Ceres Partners CIO Brandon Zick on How Private Equity Invests in Farmland

Barry speaks with Brandon Zick, Chief Investment Officer at Ceres Partners. They discuss how his private equity company invests in farmland, and food, agriculture and water. They also discussed his path into finance from growing up on a farm, to studying finance and Japanese in college. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

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• 2:11Speaker 02

  This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

• 2:17Barry Ritholtz?

  On the latest Masters in Business podcast, I sit down with Brandon Zick. He is the Chief Investment Officer at Saris Farmland Funds, a $2 billion firm that specifically invests in farms. I know Brandon for a long time and I've watched this asset class grow. I thought this was really a fascinating conversation. You just have no idea how complex and interesting farmland investing can be. I thought this was fascinating and I think you will also, with no further ado, my conversation with Saris Farms, Brandon Zick.

• 2:55Speaker 04

  Thanks for having me, Barry.

• 2:56Barry Ritholtz?

  Well, you and I know each other for a long time and this is long overdue to have this conversation and the Wisdom Tree acquisition was the perfect excuse. We'll get to that in a moment. I want to start with your background, which is kind of fascinating. You grew up on a dairy and crop farm in northeastern Pennsylvania. How did that farming upbringing shape your attitudes and thoughts about land, agriculture, value, and risk?

• 3:28Speaker 04

  Yeah, that's a, it's a great question because growing up on a really active family farm, you learn a lot of things and one of them was I definitely did not want to be a farmer for the rest of my life. We did real work. I was the oldest of six and so, and I had great parents who, you know, instilled great values with us, but one of those values was the value of hard work. And we spent a lot of time before and after school every day actually running this dairy with our parents.

• 3:55Barry Ritholtz?

  So you're up at 5:00, 5:30 milking cows before school?

• 3:58Speaker 04

  Yeah, before school, yeah. For us, it'd be about 4:30 and with three brothers, usually there's three jobs on a dairy, milking cows, working with equipment, and then managing manure. And even though I was the Oldest brother, I was really good at the third, so that's what I was focused on.

• 4:15Barry Ritholtz?

  Well, shoveling manure prepped you for your jobs on Wall Street.

• 4:19Speaker 04

  That's right.

• 4:20Barry Ritholtz?

  The obvious joke. So, so let's talk about what led you to Wall Street. You go to Notre Dame, you get a BBA in finance and a concentration in Japanese, which is sort of surprising. What was that career plan originally, other than not a farmer?

• 4:35Speaker 04

  Yeah, when I went to Notre Dame, I just wanted to do something different and I didn't really know what I wanted to do, but I actually had a friend in my dorm that I said, what are you majoring in? And he said, well, my dad works at Merrill Lynch, I think, finance. And I said, well, that sounds interesting. And so that's how I started thinking about that. And taking Japanese as a freshman at Notre Dame was really more about just doing something different than the Latin and French I took at my Jesuit high school in Scranton, Pennsylvania. And they talked me into doing a study abroad in Japan. And I really fell in love with the country and the culture. And if I had been looking in, you know, forward instead of reverse, I probably would have taken Chinese or something else. And I was

• 5:16Speaker 04

  looking backwards and, you know, continued on with the Japanese and then was lucky enough throughout my career to be able to spend some time there, not full time, but at least to travel to Japan. And if we ever get to the point that we have Japanese investors, I'd be really excited, too.

• 5:31Barry Ritholtz?

  So, first gig right out of school is you become, you join the finance analyst program at Lehman Brothers. Was that here or was that close to your home?

• 5:42Speaker 04

  Oh, yeah, that was here in New York. Yeah, we started training in One World Trade at, um, July of 2001. And we were eventually in Three World Financial Center. And I spent three years at Lehman Brothers and learned a lot of different things, but some of it was, I don't know what I want to do. And I had a friend that had moved to Morgan Stanley, and that's how I made my way shortly thereafter over there and spent six years at Morgan Stanley in various roles. But I knew I always wanted to be on the buy side. And there, you know, everyone dreams of being in private equity and how do you get there? And it's a difficult path. And when you think about what are the things that you could be Good at or that you have interest in, that's how I kind of looped back around to

• 6:26Speaker 04

  this agriculture piece because I had a lot of valuation experience at Morgan Stanley and we worked on a number of transactions and I thought, well, how do I apply this to agriculture? And they're just, it's not like in every other asset class where there's 30 or 40 places and everyone has a fund and you just choose where you want to go. There's actually very few people that invest in agriculture exclusively. And so it was kind of stacking that background of valuation and transaction experience and maybe a rekindled interest in agriculture and farmland, not on the actual labor side, but on the investment side. How do you do this outside of just the big boys like John Deere or Case IH or at the time Monsanto or these big ag companies? How do you do it?

• 7:09Speaker 04

  So that's kind of how I made that path all the way back around.

• 7:12Barry Ritholtz?

  So you prefer spreadsheets to pitchforks and chovels?

• 7:16Speaker 04

  A little bit, yeah. Although there are plenty of days in my career now that you get tired of being in the office. And you said I'd much rather drive around and look at some of our properties and check in on some of our farm tenants.

• 7:27Barry Ritholtz?

  Well, we're going to talk about the farms and the tenants and what that investment process is like, but I just want to stay with Morgan Stanley for another moment. You're there for six years. You start out really as a grunt in strategic planning, due diligence, valuation analysis, deal negotiation, execution, but eventually you become a VP in the investment management division. Is that where you really hone your chops on acquisitions and strategy?

• 7:54Speaker 04

  Yeah, it was an interesting time to be there within investment management. Morgan Stanley had a mandate to really grow that business, especially on the alternative side. So the plan had been to put together a pretty sizable balance sheet by minority stakes and asset managers, maybe take some asset managers like Frontpoint over completely. And then the great financial crisis happened and we went from a team that was really given the opportunity to use a balance sheet to, we were told we need to create a balance sheet. So things that we had bought now needed to be sold and that was really the impetus for the transaction that sold. Van Camp and a handful of other Morgan Stanley equity businesses to Invesco.

• 8:36Speaker 04

  So on that deal, I was actually working more on the sell side of that deal. And when you're selling things, you realize this probably isn't a long-term career strategy. Eventually, you run out of things to sell.

• 8:45Barry Ritholtz?

  Right, once the balance sheet runs down. So you started at Lehman, but you got out of there before the financial crisis. You lived through the financial crisis at Morgan Stanley. The CEO at the time was John Mack, is that right?

• 9:01Speaker 04

  When I started, it was Phil Purcell. John Mack came shortly thereafter and then, or came back shortly thereafter. And then during my time there, within investment management, James Gorman came over from Merrill to take over.

• 9:14Barry Ritholtz?

  I had Mack on the program a couple of years ago after he wrote his autobiography. And really, of all the major brokerage firms, there were a handful of companies that came through the financial crisis, balance sheet and reputation intact. Mack seems to be the guy that guided Morgan Stanley through, cut that very reasonable deal with Mitsubishi for some much-needed capital, and came out the other side. And Morgan Stanley is now absolutely one of the biggest brokerage shops, full-service brokerage shops on the street.

• 9:49Speaker 04

  Yeah, I mean, they've, you know, not without peril for everyone at that time, but certainly, you know, they were able to navigate through in a way that very few were able to do it as successfully as Morgan Stanley was.

• 10:02Barry Ritholtz?

  And at Morgan Stanley, is that where you got your chartered alternative investment analyst cred?

• 10:08Speaker 04

  Yep, yep, I did that. I didn't have the time to do the CFA also during that time, but yeah, it was something that was slightly different. And, you know, I always had interest in commodities and other types of alternatives, not just hedge funds or private equity. So there was, it was just a way to learn a little more and add it to the resume.

• 10:27Barry Ritholtz?

  How much did the financial crisis precipitate? You're saying, hey, I have skills and I have insights, I'm going back to farmland, but from a different perspective.

