Pod Insights Masters in Business At The Money: Farmland Investing About this episode Farmland is a real asset that can be accessed through private funds. The asset has seen broad, non-correlated gains, hedged against rising prices. And farming acreage shrinks every year.
Brandon Zick is Chief Investment Officer of Ceres Farmland Fund (now part of Wisdom Tree); the fund owns and manages about $2 billion in agricultural land assets.
Each week, “At the Money” discusses an important topic in money management. From portfolio construction to taxes and cutting down on fees, join Barry Ritholtz to learn the best ways to put your money to work.
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2:25 Barry Ritholtz? Have you ever thought about investing in farmland? Real assets have become increasingly popular, primarily accessed through alternative investments like private equity funds. Farmland has seen broad, non-correlated gains, and they show little signs of slowing down. After all, they ain't making any more land. I'm Barry Ritholtz, and on today's edition of At the Money, we're going to discuss investing in farmland. To help us unpack all of this and what it means for your portfolio, let's speak with Brandon Zick. He's Chief Investment Officer of Saris Farmland Fund, managing about $2 billion in ag assets.
3:07 Barry Ritholtz? By the time you hear this, Saris will have closed their sale to Wisdom Tree, where they're going to continue operating as an independent agriculture investing firm. And full disclosure, I'm also an investor in Saris through my own personal investing. So Brandon, let's just start with a basic question. What makes farmland a compelling addition to any investment portfolio compared to other real estate assets?
3:34 Speaker 03 Thanks Barry. And farmland, it provides a lot of different things that help in a portfolio. So farmland will generate a good amount of income. It's positively correlated with inflation, and it's also non-correlated with other things in your portfolio, and becomes a diversifier, and it's a capital-appreciating asset. It's not a depreciation play.
3:53 Barry Ritholtz? So yield, capital appreciation, and an inflation hedge?
3:57 Speaker 03 That's correct. Yeah, and that's why investors have been investing in farmland for a long time, but it's now becoming more broad-based to the public markets.
4:05 Barry Ritholtz? So let's talk about that historical pattern. If there's rent and yields, is this potentially a fixed income substitute? Do dividends get paid out to investors?
4:16 Speaker 03 Yeah, that's the way that a lot of people look at it. The annual income could be paid off as a dividend, so you do see some public REITs and private REITs that are structured that way that would force that dividend out. But you can also just... Continue to reinvest as well and you have that capital appreciation. And if you think back over the last 70 years and look at data from the Chicago Fed, you'll see that long-term appreciation's averaged about 6% annualized. And the components of that are really just inflation plus gains in productivity. So because farms, these are living beasts where they're actually growing crops every year and improvements in technology can help crop yields and increase the bottom line. You see a number of those benefits fall to the landowner.
4:59 Barry Ritholtz? So you guys have scaled up to $2 billion in farmland investing. How do you identify and source attractive farmland opportunities? What's the current market like?
5:10 Speaker 03 Yeah, so there's a number of ways to buy farms. So there are public auctions that exist. They're very localized and we'll attend 200 to 300 of those a year. But the majority of farmland is done through private transactions. And these aren't listings. You don't see for sale signs on farms.
5:27 Barry Ritholtz? There's no Zillow for agriculture?
5:29 Speaker 03 No, not yet at least. There are people trying to do something like that, but there are ways to source farms kind of off-market. And we do all of that through our farm tenant network. So we're not, even though I grew up on a family farm, we're not operating the farms ourselves. We're renting the properties to active family farmers. All of those farmers own ground. They rent land from us, but they rent a real, a large preponderance of their acres from other people. And those other people are usually not institutional investors. They're estates, trusts, non-farming heirs, people that after two or three generations, they will likely sell the land. And so we use our tenant network or our farmer network to try to source some of those opportunities privately.
6:12 Barry Ritholtz? And you guys mostly invest in the US? What regions or sectors do you find most attractive?
6:18 Speaker 03 Yeah, we're the US only. Our mandate is really anywhere. We invest in 12 states, but about two thirds of our acres are located in Indiana and Michigan and almost 90% of our acres are in the Great Lakes states. So add in Illinois, Wisconsin, Kentucky, Ohio, and Western New York. We think that's our sweet spot because there's a fantastic market for rental with farmers. It's highly competitive. It's very high quality soils, which are great for growing crops. We also have a lot of water resources, both underground and it rains when you're trying to grow a crop. And these are commodities, so low cost producer wins. And being closer to the population centers of the East Coast and where all of these crops generally move is a huge benefit as well.
7:03 Barry Ritholtz? You mentioned inflation earlier. How does inflation and just general macroeconomic trends affect farmland values and investor interest?
7:13 Speaker 03 Farmland is positively correlated with inflation and that comes from a few, in a few different ways. So, you know, clearly crop prices can increase and, you know, that's one of the bigger things that can help drive revenue on farms is increase in crop prices, crop yields. But over time, you know, farmland has a number of different uses. So whether it's for development or other types of things on top of just your typical farmland, you'll see that increased value over time. So even with a booming economy, you can see farmland values increasing as well, even if the actual ag production on that farm is not increasing.
