The fund currently has $100 million of farmland under management in both California and Oregon. The model has grabbed the attention of some of Silicon Valley’s elite, including the likes of Ali Partovi and Scott Banister, for its simple yet disruptive solution. We spoke with General Partner Stephen Hohenrieder and Vice President of Marketing and Investor Relations Erin Roach about this innovative investment model and what it could mean for the future of food.
Can you provide us with a high-level overview of the business model at Farmland LP?
Stephen Hohenrieder: If you look at the migration of farming from the mid-1950s to today, you’ve really had a progression toward monocrops, where you’re growing a lot of one thing and relying on synthetic inputs to enhance your soil fertility. There are economies of scale and there are reasons why farmers do it – they want to grow a lot of the same thing; they want to sell to one market rather than having to develop a lot of markets for different things; and they want to be able to make full use of the equipment that they own (it takes different equipment to grow different crops). To solve for that conflict, we have decided to rotate farmers instead of rotating crops.
We buy conventional farmland and convert it to more regenerative, organic practices. That may mean organic-certified or it may just mean more sustainable. When you think about those practices though, in many ways that really means farming the way that we did 100 years ago – planting a lot of different crops in rotation, integrating diverse livestock, and building soil fertility naturally in the course of your business. We develop the crop and livestock plan for the farm and then lease the land to farmers who want to farm one of those fields. The farmers are then able to get two to three times the price for the crop because people will pay more for sustainably produced and/ or organic crops.
We structure our leases in such a way that we eliminate some of the risks for the farmer. Rather than a straight cash lease, which is common, we charge a base rent and then we have a revenue sharing agreement with the farmer on their crop. So if they have a bad year, they don’t get wiped out. On a particular field, we may not do as well as we would have otherwise, but if the land is as productive as we expect it to be and they are successful, then we all benefit from the increased revenue.
When you purchase a farm, how often are the original owners still involved with the project? Is that something that you try to incorporate or do you typically purchase the land and go your separate ways?
SH: In most cases, either the owner or the tenant is still involved. If you think about farmland ownership in the United States, 40 percent of land is leased to farmers today. One statistic that we have found to be really interesting is that there is about $2.4 trillion worth of farmland in the United States – the same as all the office buildings in the country – but only one percent of farmland is institutionally owned.
So, you have this incredibly fragmented ownership, but you have a lot of families who aren’t interested in farming anymore, so they’ve leased their land to other people. We see that in the acquisitions that we’re making, but we try to honor the relationships with the tenants just as we would with the owners. In some cases, it even means having members of the family stay on the farm indefinitely. We just did an acquisition where two older members of the family will stay in their houses as long as they’re alive.
Why aren’t more institutional investors investing in farmland and using similar tactics?
SH: Pensions, endowments, and insurance companies are all buying farmland, but even if they’re converting it to organic, they are still farming a monocrop. What we do is hard work. We’re both the landowner and management company, and a lot of other investors just want a straight cash lease. We’re curating a tenant mix of farmers who all want to be on our land and whose values are aligned with what we’re doing, but also creating an infrastructure and set of services that meet their needs.
From an investor perspective though, I think it’s interesting because it’s an uncorrelated asset. Most of the capital that we’re deploying – 80 to 85 percent – is going into land. There’s a stored value. From that, we’re able to generate current yield, and the land appreciates over time. So, we find that family offices and foundations are especially interested in what we’re doing.
Erin Roach: First, I think real assets are undervalued in people’s portfolios in general. Second, there are people who are doing organic agriculture, but there is a difference between closed-loop and organic agriculture. Organic agriculture can be just another flavor of monocropping, but what we’re really doing is regenerative, which is a very different model, and the closed-loop nature of it makes it distinguishable.
SH: That’s a really important point. There are a lot of people who have simply replaced petroleum-based fertilizers and inputs with organic-certified inputs, but that doesn’t necessarily mean that it’s better for the land, though it’s certainly an improvement. I saw a saying the other day, “Organic is really doing less bad. Regenerative is making things better.” We’re really looking at building the health of the ecosystem in the course of producing food so that it’s productive in perpetuity. Out of that comes more profitability. It’s really interesting as you think about investors because we have some very financially focused, conventional investors within our capital base. They want to own agricultural land, but they look at what we’re doing as building value in that land asset rather than depleting it. So I think that there is an important distinction between being regenerative and being sustainable. There’s a lot of capital going into sustainability, but not a lot of capital going into more regenerative farming.
“Nature loves diversity, but economics loves specialization.”
Why do you think that is?
ER: I would say it’s just more complex, and that’s not a bad thing. It takes a little more knowledge.