• 10:38Speaker 04

  Yeah, well, it definitely started the conversation. And being here In New York, I knew there were very few options for probably investing in agriculture, at least at that time. Even today, we don't recommend it, but there are people in the big city on the coast that invest in farmland. And I had a very close friend from Notre Dame that at the time was running private equity at Notre Dame's endowment. And I had contacted him and said, I'm interviewing with a few of these firms that invest in farmland, so groups like John Hancock and UBS that had existing funds or separate account businesses that would invest in US or global farmland. And I asked him, have you guys underwritten them? Have you invested with them? Have you talked to them? And he was very frank. And

• 11:19Speaker 04

  he said, generally, we don't think you get paid for the risk involved with investing in land and the duration that you need to hold it. But he said, let me introduce you to it. There's another Notre Dame guy that he started something really small. He's got very few assets, but he's investing in farmland. And that's how I met our founder, Perry Beath, through my friend, Tim Dozel, who's now the CIO of Notre Dame's endowment, actually, runs the whole shop.

• 11:43Barry Ritholtz?

  Oh, really?

• 11:44Speaker 04

  And so he's had a very successful career. And one of the best decisions, at least from my standpoint, that he made was putting Perry and I in touch.

• 11:50Barry Ritholtz?

  It's amazing how these random introductions through various networking groups and alumni groups really can lead to some interesting outcomes. When you joined Saris in 2010, $30 million, I mean, that's a small, single brokerage account. What were you thinking joining a firm that tiny?

• 12:15Speaker 04

  You know, that sounds a lot like what my wife was asking me at the time, too. Why are we doing this? And what are we doing? And it was interesting, there were Perry had 30 million in assets. I think it was 17 million in equity, and we didn't charge on the debt. So he said, I can afford to pay you something. It won't be much, but it'll be something. And I talked to my wife, Erin, and said, I think this would be a great opportunity. And she kind of echoed some of the things that people I worked with at Morgan Stanley, when they said, well, what do you do if this?

• 12:44Barry Ritholtz?

  You're doing what?

• 12:45Speaker 04

  Yeah. What do you do if this fails? And of course, no one knew anything about what we were going to do. But they said, well, what if it fails? And I said, well, if it fails... There's two things that can be confidence. One is I'll know it. There's only, you know, it's a very small shop. It's not like some trader in Singapore is going to blow us up overnight. I'll know it's not working. Either the investments are bad or we're not raising money. And the second was, there's going to be a great skill set developed here that even if it doesn't work, the worst thing I can do is just move back to New York and now I've got a differentiated thing on my resume. So, you know, we started there. We moved in December of 2010 to South Bend, Indiana. It's not a great weather trade, really. Even in New York, December's not great, but South Bend, it's much worse.

• 13:27Barry Ritholtz?

  That's like zero and a lot of snow.

• 13:29Speaker 04

  It's cold. Yeah, there was a lot of snow as the moving truck was moving in. But it's been great. And we started to really build that momentum and, you know, just being in, on the ground floor of a company with a founder who has a vision is, you know, you can't ask for anything more.

• 13:49Barry Ritholtz?

  So, farmland is a real asset. It's different from traditional real estate assets you think of offices, multifamily, warehouses, so many different, single-family homes. What is it about farmland that makes it such a unique investment opportunity?

• 14:08Speaker 04

  Yeah, I mean, there's a few things that go into it that just make this market different. And you don't, I don't personally think you have to have grown up on a farm to know anything about farmland or agriculture. But it is a very, you know, it's a very people, person, business because these are the types of properties that we believe you have to rent directly. We don't use just property managers to go out and do it. But in farmland, there hasn't really been an institutional roll-up. So, in office and in manufacturing and distribution centers and cold storage, everything's been rolled up over time into big institutions. And probably the most similar to farmland, when you think of what is the underlying asset, would be timber. And back 40 years ago, Jeremy Grantham and others started a huge, kind of move of taking

• 14:53Speaker 04

  the end users of timber and handing their assets that they're going to use as part of the end product to But in farmland, the end users don't own the land. So the groups like John Deere and Monsanto and Mosaic and ADM, they might either sell into agriculture or buy products out of it. But the land, while it is the true means of production, it's usually owned by others, not these big corporations. So particularly in the Midwest, you'd say the active family farmers, like that farm I grew up on, own about 40% of the real estate. Institutional investors today own about 3%. And that includes the largest investors, like the Mormon Church,

• 15:34Speaker 04

  the Bill and Melinda Gates Foundation, groups like Cirrus that might own between a couple hundred million to three or four billion in assets. But you just don't have these big other groups that own land. It's a very dispersed ownership group made up of estates, trusts, non-farming heirs that have owned this for generations. And two or three generations previously, they were actively farming the ground. They went to college and did other things, but there's zero, pretty much zero vacancy in US farmland.

• 16:05Barry Ritholtz?

  Zero vacancy. That's amazing.

• 16:07Speaker 04

  Yeah, every farm that can be farmed is farmed every year. And you lose farmland every year in the US because of things like development and conservation. And in parts of California, maybe lack of water, aridity, that they take farms out of production to transfer water to other properties. So you have this group of, or this total pile of farmland in the US that gets smaller every year. You have farmers that understand this is a scale game. They want to grow. So it's an interesting dynamic for investors to come into the space because it's not as if, if you decided tomorrow, Barry, that you wanted to farm 100,000 acres, you could buy all the equipment, the seed, the fertilizer, the chemicals, and you could find the labor to do all of that. But what you wouldn't find

• 16:52Speaker 04

  is 100,000 available acres to go, to go farm.

• 16:55Barry Ritholtz?

  It's that, that small amount of acreage comes up each year.

• 17:00Speaker 04

  Yeah, it's very, well, it's just not up, there's not a jump ball every year for it. It's all occupied. And even most farmers, and I'll use the Midwest as an example, because growing up in the Northeast, farmland was much different. There wasn't quite as robust a rental market. In the Midwest, which is one of the reasons we focused on that, is there's a very robust rental market. And we want to rent land. So we want not just one or two large farmers who will get, provide us with a rent indication or a rent bid. We want the opportunity to have 10 or 20 different farmers. And, and these are all, we work with across the board, 170 different farm tenants today. And, you know, all of those farm tenants rent our land, they own land, and they rent a lot of land from other people.

• 17:44Speaker 04

  So that actually becomes kind of a long-term proprietary deal sourcing network for new acquisitions. So we feel like we are doing the institutional roll-up. If you decide, if we decided we're only going to do deals of 25 or 50 million in size, there's not a lot of deals to do every year, and certainly not in the Midwest.

• 18:02Barry Ritholtz?

  Mostly smaller, uh, family farms, regional farms that occasionally come up when the next generation decides, we don't want to farm this the way mom and dad and grandpa did. We're, we're going to the big city.

• 18:16Speaker 04

  Right. And even a lot of what, they've already made that decision in some cases, a generation ago, but they still own the land. It's been more of, not a financial asset, but more like a family asset. And what you tend to see in, in taxes drive a lot of behavior in every industry. In agriculture, it's pretty meaningful because if you have this one very large real estate asset, people usually wait to get that step up in basis, and then they're saying, well, now is the time we're going to sell, regardless of market conditions. It's, we don't want to pay the tax going back three, four, or five generations to a cost basis of nothing.

• 18:50Barry Ritholtz?

  Right.

• 18:50Speaker 04

  So there are kind of unique time periods, and maybe 2012, end of 2012 was an example where there were some new tax, uh, things coming up, a higher capital, long-term capital gains tax, the Obamacare investment tax. And there was at least a discussion around that, a state tax exemption being reduced from, I think- At the time, it was at four and a half or five and a half million per spouse, down to a million. So that drove some real behavior at the end of 2012 from people saying, we want to sell this before the taxes go up. Usually folks just wait until they get that step up in basis and then they're going to sell it.

• 19:26Barry Ritholtz?

  And today, a family or what is it 15, 12, used to be 12 million exemption for states? I think it's up to close to 15.

• 19:35Speaker 04

  Yeah, per spouse.

• 19:36Barry Ritholtz?

  Per spouse, so.

• 19:37Speaker 04

  Significantly larger. So any discussion around a reduction in that, which obviously things get being permanent and I'll use air quotes around permanent.

