Gladstone: ‘Why spend time and energy growing corn?’

Chief executive of US horticultural farmland investment company Gladstone Land David Gladstone tells Agri Investor why lower prices won’t push the REIT towards greater commodity crop exposure and says growers don’t need to own the land they farm.

Do falling US row crop values allow you to increase your exposure to commodity crops through opportunistic purchases?

We’ve bought a couple of grain farms during this down period and will take advantage of opportunities in the space, but not many. I don’t want to be a commodity crop-based fund [because] I don’t want to take that much risk. I’m not sure why people spend so much time and energy growing corn, when you can get the same mix of risk and return on the commodity exchanges. You can go through the difficulties of growing corn and hopefully make a profit, or you can just go to the Chicago Mercantile Exchange, make a couple of bets and do the same thing.

Farmers get tax relief on land and see it as an investment, so how do you convince them to sell? 

Established owner-operators can sell their farm to us and lease it back [for ten years, with the option to extend, sometimes to inheriting family members], which gives them liquidity. Between 50 percent and 75 percent of our deals follow this model. As we’ve gotten bigger, more farmers are taking up REIT shares rather than cash, which are like our stock but the farmer doesn’t have to pay taxes when he trades his farm for them. They only pay taxes when they sell the shares, and get a dividend for as long as they hold them, [meaning] the farmer winds up saving on taxes.

Why does it make sense for operators to lease the land they work, rather than own it?   

Farmers often believe that they have to own their land to know they’ll always have it, but a farmer who’s renting has flexibility. They can take on more land or choose to rent just half of a farm at the end of a lease term, depending on their needs. For a small farmer who wants to get into business, the best thing he can do is rent a small farm to get off the ground, rather than raising the money to buy it.

How does investing in speciality cropland differ from row cropland?

In the Midwest, you have a lot more farms going to auction, and the auction process is pretty efficient. There’s a higher [entry barrier] to buying land in the produce sector. If you were sitting in New York and you wanted to go into the avocado business … you’d need somebody to help you find the farm. It wouldn’t be listed in the newspaper. We have farmers that we’ve worked with for years and they will call us and say “There’s a farm that’s going up for sale. Would you buy it and let us rent it?” Those are golden for us, because if the farmer likes the farm, it’s probably a good piece of land.

Specialising in horticultural crops, how much of a role does water access play in your acquisition strategy for farmland?

It’s extremely important. We spend a lot of time before we buy a farm reviewing all the information we can. We have experts we bring in who do nothing but determine what the probability is of finding water if you drill. It’s an imprecise science, but it works pretty well.

We wouldn’t buy a high value crop like strawberries or lettuce without strong access to water. You can grow lettuce in Virginia, but you’ll never come close to the low price of lettuce in California, where you can grow four crops a year because of the long growing season and water access. In California there’s water. It’s just an issue of making sure you can find it in the ground. We drilled a well in Watsonville, and it was a gusher and it recharges. But we had some wells in Salinas, not too far away, and during the drought those went down very low.