Farmland LP

Summary

Farmland LP owns and manages over $200 million in US farmland assets. It buys conventional farmland and converts it to organic and sustainably managed acreage that can grow higher value crops, such as wine grapes. It farms around one third of its land directly and leases out the rest to farmers who are specialists in certain organic crops. These farmers often work together to maintain multi-crop rotations between each other’s fields, which improves soil health.

Around 80% of the 900 million acres of farmland in the US is used for permanent pasture and harvested crops [1], where conventional farming techniques such as monocropping, pesticide use and continuous grazing are often used. However, more evidence is emerging on unintended environmental impacts from these techniques, such as soil erosion and water pollution.

Farmland LP is a real-asset based fund that buys such conventional farmland and converts it to organic, sustainably managed acreage that can grow higher value crops, while also improving soil health, biodiversity, water quality and carbon sequestration.

A certified B Corporation that was founded in 2009, Farmland LP (Farmland) currently manages over 13,000 acres of farmland in Washington, Oregon and Northern California.

Fund Structure

Farmland LP has approximately $200 million in assets over two funds. Fund I is structured as a Limited Partnership with approximately $90M in AUM. Fund II is an LLC structure that can later be converted to a Real Estate Investment Trust (REIT), which raised $135 million and closed to new investors in 2021.

Investors across these funds include family offices, institutional investors, clients from wealth advisor firms and accredited individual investors. Each fund has a six or seven-year ‘lock-up’ period, after which investors can stay in the fund to receive regular distributions, or exit and receive a capital gain. The minimum investment amount is $50,000 for individuals and $1 million for institutional investors.

Within their funds, Farmland LP typically utilises a 30-50% split between debt and equity to drive returns to investors. Farmland LP secured a Human Impact + Profit (HIP) ESG rating in 2021 that was the highest ever awarded a corporate issuer. This rating qualifies them to access debt capital via the Green Bond market, underpinned by the ICMA Sustainable Bonds Guidelines.

Farmland LP plans to launch a Fund III with a similar strategy later this year.

Craig Wichner, Founder & Managing Partner, Farmland LP

Investment Opportunity

Craig Wichner, CEO and founder of Farmland LP, says that sustainable and regenerative farming is a compelling investment opportunity with significant growth opportunities. Despite this, only 2% of US farmland is currently owned by institutional investors.

US farmland historically has been a consistently appreciating real asset that also generates cash flow. “Returns are uncorrelated with the stock and bond markets and positively correlated to inflation, because when food prices go up, the value of crops go up,” says Wichner.

“The total returns on US farmland, unlevered, have been around 11% per year over the past 90 years, half from cash flow, half from land value appreciation. We take that farmland and we make it even more productive by converting it to organic, increasing profits and creating ecosystem benefits,” says Wichner.

He says that investors in its funds can expect to make an annual net return of 9% to 11%, although Farmland’s internal models suggest a return as high as 13% is possible. “We’re targeting to generate higher returns, because I’d rather exceed expectations,” he says.

Farmland LP’s upcoming new fund is partly a response to the fact that investor interest in organic and regenerative farming is increasing, both from investors who have specific ESG goals and those who are generally in favour of investing in sustainable assets over less environmentally friendly options. He adds that consumer demand for organic food is also outpacing supply, while the supply of farmland in the US is decreasing as more of the country is developed and chemically damaged soil can no longer be farmed.

Revenue Generation

Farmland generates cash flow in two ways. It leases out two-thirds of its land to tenant farmers, while its farm management team directly farms the other one-third of its acreage.

“Our fundamental value proposition is that we can buy high quality farmland that grows low value commodity crops and take it through a three-year organic conversion process to grow specialty and permanent crops that carry an organic premium. We’ve demonstrated this value proposition over the last 12 years,” says Wichner. As an example of generating superior returns, he says that Farmland LP can increase rents from $300/acre to $800/acre on the land that has been converted from conventional to organic acres.