• 19:45Barry Ritholtz?

  10 years is permanent these days.

• 19:46Speaker 04

  Everything changes. But yeah, that, when you have this one significantly large asset, the tax, taxation on that will dictate how they move it sometimes.

• 19:57Barry Ritholtz?

  Really fascinating. Coming up, we continue our conversation with Brandon Zick, Chief Investment Officer of Sarah's Farms, discussing how he helped grow the fund from $30 million up to $2 billion. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

• 20:25Speaker 00

  At Brookfield, we invest in the thing behind the thing, behind the next big thing. Our focus across infrastructure, energy, real estate, private equity and credit is helping to build the backbone of the global economy. We combine deep operational expertise with disciplined long-term investing, uncovering value and partnering alongside clients to shape tomorrow's economy today. Learn how you can own what's next at Brookfield.com/own. This is not an offer to sell or investment advice. Investing involves risks, including loss of capital.

• 20:59Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to space. SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs, and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices,

• 21:43Speaker 01

  but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute, brought to you by ChatGPT. Get started at ChatGPT.com.

• 22:26Barry Ritholtz?

  I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Brandon Zick. He's Chief Investment Officer of Saris Farms. They are a specialty fund investing in farms and farmland. So let's talk a little bit. We were discussing earlier how farmland generates revenue, and we're going to go into great detail with that. But I want to explain to investors what farmland gives them exposure to. What are you getting when you buy a chunk or a bunch of different farms?

• 23:02Speaker 04

  Yeah, so farmland, and I'll focus more on Midwest row crops. But row crops generally are annual crops because there are a few different buckets and...

• 23:12Barry Ritholtz?

  When you say row crops, I think corn, wheat, barley?

• 23:15Speaker 04

  Yeah, vegetables, annual crops, crops that are planted every year. You rotate as opposed to permanent crops. And really, it's a complete distinction. Permanent crops would be things like wine grapes, pecans, almonds, pistachios.

• 23:30Speaker 04

  Blueberries, things like that where your exposure is not just to dirt, which is what row crops really is, like our asset is dirt and there's optionality around what you can plant there. Your exposure in permanent crops is more specific to a specific crop and in some cases also a very specific variety. So if you had red delicious apples and they're out of favor and people want Honeycrisp apples, then while you own apples, you don't own the prime asset. And so we've focused almost exclusively on row crops and we've done that for a few reasons. One is we think it's much less risk, but it also hits on the investment objectives of farmland, we think, more cleanly. So some of that is current income, a positive

• 24:14Speaker 04

  correlation with inflation, diversification in a portfolio, non-correlation, and then also an appreciating capital asset. So our asset is primarily dirt. So there's a little bit of depreciation you can take around things like if there's buildings or grain storage bins or irrigation equipment, but primarily our asset is just dirt and it's appreciating over time. And the reason for that is a few things. The Chicago Fed has data going back almost 70 years that'll say that farmland has averaged about 6% price appreciation during those 70 years on an annualized basis.

• 24:51Barry Ritholtz?

  Is that real, net of inflation or before inflation?

• 24:54Speaker 04

  That's total. That's gross. So if you look at what makes up that, it's really just inflation plus gains in productivity. So every time there's new technology, whether it's seed genetics or fertilizer technology or equipment technology, anything that can create more yield on a farm, in theory, that return should fall to the landowner, or at least a portion of it should fall to the landowner, not just to the operator. So if you're an active manager, we feel like you'll capture some of that. If you're a passive owner of land that doesn't understand, well, what is the land actually producing, what should I be generating in rent, how do I capitalize that into a land value, maybe you

• 25:35Speaker 04

  don't. But if you look back over time, that capital appreciation's been about 6% and it's really just maybe there's been a little bit of cap rate compression, but it's more around Gain some productivity and then just CPI inflation.

• 25:48Barry Ritholtz?

  Let's talk about inflation. I was reading last week that beef prices are at record highs. For many types of investors, especially fixed income, inflation is really a big challenge to navigate around. It sounds like with farmland, inflation isn't necessarily a bad thing. How do you think about rising prices, especially in the supermarket, and what that means to the properties you own?

• 26:15Speaker 04

  Yeah, so within agriculture, inflation comes two ways. So if you're an operator, if you're a farmer, inflation's real because you're...

• 26:23Barry Ritholtz?

  You're paying more for seed, fertilizer, chemicals.

• 26:25Speaker 04

  Equipment, wages, wages, everything that gets baked into growing that crop, inflation plays a part in it. As the landowner, the actual dirt has a very positive correlation with inflation over time. So we, I'm not going to say we love inflationary environments, but this is an investment that's built for inflationary environments. And the way that we think about how global central banks treat, you know, the way they do business, we think we're in an inflationary environment for the long term. So we think this is an asset that works well with that.

• 26:56Barry Ritholtz?

  This is a good hedge against rising prices.

• 26:58Speaker 04

  That's right. And we've, you know, back when rates were extremely low, a lot of our investors used farmland or used CRIS as a inflation substitute, or a fixed income substitute, something that's positively correlated with inflation. Even with rates being higher, I view farmland more as a tips-like thing, and we haven't seen much appreciation there.

• 27:19Barry Ritholtz?

  What is the yield on farmland as an investor, and where does that yield come from? Is it rent? Is it sale of property? Is it other elements?

• 27:30Speaker 04

  Yeah, so the gross rental yield on our portfolios range between 4% and 5% a year. Now, when you think about, if you look at the index, so there's non-investable indices that are out there, or if you look at the Chicago Fed, or some of the large land-grant universities, they'll put out a lot of data around what cap rate do farms trade at. Because while there's no Indiana farmland go on Bloomberg yet. There are a lot of public transactions that happen and we'll attend 200 to 300 public auctions a year and they'll be in attorney's offices, VFWs, these are on a random Tuesday night at 6 o'clock, someone selling 120 acres of farmland and we track

• 28:13Speaker 04

  where does this sell versus our reserve price, we know what rent we could earn on that property, so what implied cap rate is land selling at. Generally speaking, in the Midwest, in the Chicago Fed 7th District, land trades at 1.5% to 2.5% and your buyer is typically a neighboring farmer. So that's their strategic investment they're making and that farmer may take the landowner rental return and their operating return and compress them together to justify whatever price they're paying. But we try to target that 4.5% to 5.5% when we purchase a farm and that'll come, it'll all come exclusively in terms of rent, that's what we're underwriting. But then the total return will be that mix

• 28:56Speaker 04

  of rental income and then appreciation over time. And appreciation can be that beta that I referred to, that Chicago Fed data that says 6% a year on average, but then there's alpha that we can add. And a lot of that is because the people that are selling farms are usually not active farmers. I mentioned these are estates, trusts, non-farming heirs and there's some low hanging fruit in terms of CapEx that a farmland investor can do to decrease the risk of a crop growing and also increase the yield. So a really, you know, a common thing that we do is add irrigation. And that irrigation will help us increase the yield, decrease the risk for the tenant and it increases our rent. But also, we can

• 29:39Speaker 04

  capitalize that increased rent into a higher land value over time. So if we can find those opportunities to do the CapEx, that's our bread and butter.

• 29:47Barry Ritholtz?

  I'm going to say something that sounds a little ridiculous, but... You're a Graham Dodd valuation investor into farmland? Is that, am I getting this right?

• 29:57Speaker 04

  Yeah, I mean, there's no black box here to what we're doing. It's really a blocking and tackling strategy. And we encourage all of our investors when they, when they're contemplating this, or even on an annual or biannual basis, come out and look at these properties and see what we're doing. And we have folks that have, you know, trade, they've been trading their entire career and they'll come to a farm auction and say, "Well, you were underwriting the same rent on two properties across the street from each other. One sold for X, one sold for 2X. How does that happen?"

• 30:27Barry Ritholtz?

  Right.