7:48 Barry Ritholtz? So let's talk about those other opportunities briefly. Mineral rights, easements, you mentioned hunting when we were chatting about this earlier. Even data warehouse and AIs are looking for property in those spaces. How significant add-ons are those to the basic value of farms?
8:10 Speaker 03 Yeah, so there's really two different groups I would put that in. You can have some of the ancillary income, so like harvesting select timber on farms. Typically, when you're buying a property, it's not 100% tillable. And even during, even if it were to be 100% tillable and growing crops, there are off-seasons and you want to continue to manage those properties. So, we lease out farms for hunting, we harvest select timber, we like oil and gas rights or other types of minerals that can be incremental. We've had wind turbines on properties, and those are all kind of incremental to your farm value. Then there are other things like solar where you're taking the majority of the farm to convert it, and in that case,
8:51 Speaker 03 you may have a 30-year lease, inflation hedged, of course, but the income is going to be anywhere from three to five times the farm income.
8:59 Barry Ritholtz? Wow.
9:00 Speaker 03 So you could be generating 15 to 20% a year in gross income off of your, over your cost basis.
9:05 Barry Ritholtz? For solar?
9:06 Speaker 03 For solar. And then there are other opportunities when you own real estate, when you own dirt, there's optionalities, to your point, around easements. So easements can be conservation easements, which we don't really do much of, but they can also be easements for running fiber, for running power, and there's a lot of natural gas, there's a lot of opportunity there. And then you can see for manufacturing, you can sell properties for that for multiples of farmland value. And now in the Midwest, we're seeing a huge demand for data center development, and that's anywhere from eight to 20 times farmland value. Because when they identify a site that has great power resources, great water,
9:46 Speaker 03 hopefully few neighbors, has fiber there, there's a lot of ways to be able to, you know, build these things that then, you know, they're going to be willing to pay a strong price.
9:57 Barry Ritholtz? And this administration has been urging the owners of these, or builders of these, to focus in the US. They're not comfortable with the servers overseas, even if it's cheaper to operate.
10:11 Speaker 03 That's definitely an issue that's out there, and you really need to be within the US in areas where there's capacity on the grid. You certainly need favorable...
10:22 Speaker 03 or favorable government in all these areas to be able to do it as well. And you will see a saturation in certain spots that then they have to move to others. So some of the largest data center campuses in the US or outside of Chicago and Columbus, Ohio, you don't see much new development going on there because of lack of power, oversaturation. So we're seeing much more demand in places where we have a big footprint like Indiana, Michigan, parts of Kentucky, parts of upstate New York.
10:51 Barry Ritholtz? So what are the risks unique to farmland investing? How much of this is climate change and weather, water access, and just government regulation and nimbyism? What do you have to think about when you're considering risky business?
11:07 Speaker 03 Yeah, so on the, when you think of the climate side, those are the traditional risks to farmland. So droughts and floods and things like that. So we prefer to invest in areas where you have that natural rainfall, you have strong soils, good drainage, you don't buy farms right next to big rivers because they can flood. So there's, and then as you think over time, okay, there's climate change, is there a warming happening, is the grain belt moving farther north? So our position around the Great Lakes, we think mutes a lot of that risk.
11:38 Barry Ritholtz? In other words, this is an area that's only going to become more attractive for farming.
11:42 Speaker 03 That's right. If the Great Lakes region is running out of water, then everyone else already did. So it's, it's an interesting dynamic. And so that's where we focus our investment. But there's farmland all across the US that has all different types of values and different ways to manage risk. And in farmland, you can do that through implementation of drainage structures, you can do it through irrigation to try to be able to have water when others don't. So there are ways to mitigate some risk there. To your other point about regulation, I mean, the history of the US is agriculture. So there are a lot of regions that agriculture is encouraged and development always brings pressure. So when you think about what are the, the issues in farmland that farmers face today?
12:26 Speaker 03 It's development pressure, it's labor pressure, the input cost and things that come in. So if you're in areas like California where we don't invest, there is a lot more regulation around water, around labor, that makes it more difficult to be an operator when you're growing a commodity crop. So, you know, there are places that we move away from or we don't invest in generally. I'm not saying we never would, but we haven't yet because we just don't think it's an attractive area.
12:51 Barry Ritholtz? So, let's talk about California for a second. Every time I'm on the west coast, I marvel at how local and fresh the food is. Avocados are everywhere, the tomatoes are wonderful. They have a lot of really good local crops, but what I'm hearing from you is California may not be an attractive agricultural investment area. Is that taxes? Is that regulation? Is that water availability? What are the challenges of farmland in California?