SH: I would also add that it takes a different timeframe. If you are raising a ten-year fund, it’s very hard to do what we’re doing because you need to get the capital raised over a couple of years, you need to add that value in the next few years, and then you need to give the capital back to your investors in the following few years. We are creating a perpetual vehicle. Everything we do is intended to generate cash flow, but with a ten-plus-year perspective.
If you think about putting land into pasture for two or three years, we’re generating returns and income from it by putting livestock on it, but not as much as we could if we were to plant blueberries, for example, and generate a profit in that three years. But ten years out, the land will be in much better condition than if we had just been growing blueberries for the whole ten years. That doesn’t mean that we don’t grow blueberries, it’s just that we think about what we’re doing down the road in between the blueberry crops.
There are also other ways that we’re able to derive value with our model. The land that we have about 50 miles east of San Francisco is right in the path of real estate development. So, we serve multiple purposes by farming this land and we’re able to derive value from that. We don’t ever intend to build houses on it, but we’re able to reduce our cost basis by also deriving the ecological and the conservation value from it. We’re talking to land trusts and we’re talking to other organizations that have an interest in protecting that land. We’re able to put it into conservation if it makes sense, or we’re able to derive value from habitat mitigation for different species of living things. When you look at it as an ecosystem, there are a lot of different sources of value other than just looking at it as being able to produce a lot of blueberries.
How do you foresee this system being scaled?
SH: Well, we’re raising more capital. And we just completed a fairly significant acquisition. We intend to deploy $250 million total over the next five years.
ER: It really is a paradigm shift. People need to think about farmland and farmland ownership differently. It’s very much moving into the shared economy mindset. I think that’s probably the biggest barrier. There’s plenty of land out there, but institutional investors have been thinking about it in a very square way – “how much can this land produce by growing this one crop?” Nature loves diversity, but economics loves specialization. So people have just been boring down on specialization, where our model is very much about diversity.
Why hasn’t sustainable agriculture scaled faster and what is needed to shift the paradigm of the industry to make sustainable agriculture the new normal?
ER: The reason why we haven’t been able to scale organic agriculture faster with the way that we’ve been doing it – which is the way people have farmed for millennia – is that it’s very difficult for one farmer to specialize in all of these crops and achieve scale at the same time. Diversified farms have tended to remain really small.
SH: If you think about farmers, they’re trying to solve for their profitability. All of the economics on the farm, for the most part, have shifted to the seed companies, the fertilizer companies, the food companies, the distributors, and everybody else. A lot of family farms are trying to figure out how they can capture more of the economic value out of what they’re growing, but the conversion risk to organic is high. The farmer has to wait three years typically [to become certified organic]. Many farmers don’t know how to generate revenue during that period, and they don’t know what the outcome will be at the end of the three years, whether or not it will pay off for them. We’re trying to demonstrate and provide a path for the fact that conversion makes sense financially.
It turns out that many of our farmer tenants actually are conventional farmers and because we’ve taken out that conversion risk, they are now farming organic crops. Also, there are markets developing for transitional products [crops produced during the three-year conversion period of a farm becoming organic]. Garden of Eden is now starting to actually brand “transitional products” in some of its packaging. There is a grocery chain in Portland that has offered to buy all of our transitional products. All of a sudden, you’re starting to see this market evolve where people see the value in farming in these ways and they’re willing to pay a premium for products that may not be organic-certified. In the past, farmers basically had to farm organically for three years, but couldn’t be paid for any of the incremental value. Now, they’re starting to get paid for it.
The last thing really is market force. There is such supply and demand imbalance for organically produced food that these off-takers, the food companies and distributors, have to figure out ways to solve for it. We have started to partner with some of these groups. Let’s say you have an organic vegetable distributor that may be significant in size. They are supply-constrained on certain products from their farmers. The limiting factor to their farmers providing more of that product to them is more land. We are trying to help solve the problem of supply for these distributors by working with their farmers to provide them with more land.
“If everybody were doing sustainable agriculture, there are estimates that it would be the equivalent of taking 217 million cars off the road.”
What do you believe has been the most critical element to attracting such high-profile and widely respected investors?
SH: I think that there are different profiles of investors who have different goals: there are very financially focused investors who look at deals from a pure returns perspective and whether or not the strategy adds value and drives returns in an asset that’s attractive to them; there are more aspirational investors who have somewhat of a balance; and then there are people who are very aspirational and look at it as risk capital.