• 30:27Speaker 04

  And it's just who wanted which one and how, in some, in some cases or instances, the way in which the farm is being sold is inefficient. The rental market's completely inefficient. So there are times that we've bought properties, in some cases from other institutional investors, and we've doubled the rent on day one, not because we wanted to charge an uneconomic rent, but because the farmer was willing to pay that rent for that land. And, and the, the active management that the previous owner was using was either not very good or not that active. So that's where we think we, we do a really good job of just identifying, where can we add alpha? And then, again, it's not a black box. This is really just ticking and tying and blocking and tackling.

• 31:10Barry Ritholtz?

  So let's, let's talk about that alpha. You talked about rental income and appreciation and sale of land, but I recall a conversation we had years ago up in Maine where you described all these additional ways that professional farmland management generates improved economics. And some of the notes I took, mineral rights, solar and wind farm, easements, additional land use. How do you take farmland that for centuries has just been producing crops and find ways to improve the economics?

• 31:48Speaker 04

  Yeah, and you know, investing in the US is a key part of this because the landowner has a lot of rights that in other parts of the world you just don't have. So mineral rights here in the US, the surface owner generally owns them. All the way down, right? Yeah, and in some cases, those rights have been severed 100 years ago. And in certain parts of the Midwest and out west, you don't own mineral rights. We like to own them. It's kind of funny, the family farm I grew up on in northeastern Pennsylvania, growing up, no one knew what Marcellus shale was, but everyone in Susquehanna County has made more money pumping gas than they ever did milking cows. And it was really seeing that in the early 2000s, that as we buy land, you think, well, how do you maximize the

• 32:30Speaker 04

  value? These are, these are real assets. They have to be actively managed. Something as simple as harvesting timber, that's really low hanging fruit, doing select cuts, renting farms out for recreation or hunting. Frankly, if you don't rent it out, someone will hunt that property anyway without insurance and without paying you anything. So you might as well get insurance and get paid for it. So Perry Veth, our founder, he had been doing that long before in parts of Indiana and Illinois, generating mineral rights. But the way that he structured our vehicle was really beneficial to some of these long-term value options. Because I think when he was starting Cirrus in 2007, most of the people that he worked with at the time and friends of his in private equity said, just set up a typical drawdown fund and get it invested.

• 33:15Speaker 04

  As opposed to perpetual? Yeah, at the end of eight or 10 years, just sell them all off. He decided that an evergreen fund really fit the asset class better because most of the farm tenants we're working with, they want to farm this property for 10, 20, 30 years. And that's kind of the way they're thinking in terms of how they grow their business. And being able to own the property for that long makes a lot of sense if you have lessees that want to rent that way. And if you think of who are the ultimate, over time, who are going to be the ultimate investors in this asset class, it's going to be folks that have very long-dated either goals or liabilities. So endowments, foundations, trusts, infrastructure funds, insurance companies. So having this long-dated asset where you're not forced to churn or forced...

• 33:58Speaker 04

  To have these transaction costs is really important. And what we've, what we found later on too was some of the optionality around farms. So wind has been around for a long time and that's kind of a mildly incremental increase in revenue on land.

• 34:12Barry Ritholtz?

  You can put a wind farm up on a farm, but still grow crops also.

• 34:17Speaker 04

  Yeah, on a 700 acre farm, we have one in western Indiana, has seven wind turbines. They might take up 20 acres total between the turbine and the roads. The rest of it, we continue to rent. So that rent from those wind turbines, it's incremental. It might increase 20 or 30 basis points over your farm rent. So we'll take it, but, but it's not going to change your life. When we started doing things like solar, so solar, you, instead of seeing 20 or 30 basis points, you're seeing on an option period, maybe a three to five X the income return.

• 34:49Barry Ritholtz?

  Really?

• 34:49Speaker 04

  So if you think back to, we're buying land at a four and a half to five and a half percent income, over the course of five years during an option period, if it were to go to solar, now we're generating 15 to 20, 25 percent annualized income.

• 35:03Barry Ritholtz?

  Wow.

• 35:03Speaker 04

  So we like that, but in that case, it's taking the whole footprint of the land. And if, when we buy a farm, we're just underwriting it as an agricultural property. Farm rents, CapEx, what type of return do we think we can earn over time? And we're targeting kind of that eight to 10 percent net through a cycle on farmland. But then, once we own the property, and as you aggregate properties over time, maybe we started with a couple hundred acres 10 or 12 years ago, but now in a township, we now own 2,000 acres. And it's just been all of these incremental bolt-on acquisitions. Now that has probably more interest from some of the developers on the solar side or for other things too, that can be even much higher revenue or value.

• 35:44Speaker 04

  But we always fall back on, if it's just a farm, that's what we underwrote and we're happy with that. And we'll continue to aggregate those properties over time. We have over 500 today. There are years where we'll do 30 or 40 closings or transactions to invest 80 or 100 million. Most institutional investors would never do that, but we've, we've really decided that that's where you can add a lot of alpha on the acquisition side by doing these bolt-ons at a discount to what that, like you said, it's a very finance-worthy strategy. It's just being applied to an asset class that you usually don't see it.

• 36:19Barry Ritholtz?

  You mentioned leases. When I think of a lease, I think of either an apartment lease for a year or two or my office lease here in New York for 10 years. How long does the average farmer lease their land for, or lease your land for, if they want to farm a crop?

• 36:40Speaker 04

  Yeah, so we try to target three to five-year leases, and I'd say three is the overwhelming majority. Given that our farms are mostly growing row crops, you can see three years on the board of trade. You have transparency to where our prices. So farmers, if they want to hedge, if they want to think about selling a part of their crop into the future, they can do that. And we can all agree, okay, over the next three years, this is what that rental income will be. But when you think about other, like, across a farmer's portfolio, I mentioned they own land and they intend to own that forever. That's how they think about it. And they rent our land, and those are usually three-year leases. But then they rent a lot of land from other people.

• 37:22Speaker 04

  Those other people, even if a farmer's been operating that land for 30 years, it's usually 31-year leases.

• 37:28Barry Ritholtz?

  Really?

• 37:29Speaker 04

  So making decision, because the landowner, I'm not going to say they're not sophisticated, but they're unwilling to do a multi-year lease because they want to have the optionality to sell the property free and clear of a lease.

• 37:39Barry Ritholtz?

  Right.

• 37:40Speaker 04

  If they decide they want to sell it. So usually when farmers look to us, they're saying, well, we want to add a new combine or a tractor or make these overhead or hiring or infrastructure decisions. They actually view a three-year lease as a long-term lease in the farmland space. We have some leases that'll go Eight or 10 years if they're growing more specialty crops. So we have about 20% of our portfolio that generates higher revenue because they're growing things like potatoes for potato chips, processing tomatoes. The kind of highest quality mint you can grow in the world is in the Midwest. So we grow that on our properties. And that requires a more diverse rotation and a longer planning for the farmer. So we'll allow a longer lease in those instances.

• 38:25Speaker 04

  And we allow that because they're paying us a stronger rent.

• 38:27Barry Ritholtz?

  Huh, really, really kind of fascinating. I want to talk about scale. You mentioned bolt-ons and a lot of things. I'm kind of fascinated by the scale. And the question I wanted to ask is, are each farm that comes up for sale, do they have the same or different value for different acquirers? Like, I'm going to assume if you're the adjacent farm, that next farm might be more valuable. You spend a lot of money on combines and tractors. Hey, if you can use it on 500 acres instead of 300, your cost per acre should go down.

• 39:06Speaker 04

  Of course.

• 39:07Barry Ritholtz?

  What's the impact on scaling up? And what's a big farm? Is 100 acres big? Is 1,000 acres big?

