Farmland Is Becoming A "Buyer's Market" | Craig Wichner

An update on farmland as an asset class

One of the asset classes I get the most requests to do an interview on is farmland.

It's a form of real estate investment that yields cash flow by producing commodities -- all attractive qualities to investors worried about inflation and/or the loss of purchasing power of fiat currencies.

But how does it perform vs other asset classes?

And how does one invest in farmland without being forced to become a farmer?

For answers, we're fortunate to talk today with Craig Wichner, Managing Director of Farmland LP, which manages over 15,000 acres, farming them sustainably at scale.

For the types of quality properties Craig’s fund targets, it’s starting to become a “buyer’s market” as overstretched institutional holders put their properties up for sale.

For Craig’s slide-rich update on farmland as an asset class, click here or on the video below:

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Adam’s Notes: Craig Wichner (recorded 8.28.24)

EXECUTIVE SUMMARY

• Farmland LP is one of the largest managers focused on organic and regenerative agriculture in the U.S., managing approximately $300 million in farmland assets across over 18,000 acres in California, Oregon, and Washington. The company specializes in converting conventional farmland, typically used for low-value commodity crops, into high-value organic farmland. This process not only improves the ecological health of the land but also significantly increases its economic value. For instance, rents on converted farmland rise from $300 per acre to $750 per acre, with expectations to reach $800 per acre this year due to the high demand for organic products. Furthermore, by selecting high-value permanent crops such as organic blueberries, the company has achieved revenue increases from $1,000 per acre to as much as $20,000 per acre. This demonstrates the substantial economic benefits of their model, which not only improves soil health but also generates higher returns for investors.

• Farmland is a robust and stable asset class in the U.S., with an estimated total value of $3.8 trillion. This value is comparable to the combined worth of all apartment and office buildings in the country. One of the key strengths of farmland as an investment is its low leverage, only 13% of the sector is debt-financed, which contrasts sharply with other real estate sectors like multifamily and office buildings, which are often over 50% leveraged. This low leverage means that farmland is less susceptible to economic downturns and interest rate fluctuations, making it a resilient investment.

• The farmland market is highly segmented, with different cycles and dynamics for various crop types. For instance, the Midwest's farmland market, dominated by corn and soy, experienced significant price increases in recent years but is now showing signs of plateauing or softening. In contrast, markets for permanent crops like almonds, apples, and blueberries operate on independent cycles and are currently presenting attractive opportunities. Due to rising interest rates, some institutional investors are under pressure to sell, particularly in the permanent crop sector, creating a buyer’s market for well-positioned players like Farmland LP.

• As global temperatures rise, traditional growing zones for crops are shifting. Since the 1990s, temperatures in certain regions have increased by approximately 1.5 degrees Celsius, making some areas less suitable for traditional crops like corn. For example, Illinois, a major corn-growing state, may become more suitable for crops like sugarcane and cotton, typically grown in much warmer regions like Texas. This shift underscores the importance of forward-thinking agricultural practices and strategic land investments that anticipate these changes.

• The "corn sweat" phenomenon occurs when corn plants release significant amounts of water through a process called evapotranspiration in response to high temperatures. This process increases regional humidity levels, creating a feedback loop where the agriculture itself exacerbates heat and humidity. This phenomenon is particularly prevalent in the Midwest, where 53% of U.S. farmland is dedicated to corn and soy. The increased humidity not only affects the local climate but also causes heat stress in corn plants, potentially reducing crop yields by impairing photosynthesis and sugar production.

• Farmland LP strategically invests in farmland with