Farmland considers, on a field-by-field basis, the best crops to grow in a 10-year diverse crop rotation that delivers both economic and environmental benefits. The team then determines who should farm those crops: a local tenant farmer, who specializes in organic tomatoes or organic sweet corn, for example, or Farmland LP itself.

Wichner says that it sometimes makes sense for Farmland LP itself to farm high value permanent crops, like organic blueberries and wine grapes. “For wine grapes, for example, we’ve shown it that if we farm it ourselves, we generate gross revenues of $8,000 to $10,000 per acre at margins of 40 to 50%. So we can generate margins of around $4,000 an acre for our investors, whereas if we rented that land out, we might collect only $1,100 or $1,200 an acre.”

However, most of the Farmland LP acreage is leased to tenant farmers. Farmland LP leases the land to self-employed farmers, particularly for land that grows organic annual crops like green beans, tomatoes, winter peas and sweet corn. The tenant farmers have excellent knowledge of these crops, which is applied in the multi-crop rotations that host up to four different crops per year. This rotational focus is key to maintaining soil health.

Due to the scale of acreage that Farmland LP owns, it provides organic land in demand by tenant farmers, and can arrange to rotate the farmers around nearby fields on the same farm to support needed crop rotations. Wichner comments “This approach would be quite challenging if you were one farmer on one fixed piece of land, not to mention all of the different equipment that would be required.” Farmland LP has recently increased the average rent on its land from $700 to $800 per acre, with farmers asking for longer leases, and the tenancies are oversubscribed.

Measuring Ecosystem Benefits

Farmland LP has also demonstrated strong environmental performance. In 2017, a two-and-a-half-year study funded by the USDA and created by Farmland LP, Delta Institute, and Earth Economics quantified the value of the ecosystem benefits, like crop pollination and water purification, provided by Farmland LP. The study determined that its first fund delivered a net ecosystem return of $21.4 million over five years, compared to the outcomes that would have resulted if the land had undergone conventional farming techniques. This translates to a 7.3% annual ecosystem gain, in addition to the 10.5% annual financial return to investors.

Each year, Farmland also measures how much carbon it sequesters, how many pounds of pesticide and synthetic nitrogen it prevents from entering the ground, and a number of other metrics. Wichner points out that having its farmland certified as organic also involves a rigorous and independent certification process that is federally regulated. Farmland LP states its commitment to verifiable and transparent standards for sustainable farming, an area that has been vulnerable to misleading claims and greenwashing by some producers and fund managers.

Because of its strong record, Farmland LP was recently awarded a rating of 82 by ESG ratings company HIP Investor, the highest rating of any US corporate issuer rated by HIP. By contrast, Wichner points out that the average agricultural REIT has a score of 17. “We’re leading the way when it comes to quantifiable ESG performance,” says Wichner.

Challenges

Given Farmland LP’s financial and environmental success, why has institutional investment in US farmland in general, and sustainable farming specifically, been so limited to date? “Institutional investors want to invest in managers with a track record. We’ve spent 12 years demonstrating that we could take rents from $300 an acre to $800 an acre by getting that land certified organic, which gives institutional investors the comfort to deploy capital in the sector at scale,” says Wichner.

He adds that institutional investors are much more familiar with office or apartment building REITs, and while farmland is a major asset class, it has not been on their radar. “We spend considerable time educating investors about farmland as an asset class, and with the interest we are seeing from them, I do think we’ve reached an inflection point where we will see continued institutional interest in sustainable farmland funds.”

What’s next

Farmland LP will launch its Fund III later this year, with the aim of raising a further $350 million.

Most of the invested capital in Fund III will be used to buy more farmland in the areas where it already has a footprint. “Our business model is to have at least $50 million of farmland in one geographic area, and we can easily expand in our current geographies to a billion dollars or more of farmland. For Fund III, we will probably also add one more geography in another state,” he says.

Sources:

1. ‘2012 Census of Agriculture – Highlights‘, USDA, 2014
2. Interview with Craig Wichner, Managing Partner, Farmland LP