• 39:13Speaker 04

  Yeah, I mean, it's all relative, but in to your point about are there different values for different buyers? Absolutely. Even if you, even if two buyers both intend to farm it, there are absolutely differences in how someone will value it. In some cases, on the same land, it comes down to what crop do you intend to grow? So I had talked briefly about specialty crops, but if you're, if there's a farm in northern Indiana with irrigation that comes up, if the tenant we're looking at wants to grow corn and soybeans, they're going to be able to pay us one rent. If the tenant we're talking to would grow popcorn and processing tomatoes or potatoes, they can pay us almost double this rent on the same land. So when we look at farmers, we're trying to identify which farmer can generate the

• 39:58Speaker 04

  highest revenue, has a strong balance sheet, operates with the least amount of risk so that our rent will be paid every year in the spring. But there's

• 40:08Speaker 04

  It's really important when you look at land to determine what's the highest and best use, even just on the agriculture side. So when you think of, every farmer would love to have thousand acre blocks of land in the Midwest. That's hard because the history of ownership was the Homestead Act. So it's forty acre blocks. So within our portfolio, we have forty acre farms and we don't love doing those transactions, but if we can bolt them on to an existing property with an existing lease and the same farmer, that's kind of a no brainer. But our largest farms in southwestern Georgia, it's seven thousand contiguous acres. Wow. So that's about ten square miles in one piece. It's all irrigated and the history of ownership there is plantations. Out west, the history of ownership was ranches. So these larger tracts of land. You tend to see more institutional investment in those

• 40:53Speaker 04

  areas along with permanent crops. And there's a lot of reasons people will tell you it's around scale and efficiency. In some cases, I think it's just you can write a bigger check. If I need to deploy fifty million at once, I can do it better in those areas because the farms are just bigger. Or it's a permanent crop that it's a hundred or two hundred thousand dollars an acre, so I can deploy capital more quickly. For us, it's harder to gain that scale, but it really starts with that tenant network. So those hundred and seventy farmers we work with today, they farm our hundred and seventy thousand acres or hundred and eighty thousand acres. They own collectively about two hundred and fifty thousand acres that I don't expect they will sell, but that's kind of what they own. But they rent over seven hundred and fifty thousand acres from other people. And

• 41:38Speaker 04

  those other people are those estates, trusts, non-farming heirs. And when those folks want to sell, usually they don't have a public auction. Usually it's a private transaction. The first person they call is their farm tenant. And while we would, if our fund was closed, we would love to see prices just continue to escalate up forever, you know, over time. But you're a buyer also. You're on both sides. Yeah, we like cycles. So when farmers have really strong balance sheets, like in twenty twenty one and twenty twenty two, they were probably not passing on as many of those purchase options to us. But now we've, we're in our third year of lower commodity prices. Farmers have to be careful about how much working capital they're Kind of liquidate to go buy a long-term asset.

• 42:20Speaker 04

  And if it's a very strategic farm to them, they're going to try to buy it very close to home. But if it's something they're willing to travel for and they're currently farming, and as much as they'd like to grow their acres, to that point about efficiency you mentioned, they don't want to lose acres. So if a farmer farms 5,000 acres, if one of their landlords who owns 500 sells, and they don't, they're either not able to buy it, or someone that we're partnering with them on, if they're not able to buy it, then they just lose those acres and they immediately become overcapitalized. Every other acre becomes more expensive to farm.

• 42:54Barry Ritholtz?

  Per acre to farm.

• 42:55Speaker 04

  And so, they think about it in terms of protecting acres and growth. When you say, well, why would they partner with someone like us? So when we look at farms that would make sense to add to the portfolio, in some cases we'd pay a little more because it's a strategic farm that's close by, but we say no, probably 29 times out of 30.

• 43:14Barry Ritholtz?

  Really?

• 43:15Speaker 04

  When we're at a public auction. The hit rate is low, and while we'd like that to be higher, that's the investment discipline.

• 43:20Barry Ritholtz?

  Right.

• 43:21Speaker 04

  We'll lose sometimes by 40 or 50% above our reserve price.

• 43:24Barry Ritholtz?

  Back to Graham Dodd, absolutely. You mentioned ranch, ranching. We've been mostly talking about farming. When I think of ranches, I think of cattle farms, horse farms, sheep. What do these ranchers do? How much of the assets you own are ranches versus farms?

• 43:41Speaker 04

  Yes.

• 43:42Barry Ritholtz?

  Or is there a mix? Some do a little bit of both?

• 43:44Speaker 04

  Some can do both. Not our farm. So our portfolio's exclusively farming, not ranching acres. You tend to see those ranching acres. You know, if you think of what's the highest and best use, if you could grow amongst row crops even, corn is the highest revenue, then soybeans, then wheat, I mean, cotton would be up there as well. But as you look kind of down the value cycle, ranching would be very low because you're just not generating much rent. So it's more marginal land that's used for that, or larger tracts of land. Typically, like one of the big farmland owners is the Mormon Church. They're also one of the five largest cattle feeders in the country. So they own a lot of ranch land.

• 44:24Barry Ritholtz?

  So they're growing the feed and then sending it to their own cattle?

• 44:27Speaker 04

  Yeah, and they'll graze the cattle and then eventually, you know, take that all the way to market. That's the type of vertical integration you'll see in some areas. In row crops, you just don't see that. We like to identify tenants we're working with that if they have a dairy, so they need the land to feed the cows, they need the land for their nutrient management program. Those tenants are willing to pay more for farms if it's a strategic farm that's close by because they can't travel all over the place. But a lot of our tenants, they might have a home base that kind of looks like the center of this table and the radius that they'll travel being willing to farm, you know, they'll rent in these other areas if they can find enough acres to have scale. Because ultimately, every time a son or daughter wants to come back to the farm to help increase

• 45:12Speaker 04

  that family business, you can't just slice the pie more ways. You have to grow the pie. And I mentioned earlier, the amount of total acres in the U.S. is going down every year. And in the Midwest, you don't have problems of aridity or erosion, but you have a lot of development pressure coming in. The cities are expanding, manufacturing's expanding, so there are acres that farmers lose for those reasons every year.

• 45:35Barry Ritholtz?

  So, it seems absurd to talk about farmland and artificial intelligence, but there are two different ways I want to go with this. The first is, these giant data centers, they pay a lot more. They are a higher spending buyer or renter than, say, someone growing row crops. What's the relationship between farmland and AI and big infrastructure investing?

• 46:03Speaker 04

  Yeah, I mean, we're seeing it firsthand now in the Midwest. The amount of additional building that's happening around data centers is unbelievable. And the amount of capital that's being invested in these areas like Ohio, Indiana, Michigan, Illinois, around data center development, it's really staggering when you think about it. So there's, just outside of South Bend, Indiana, two very large data center projects that I think each is investing between nine and 11 billion on these data centers. And the real estate price, even if it's, I think our average cost per acre across our portfolios, about $8,000. You see data center prices anywhere from $100,000 to $300,000 an acre.

• 46:44Barry Ritholtz?

  10x, 12x, that's crazy.

• 46:45Speaker 04

  Yeah, at least, if not more.

• 46:46Barry Ritholtz?

  And who are these, who are the companies that are these big buyers? All the big names we know?

• 46:50Speaker 04

  Yeah, it's the big ones that are out there. I think you see-

• 46:52Barry Ritholtz?

  Google, Microsoft, who else is, uh?

• 46:56Speaker 04

  Like Amazon, Meta, it seems like what you're finding now is a lot less hoteling space for data centers and they're all single user. And it seems like they're going after the best locations, which would be large tracts of land, close to infrastructure. So you want natural gas, you need three-phase power with capacity on the line, you need fiber lines or rail access to run fiber.

• 47:19Barry Ritholtz?

  Water.

• 47:20Speaker 04

  And you need water. And that while there are multiple ways for cooling water, whether it's closed loop or open loop is a big part of all of it. So what you tend to find are a lot of these old rust belt areas, but kind of virgin farmland is the best candidate for it. And you have these single users that are going after that land. So in our portfolio, we've aggregated large properties over time and there seems to be a lot of interest around that because it's just, there are very few of these places where you can do it. It's not like even a distribution center that next to every exit on the highway, you could justify putting one there. You need all the energy and water infrastructure and fiber infrastructure and you need capacity.

• 48:03Speaker 04

  So every new, and there aren't a lot of new natural gas-fired power plants that get built, but when one gets built, it seems like a logical kind of co-user of that power would be one of the data centers.

• 48:14Barry Ritholtz?

  I was gonna say, what about co-location where you just run a nat gas line and build your own electrical facility adjacent to one of these power plants?

