make sure they can pick the blueberries quickly and efficiently. Unlike blueberries from South America, which are picked green and ripen during the several week trip to the US, their blueberries are picked at their peak of ripeness and reach stores within a few days. Allowing them to ripen on the bushes results in better flavor and higher sweetness, generating a price premium with Driscolls their distributor. The big berry harvesting machine below straddles the row of blueberry bushes, shakes the bushes as it passes over and scraps off all the ripe blueberries in one pass:

They harvest at night when it is cooler to reduce stress on the bushes.

--Dean

 

[Gordo]

Nice, thanks. It still surprises me that they can make so much per acre from blueberries but that is great.  Land seems like a good way to hedge inflation.  Having massive scale and mechanized harvesting equipment is key, small farmers probably couldn't compete with that or duplicate it.

[Dean Pomerleau]

Here is a good overview of what it is like to invest in farmland via acretrader.com:

https://passiveincomemd.com/acretrader-review-my-investment-in-cash-flowing-farmland/

--Dean