13:21 Speaker 03 Yeah, so those local crops that are going to local markets are, you know, the produce you can get in California is second to none. I would agree with that. That's not a scalable, large business from our standpoint. Now, while there are some very large owners of farmland that produce the California cutie oranges, the big pistachio growers and almond growers, they're all large corporate groups that, this is the only spot to grow that, the avocado. So, that makes sense, but from the row crop standpoint, there's a lot of water being used to grow crops that you kind of have this misalignment of incentives longer term around use it or lose it strategies around water.
14:02 Speaker 03 So, you'll see a lot of cotton and rice grown in California that I would probably say that's not where you should be growing that and using that water. But, you know, we look at regulation, it's coming everywhere around water because water will be, you know, the next big battle that's out there and restriction is going to come right after regulation. So, as things get restricted, we think it's more prudent to be in areas where there's an abundance of water or an aquifer recharge as opposed to California where you, you have no new infrastructure being built to capture water, no new reservoirs.
14:37 Barry Ritholtz? What about desalination? You would think this, the Pacific Ocean adjacent, they should have all the water they want.
14:43 Speaker 03 Well, you, for municipal, that actually might make sense at some point. I mean, the cost is significant, the energy costs are significant. As those costs come down for the high Highest and best use of water municipal, that would be the right answer. And then industrial, agriculture is a low value use of water. It doesn't mean in areas like California that they don't have senior water rights. Agriculture actually does have senior water rights in parts of California and Arizona because the farmers were the first to settle out there. So they're actually ahead of cities in Arizona, farmers are ahead of cities like Phoenix in terms of where they stack.
15:17 Barry Ritholtz? And hence the water issues in places like New Mexico and Arizona.
15:21 Speaker 03 That's right. And then you just have this, the actual climate is not, it's not recharging aquifers. And if you're not going to build infrastructure to, to take advantage of when it does rain, then that's a, that's an area that we don't find an attractive investment opportunity.
15:36 Barry Ritholtz? Let me ask another California investing farm and land question. Vineyards, are these an investable asset or is that essentially a sort of vanity project that all these separate vineyards are running?
15:50 Speaker 03 That's an interesting question because, you know, wine consumption's gone way down and the same for craft beer. You know, people have moved to non-alcoholic, they've moved to seltzers, high noons, et cetera. So from that standpoint, it's a little challenged on the macro level. The idea of investing in vineyards, actually, one of my brothers went to Cornell and he ran vineyards in California and other parts of the country. And he would tell you, it's just very difficult with labor. You have to be able to sell the bottles for a very high price. If you're just producing grapes and then selling them to someone else that's selling the retail product, that's a difficult business to be in. So we don't get excited about investing in vineyards. Although in Michigan, we do have one juice
16:33 Speaker 03 grape farm and I think Welch's will continue to produce grape juice for a while.
16:37 Barry Ritholtz? Really interesting. As an investor in farmland, how do you balance the two different forms of gains, annual income from rent and crops versus just long-term appreciation of the underlying land?
16:54 Speaker 03 That's really the benefit of farmland is you can, you know, if we look at our return series over time, in areas of strong commodity prices, you tend to have much higher land appreciation. And then in areas, in cycles, the parts of the cycle with low commodity prices, income comprises a bigger point, a bigger portion of your return. And that high income actually mutes volatility over time because you're going to generate that four or 5% income every year. And that can really, across cycles, dampen the volatility you might see from changes in commodity prices. Now, you would think if commodity prices are changing, your rents are materially changing. All of our leases, we like multi-year leases that are negotiated kind of three years at a time.
17:36 Speaker 03 So even if commodity prices are moving down, our rents aren't really moving down, or only a portion would be negotiated down. And then as they go up, we try to build a call option into the lease that we can benefit somewhat along the way.
17:48 Barry Ritholtz? Final question. What are the most significant challenges emerging in farmland investing looking forward?
17:55 Speaker 03 Yeah, I think there's going to be a lot more competition because historically, there really hasn't been much institutional investment in this space. Only about 3% of US farmland is institutionally owned.
18:06 Barry Ritholtz? Wow.
18:07 Speaker 03 And some of that is weighted much more heavily toward permanent crops like vineyards or orchards, areas of the country where you can put larger dollar amounts to work, so the southeast or the west. But I think a lot of people are identifying farmland as a great asset, especially for long-term oriented investors. This is an asset you can hold for 30, 40, 50 years with some of that optionality around solar, wind, timber, even selling into manufacturing or data center construction. Infrastructure funds should have a lot of interest in this because it's a long-term asset you can pair with these long-term goals and liabilities.
18:46 Barry Ritholtz? Really, really fascinating. So to wrap up, if you're looking for a non-correlated investment class, an alternative that's a little different than multifamily or office space or other traditional real estate investing, consider farmland. You get regular income, appreciation of the underlying land, and you're somewhat hedged against rising prices and inflation. I'm Barry Ritholtz. You've been listening to At the Money on Bloomberg Radio.
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