• 48:21Speaker 04

  I feel like some of that is definitely happening and will continue. I mean, ultimately, some of these data centers will all be powered by modular nukes. When you get down to it, you need...

• 48:31Barry Ritholtz?

  Thorium, is that what we're talking about?

• 48:32Speaker 04

  Potentially, yeah. I mean, the idea of when a data center is going in, or even a big manufacturing facility, sometimes you'll see co-location of solar. And while solar has a lot of benefits, it's not going to power something like that. That's more just, I think, for credits to sell into the grid. I mean, we have Three Mile Island potentially coming back on, so there's a lot of different options. And I think across states like New York State, they've closed down some nuclear facilities or consolidated.

• 49:00Barry Ritholtz?

  Well, Shoreham never opened here. They spent billions over 20 years. There was no escape route. Islands are not great places for nuclear facilities, but you know, you see countries like France, 90% plus of their power generation comes from nuclear.

• 49:17Speaker 04

  Right. And the hard thing, when you think about power, I mean, I kind of laugh. I had two siblings that both went to Cornell, so I've been to Ithaca quite a bit. We own farms in upstate New York, and every time I drive from our farms there down to our family farm in northeastern Pennsylvania, you'll drive through parts of New York State that will say, no industrial, you'll see signs that say, no industrial solar, no wind farms, no fracking, no nuclear, but they all turn on their lights. So we have this really perverse view out there that, you could call it NIMBYism, you can call it whatever you want, but we need more of everything.

• 49:51Barry Ritholtz?

  More power, for sure.

• 49:53Speaker 04

  Yeah, if you look at, there's a few great graphs out there that show kind of the history of consumption for power, and the same amount of coal that's been used throughout history, this year will be the year that the most coal is used. The most peat that's ever been burned or wood is happening this year. The most oil produced or burned, natural gas. The only energy source that's ever gone down, really, is nuclear, and that was out of, you know, out of regulation.

• 50:19Barry Ritholtz?

  Fear post Three Mile Island. Yeah, there's a lot of fears around it.

• 50:21Speaker 04

  And so, if you look at, what do we need? There's no energy, in my opinion, there's no energy transition that will ever happen. This is, we need more of everything. So...

• 50:29Barry Ritholtz?

  That's really fascinating. I saw a chart, I forgot where, biggest producer of solar energy in the United States, Walmart. All their distribution centers, all their super stores, especially in the South, they just say, we have dead space on the roof, loaded up with solar, and they're not only subsidizing their own power consumption, they're getting credits for selling it back to the grid.

• 50:53Speaker 04

  Yeah, I think it makes a ton of sense, especially if you're building greenfield, when you can actually, it's tough to retrofit things for solar. And even when we look at farmland that goes to solar, the idea of these little community solar gardens, I don't think is very scalable. You tend to see more industrial... Solar sized solar fields and it's, you know, from the landowner's standpoint or the farmer's standpoint, or the, if a farmer's the owner, you know, they're interested in the highest and best use. So what you tend to see is we have farm tenants that they sell land for development all the time. They, you know, these farmers are very sophisticated. They're CEOs. This has been happening for generations where someone will sell land that's close

• 51:34Speaker 04

  to town for a very high price and then they'll move 20 miles farther out and buy three times the amount of land and set up shop there. So while the idea of a farmer moving always seems, you know, really hard to believe, this has been happening forever. The western suburbs of Chicago have extended and extended and extended and farmers are, you know, I consider them dumb as a fox. Like they'll, they'll sell for-

• 51:57Barry Ritholtz?

  You say that as a farmer.

• 51:58Speaker 04

  Yeah, I know. It's, it's interesting. They, they'll sell for a very high price and when that development doesn't happen, they'll buy it back for less and they'll wait for the next round of development and sell it again. So-

• 52:08Barry Ritholtz?

  Oh, that's funny.

• 52:09Speaker 04

  So, you know, some of the competition we see when we're buying farms, it's not just farmers that had profitable years. It's farmers that have 1031 exchange money because they sold land to a data center or they sold land-

• 52:21Barry Ritholtz?

  And they have three years to reinvest before they get hit with taxes, something like that?

• 52:24Speaker 04

  Yeah, it's about 18 months and they have to identify properties, but they have to go out there and reinvest it and kind of like, like to-

• 52:30Barry Ritholtz?

  Right.

• 52:31Speaker 04

  -keep their cost basis. And farmers are really good at, um, you know, figuring their way around these tax codes and, you know, good for them. And I think that's a lot of the competition we see are 1031 buyers because there's just big dollars getting thrown around.

• 52:45Barry Ritholtz?

  That have no choice. They have to get deployed otherwise you pay in the tax-

• 52:48Speaker 04

  Yeah, and they want to continue to buy farmland. And a lot of farmers, I mean, it's really interesting when you talk to them and you'd say, well, what's your dream scenario? And one of our tenants who sold some land to a solar company and they were selling land for a data center, I said, well, what's your goal? And they said, well, we want to continue to farm. We just want to do it debt free. So it's not like they just want to buy a place in Florida. They'll have one, but they, they want to continue to farm. So they want to go buy more farmland.

• 53:13Barry Ritholtz?

  Really, really interesting. Coming up, we continue our conversation with Brandon Zick, Chief Investment Officer of Sarus Farms, discussing the state of farmland investing today. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

• 53:41Speaker 01

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• 55:06Barry Ritholtz?

  I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Brandon Zick. He's Chief Investment Officer of Saris Farms. They are a specialty fund investing in farms and farmland. We haven't really talked about the risk of farming and a couple of my favorite YouTube shows. So I'm a car guy. I like Harry's Garage and his adjacent channel is Harry's Farm. And watching him do this stuff, you realize what a difficult job farming is, especially sometimes there's drought, sometimes there's too much rain, it's so...

• 55:45Barry Ritholtz?

  Expensive and so much of your product is totally out of your control. And then if you liked Top Gear, there's an Amazon show called Clarkson's Farm. And it makes you realize, God, this is an impossible business. At least in the UK, farmers there are having a really hard time. So let's talk a little bit about the risks of farming and the risk of investing in farming. What are the possible downsides?

• 56:14Speaker 04

  Yeah, so on that, being a farmer is a very difficult business. I mean, there are so many different risk factors and so many decision points that you can make that completely can impact your bottom line in a material way. Not just what crop you grow and when you plant, but when you sell it, how you sell it, who you sell it to, how you store your grain. And all these things can change year to year. And to your point, and this kind of goes back to, there hasn't been a lot of institutional roll-up yet on the land side. But the people that sell inputs to farmers, and the inputs can be seed, fertilizer, equipment, whatever it may be, and the buyers of their crop, the large grain buyers out there, your

• 56:55Speaker 04

  bungies and ADMs and Cargills, they all have a lot of pricing power. Your average farmer doesn't have any pricing power. So they're a price taker on the input side, they're a price taker on the crop side. So part of our value add for investors is we try to identify farmers that are the most well-positioned to have whatever pricing power they can get. So they have to have scale, so that when they're buying inputs, that they can go out and negotiate the best price possible. You want farmers that can store their grain, so they're not selling it all at harvest. They want to be able to sell it into the spring when other people don't have the crop. Yeah, so hopefully you get that positive carry. So we try to identify those folks.

• 57:36Speaker 04

  But when you're looking at investing in farmland, what are the downsides? Well, there's certain just climate issues. So if you're close to a river and it floods, that's a problem. If you have very sandy soils and it doesn't rain, and you have drought, that's a problem. So we like to have farms where we can do some of that. Like adding irrigation or adding drainage so that you can help manage some of those risks.

• 58:00Barry Ritholtz?

  How do you manage around weeds, pests, bugs, and disease? Because there are a lot of dangerous diseases that literally come in on the wind.