No matter who it is and what the mix is though, I think that there are three factors that really drive their decision to invest with us: 1) it meets their risk and return profile, 2) the strategy makes sense, and 3) it’s something they want to be a part of. They have the ability to deploy their capital into the equity markets, fixed income, or into other types of venture capital or private equity, but I find that a lot of our investors at the end of the day like being a part of what we’re doing. We’re generating the returns that they expect with the commensurate amount of risk. They believe in the story and our strategy, but it’s also something that they can be part of and that they want to support.
ER: What we’re doing is disruptive enough, and it’s also such a clean, simple, elegant solution to a real problem. When people learn that most of the land in the United States is being farmed for corn that’s being shipped all over the world to feed cattle who really weren’t designed to eat it in the first place, when you could just be feeding cattle on the grass that grows where they’re raised and fertilizing the soil at the same time, all of a sudden, this other system that we’ve developed just seems silly. When there’s a bit of education involved, people usually love the fact that it’s such a simple, clean, elegant closed-loop solution, and it meets their sensibilities as people who are trying to find that constantly through their own businesses. It’s also a great counterbalance to volatile tech stocks. It’s a real asset.
What’s giving you hope for the future?
SH: I have a ton of hope because I think there has been a structural change in consumer demand. If you look at how we, as consumers, aspired to buy our food up until the early 1900s, we had a connection to the production. We thought about the relationship between our food and the land; it tended to be regional, but it didn’t have to be. After World War II, in the ’50s, it didn’t matter who you were or what your socioeconomic, cultural, or geographical background was, most people aspired to buy more packaged, processed, convenient, and branded foods. They were new and they were sexy.
That evolved through the ’60s. I remember in the ’70s thinking it was such a treat to get a TV dinner, right? The fast-food system developed out of that. I remember in the late ’70s and early ’80s seeing signs at McDonald’s that read, “over 1 million served.” I would argue, and I think people generally agree, the way we aspire to consume our food today across every socioeconomic level, culture, and geography – and this is more exaggerated in certain segments – is starting to look more like it did in the early 1900s and before. People are less interested in processed and packaged foods. They’re not sexy anymore.
Food is something that we experience with each other. We like to discover it together. We love to introduce each other to it. We share it. People are starting to look for a connection back to the source of their food and they’re willing to pay for it. If you look at food as a percentage of our total spend as consumers, it went from somewhere in the range of 15 to 17 percent of our income spent on food in the ’60s to 6 percent today. In the ’60s, somewhere around 7 percent of our income was spent on healthcare, today it’s somewhere around 16 percent. You had this inverse correlation. This has become an economic reason for people to shift what they eat, besides the cultural reasons and just the aspirational taste.
You’re seeing organizations like Kaiser Permanente develop food programs to be preventive and to drive health. You’re just starting to see a shift in our healthcare system, which is going to take a really long time, toward keeping people healthy rather than addressing symptoms. So, I am very hopeful about the future because I think that this is a structural shift. I think that it will take time, but I think people are building awareness just in the way they did in other food segments in the past. People are realizing there is value in these better-produced products.
ER: Two things. One is that sustainable agriculture truly has great potential to change the world. If everybody were doing sustainable agriculture, there are estimates that it would be the equivalent of taking 217 million cars off the road. We would really be turning the clock back on climate change. To me, it’s exciting that you can not only produce healthy food, but you’re also sequestering carbon and other greenhouse gases. I think that it’s just a very hopeful story. I also think that it’s things like this, like Conscious Company Magazine, which is raising the awareness that you can do business in a much smarter way. Business is truly an exciting lever for change. So, that’s hopeful, truly.
Increases in farmland values have consistently beaten the stock market and outperformed the S&P 500 since the early 1990s.
FARMLAND LP’S UNIQUE BUSINESS MODEL
Investors invest their money with Farmland LP
Farmland LP uses a revenue sharing model with the farmers that benefits both the farmers and Farmland LP’s investors
Farmland LP leases the farmland out to farmers who grow and produce sustainable crops that can be sold at a premium
Farmland LP purchases farmland
Farmland LP develops a regenerative crop and livestock rotation plan for the newly acquired farmland and converts the farm to organic, sustainable practices
MAIN BARRIERS TO SHIFTING THE PARADIGM TOWARD SUSTAINABLE AGRICULTURE
Regenerative agriculture requires diversified management and skill sets. Most farmers specialize in only one or two crops.
2 CONVERSION RISK
For most farmers, it takes a full three years to become certified organic, and farmers can’t afford to slow production or leave land fallow during that time.
It’s expensive for farmers to finance land, equipment, and infrastructure improvements. A farmer’s growth is limited by the amount of land they can afford to purchase.