• 58:09Speaker 04

  Yeah, and that's, I mean, part of what, the way we've constructed this portfolio, I mean Perry was really prescient when he thought about the Great Lakes, the Midwest. It wasn't just because he was from Wisconsin or he was traveling to the Midwest. It's because in the Midwest, we have the best soil, some of the best water resources. And what I mean by that is these recharging aquifers, the Great Lakes aquifers. But also it rains during the crop season. So the cheapest form of irrigation is still it just rains. You don't have to turn anything on or do anything. But there are parts of the South and the West where it doesn't rain when you're growing a crop. Or it's very sporadic. So you can't really grow a crop without irrigation. In the Midwest, it's more supplemental. So from a risk management standpoint, it starts with good soil, good water.

• 58:52Speaker 04

  We like good infrastructure so you can move your crops around. You also, and I had mentioned earlier, we like areas where it's a highly competitive market for rent. Because we're renting ground, we want to have lots of farmers out there that are all looking to grow. They're all looking to add acres. And so that makes a very competitive market from the rental side. Some of the stuff that, you know, investing in the US isn't a risk, but there are a lot of people and a lot of managers that invest outside of the US. Currency risk is a big deal. Sovereign risk is a big deal. I mean, there's been many investors that have had more than their hand slapped for buying land in South America, particularly in Brazil, that they found out the group they bought it from might not have been the owner. And there's a lot of things that, we think transparency is key.

• 59:37Speaker 04

  But we, we really like title insurance. We like rule of law. So we invest in the US. We invest in areas that are very friendly to farmers, you know. And so that's, we don't own any land in California today. Maybe we will at some point. I think that's a little bit more difficult from a regulatory environment. And water is something that we view as longer term. You know, water's going to be a gating issue or a gating factor in a lot of areas. And you're seeing not just regulation, ... restriction all across the country. So we want to be in areas where water is plentiful. It's one thing to have a paper water right, it's another to have water availability. And that's what we focus on.

• 1:00:15Barry Ritholtz?

  So, so last question, last two questions before we get to our favorite questions we ask all our guests. Let's look out five or 10 years. What are some of the biggest opportunities in farmland and, and what are some of the potential dislocations and risks you're, you're considering?

• 1:00:32Speaker 04

  Yeah. So in terms of opportunity, I mean, we, we think there's just so much capacity out there to continue to invest in the, the current markets where we are today. But within the U.S., we think, you know, the world's going to continue to need food. As water becomes more expensive in other parts of the U.S., so California as an example, or Arizona as an example, a lot of those crops that people want to have the USA sticker on, so vegetables, produce, they're going to be grown more, at least seasonally, in areas where they're cheaper to grow.

• 1:01:06Barry Ritholtz?

  Like Mexico?

• 1:01:07Speaker 04

  Uh, so, a lot of that, today, a lot of produce is grown in Mexico, and that's, uh, labor's the biggest issue. Labor there is next to nothing. So, if people don't care if, if they're blueberries, or if they're watermelons, say, USA, then it will all come from Mexico if people don't care, because it's just, from a cost of production standpoint, it's so much less. But in California, the cost of water, so let's say you have a well that you need to pump a thousand gallons a minute to grow celery, that might cost a couple hundred thousand dollars a year. The cost of the well itself is a million dollars to grow that same celery, maybe less of it because you're not growing year round. In Michigan, that well costs $50,000 and it costs $200 a year to operate. So even if

• 1:01:52Speaker 04

  the labor cost was same same, the cost of production's much, much less. And every crop in the U.S., almost every crop, moves west to east toward the population center.

• 1:02:01Barry Ritholtz?

  Right.

• 1:02:02Speaker 04

  So if you're east of the Mississippi, you've cut a huge freight cost off of the cost of production, too.

• 1:02:07Barry Ritholtz?

  So Midwest, straight to the west, east coast, and much cheaper than coming up from Mexico?

• 1:02:11Speaker 04

  Yes. And I think over time, you know, we're going to see more and more of that high revenue production move there. So we view that as an opportunity. A risk is always do, does the cost of labor outpace technology growth? We've seen, and part of the reason we like row crops are because there's more technology being implemented and much less labor.

• 1:02:30Barry Ritholtz?

  I'm glad you mentioned that because one of the things that was fascinating on both those shows were the GPS-driven tractors. So if you're going to run a combine, you're going to lay fertilizer down, you're going to harvest, these things essentially drive themselves long before Tesla because doing that efficiently is a giant money saver. Talk about the technology that's making farmland more productive.

• 1:02:57Speaker 04

  Yeah, I mean, technology, I would say in agriculture is moving as fast as anywhere. And, and it's really because there are real tactical issues around labor's too expensive, the cost of inputs has gone up. So to talk to our farmers, and, and that's a big part of our underwriting is we want farmers who are using the latest technology, whereas in the past, if someone was planting a crop, they would broadcast equally across the entire field, the fertilizer, the seeds. And when you look at actually some of these farms, the soil types and quality throughout a farm can be highly diverse. You could have five to 100 different soil types. So the soil mapping that they can do with technology to then-

• 1:03:36Barry Ritholtz?

  Via satellite, right?

• 1:03:37Speaker 04

  Yeah, via satellite. And they also use probes to get out there, trust but verify. You go out there and do that, and then they can use variable rate applications of fertilizer and seed. So in an acre of ground of really high-quality black dirt, they might plant 35,000 seeds per acre, but then in the sandier, less, lower-quality soil, it's only 20,000. So, and, and achieve the same yield. So what you're doing is saving money on the seed, applying fertilizer so that it's not running off. And farmers don't want waste either because that's money that's just rolling away.

• 1:04:13Barry Ritholtz?

  And this isn't just satellite. It's satellite, it's drone, it's a lot of high-tech tools that you don't think of. You think of picks and shovels with farms, but there's a lot of high-tech here.

• 1:04:23Speaker 04

  Well, and something as easy as, if you said 20 years ago, you had irrigation on a property, these big- Irrigation pivots and you know there's some publicly traded companies that manufacture all these in the US like Valley and Lindsay and 20 years ago if a farmer had 20 pivots they'd have to have five or six different people in the morning get in a truck and go out and start them up and then throughout the day drive by and make sure they're still running now that farmer can control everything from his or her iPhone they can start it stop it monitor they have soil moisture probes out or they moisture probes out in the soil so that they know do we need it in some cases they are using AI or some learning mechanisms to say well based on is it going to rain we're not going to turn itself on so farmers are

• 1:05:07Speaker 04

  subscribing to some of this kind of smart data to go out there and make them a better operator and those are the farmers that when you look at who are the people that are going to grow they're the ones that are using the latest technology that'll do that.

• 1:05:20Barry Ritholtz?

  And our final question before our favorites what do you think people don't understand or aren't talking about when it comes to farmland as an investment?

• 1:05:31Speaker 04

  Yeah, I think most people don't understand just the sophistication of the farmers they're dealing with when people say what's going on in agriculture they paint with a very broad brush and you wouldn't say that if you said what's going on in accounting well there's some great accountants and probably some poor ones or what's going on in any industry you have to look at who are the people leading the way and that's who we try to partner with because we think they will help us generate the best returns whenever that Bloomberg Indiana farmland go exists it's going to be pretty fully priced I think it'll be much more efficient the inefficiency is still out there and I think that's what we're able to I won't say take advantage of but that's what we've been able to lever over time is focusing on that

• 1:06:14Speaker 04

  inefficiency there will be a lot more money that comes into investing in farmland we're seeing crowdsourcing of farms we're seeing more public REITs that are going to be launched and that will be out there but I think it's a long way when you think of there's no cheap beta there'll be a lot of expensive beta out there there are still alpha generators and this is an asset class that you just have to go pick a manager you can't just say asset allocation helps us and gets us or you have to pick Manager.

• 1:06:39Barry Ritholtz?

  There's no vanguard for passive indexing for farming.

• 1:06:43Speaker 04

  Yeah, there's no wisdom tree for that.

• 1:06:45Barry Ritholtz?

  All right, so let's jump to our favorite questions. We ask all our guests, starting with, tell us about your mentors who helped shape your career.

• 1:06:54Speaker 04

  Yeah, so I'll start with my parents because they encouraged all of us, the six of us in our family, do something else. We know this is not.

• 1:07:03Barry Ritholtz?

  Not uncommon with farmers, right?

• 1:07:05Speaker 04

  Yeah, and they both grew up on dairy farms and we grew up on my dad's family farm. And my parents were both very well educated. You know, I remember some of my best memories as a kid were having dinner, watching Jeopardy with them. And it was, we were always shocked, how do they know all these answers?

• 1:07:22Barry Ritholtz?

  They ran the table.

• 1:07:22Speaker 04

  Exactly. We were not very successful. But, you know, our parents were really focused on education and just doing, you know, something better. You know, we'll always have the family farm. My mom still lives there today, and it's great to go back there. But, you know, they really encouraged all of us, go do something else and gave us the opportunity. There was no pressure for any of us to come back to the farm. They actually said, I remember my dad telling me, the year you were born and the year you graduated high school, the price of milk was the same. This is not a long-term strategy. So, and so, so I'll start with them, but, you know, I had some great folks I've worked with throughout my career.

• 1:08:01Speaker 04

  Someone at Morgan Stanley that I think really made a difference for me was Arthur Lev, who had come from Front Point. He was the head of chief legal officer there. And he was probably the biggest proponent of me going to Cirrus. He said, you have to do this. Why would you not? And I've worked with some great people that, you know, having been at Lehman Brothers, there's a lot of people that got vaporized that I really respected. And you just think, okay, if you're going to take a chance on something, you got to do it. And seeing kind of what's happened over time throughout my career, a lot has occurred. You know, it's all shaped you in a different way. And our founder, Perry Beath, I mean, he, I think about this today, in five years, I'll be 52.

• 1:08:41Speaker 04

  And that's when he started Cirrus, when he was 52. And it was completely different than being the fixed income money manager that he was. And, you know, building a great team, I think, is the best thing he did. And the people that we've been able to hire over time, you know, I want to be their mentor because I know they'll be better than me. And that, to me, has been the most important thing.

• 1:09:02Barry Ritholtz?

  Really fascinating. Let's talk about books. What are some of your favorites? What are you reading currently?

• 1:09:06Speaker 04

  Yeah, so a book, and I mentioned water is just such an important thing. A book that I read often is called Water: The Epic Struggle for Power in Civilization. And it really talks through, it's a history book, but it talks through the success of civilizations around their ability to access clean water and their ability to treat dirty water and get rid of it. And it's just a fascinating story of, and I, kind of the growth throughout the world, population growth. But something I'm reading now that, or I just finished, and it's because I'm on the board of my high school, they just did away with cell phones. And it's the anxious generation, and it's really a-

• 1:09:42Barry Ritholtz?

  Is that Jonathan Haidt?

• 1:09:44Speaker 04

  Yeah, it's an eye-opening book about social media and when people have their phones, just how it impacts their life. And so our Jesuit high school did away with cell phones. And I think it's the greatest thing they could've done.

• 1:09:55Barry Ritholtz?

  There's a lot, lot of that going on these days. More and more, uh, school districts are forcing them, the kids, to put schools and phones in lockers.

• 1:10:03Speaker 04

  Yeah, they should, they should do that. I mean, we have to get them out of our house. The iPads and stuff, that's a, a bigger battle to get through. But, yeah, it's something that's just eye-opening.

• 1:10:12Barry Ritholtz?

  Let, let's talk about streaming. What are you listening to or watching on Netflix or Amazon Prime?

• 1:10:17Speaker 04

  Well, I have a lot of windshield time, so I listen to a lot of podcasts. So, you know, Invest Like the Best, obviously, um, you know, Meb Faber, Jeremy Schwartz, Barry Ritholtz. I listen to a lot of business podcasts. I also love sports, so I listen to a lot of Ringer podcasts too, around sports and entertainment. Uh, on the streaming side, you know, I re-watch The Wire every year.

• 1:10:40Barry Ritholtz?

  Really?

• 1:10:41Speaker 04

  It's just my favorite show ever. And, uh, so I do that every year. I'm now watching Severance, which is an interesting, uh, I'm not all the way done with the three seasons yet, so, uh-

• 1:10:52Barry Ritholtz?

  It takes a couple of, of severe turns that are like, where did that come from?

• 1:10:55Speaker 04

  Yeah, I can imagine.

• 1:10:57Barry Ritholtz?

  But the whole concept is kind of fascinating.

• 1:10:59Speaker 04

  Yeah, exactly.

• 1:11:00Barry Ritholtz?

  Final two questions. What sort of advice would you give to a recent college grad interested in the career in either, um, investing alternatives or farmland investing?

• 1:11:13Speaker 04

  Yeah, I think back to, you know, building the network is probably the most important thing you can ever do because there's, there's so many people that are good at whatever you think you're good at, there's someone that's better at it, for sure. Whether it's modeling, you know, thinking about investing, whatever it may be, someone's always better. So to me, building that network, and, and you can't be full of it, like, you have to be genuine when you're, when you're talking to people. But I think that's been the best thing I've ever done, and that's the thing I can, and that's why I take a lot of time, I mean, we get a lot of people that reach out to us with all types of questions. And all of the portfolio managers on our team grew up on family farms. They all went and worked

• 1:11:54Speaker 04

  in finance. And there's probably a lot of Wall Street people, not per capita, but generally a lot of Wall Street people that grew up on farms and had this great foundation of hard work, and then they figured, well, just, I'll never be able to use that again for the rest of my life. So I think being able to build up your network, because sometimes you can pull on a thread and you won't know where it'll go. And so that's what, you know, that idea of talking to someone at an endowment to say, you know, kind of do a reference check for these people I'm talking to, and they just say, well, you should talk to this other person instead. And you just never know what path you're going to go down. So leverage that.

• 1:12:32Barry Ritholtz?

  Really, really interesting. Our final question, what do you know about the world of farmland investing today that might have been useful 15 years ago or so when you were first diving into the space?

• 1:12:44Speaker 04

  Yeah, I think, when I think about it now, there are very few farms we missed on that I wouldn't love to own today. And, you know, being able to look back in the rearview mirror and say that would have been a great purchase, you know, that's always interesting.

• 1:12:59Barry Ritholtz?

  Is the regrets more the things you did and shouldn't have, or but the thing, or the things you missed and wish you did?

• 1:13:07Speaker 04

  No, it's the things we missed that we wish we had done. But today, we're in a position that we use no leverage when buying properties. They're all cash purchases. You know, you can never say you're bulletproof, but we have a great balance sheet. But over time, we were, we were still doing missionary work in terms of telling people Well, this is a real asset class. So we were using leverage to purchase properties just when we didn't have new money coming in. So we've always been very conservative. And in farmland, leverage is a different beast. You know, you can't buy a farm.

• 1:13:35Barry Ritholtz?

  It's not 20x.

• 1:13:36Speaker 04

  No, you can't buy a farm with 5% down. You need 50 or 60% down to buy a farm.

• 1:13:40Barry Ritholtz?

  So it's modest leverage and unless there's a disaster.

• 1:13:44Speaker 04

  Yeah, and it's all fixed rate mortgage debt. But we were just always very conservative. And I think some of that conservatism now, you'd say, well, maybe that was overly conservative. But, you know, we also didn't get burned. And you don't move from 30 million to 2 billion by being overly aggressive, or you don't do it all at once. You have to do it over time. And that's kind of how, what we focused on.

• 1:14:05Barry Ritholtz?

  Brandon, this was absolutely fascinating. We have been speaking with Brandon Zick. He is the Chief Investment Officer of Saris Funds, now owned, by the time you're seeing this, by Wisdom Tree Asset Management. If you enjoy this conversation, well, be sure and check out any of the 569 episodes we've done previously over the past 11 years. You can find those at Bloomberg, iTunes, Spotify, and here at YouTube. Be sure and check out my new book, How Not to Invest: The Ideas, Numbers, and Behaviors That Destroy Wealth and How to Avoid Them. How Not to Invest at your favorite bookseller. I would be remiss

• 1:14:48Barry Ritholtz?

  if I did not thank the crack staff that puts these conversations together each week. Alexis Noriega is my video producer. Anna Luke is my audio producer. Sean Russo is my researcher. Sage Bauman is the head of podcasts here at Bloomberg. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.

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