Crop price premiums and increasing demand for organic products make the proposition for transitioning conventional land promising. But buyers beware: due diligence is rigorous, the transition process is labor-intensive, and there are no guarantees.
Last time you picked up a piece of organic fruit at the grocery store, perhaps your jaw dropped when you saw the price tag, then you weighed the cost against that of a conventional piece of fruit sitting across the aisle and asked yourself: is this worth it?
It’s the same question US farmers and investors are asking themselves as demand for organic crops and products grows. The USDA said last week that the number of certified organic operations in the US reached 24,650 as of the end of 2016, a 13 percent jump from the end of 2015. It was the highest growth rate since 2008.
More consumers are willing to pay a premium for organically produced food and organic crops fetch a significant premium over conventional ones. However, both the transition process and farming of organic crops is laborious, with many unknown variables. So again: is it worth it?
Marc Schober, director with Colvin & Co, a farmland investment manager, told Agri Investor that he believes it is… in certain instances. But he also described a rigorous due diligence process and a number of obstacles that must be assessed before making a decision.
The most significant barrier is the three-year transition period for converting conventional crops to USDA-certified organic. “It’s really hard to make money during those three years,” Schober says. “A plan needs to be in place to prevent the transitional farmer from going bankrupt.”
Among other questions: is there a regional buyer willing to pay a premium? Is there sufficient water and drainage for organic crops? Does the land’s shape and location allow for an ample contamination barrier? Does it lie in proximity to potential organic operations partners?
But first, you need a farmer. Schober notes that the search for conventional farmland investments typically starts with identifying the land then approaching farmers looking to expand, whereas the search for organic starts with the farmer because they are very specialized and few in number.
“With conventional farmers, 99 percent of the time the answer [to expanding] is yes,” he says. “With organic, it’s more like 50 percent because of the dramatic additional labor required. An organic farmer with 1,000 acres in the Midwest may have as many acres as they need to fill their labor force and can’t physically take on more.”
On average, Schober says land may generate a 3 percent gross cap rate from a landowner perspective while in transition, which realistically could jump to 5 or 5.5 percent after the three years. Conventional farmland yields between 4 and 5 percent, he estimates.
Successful transition yields substantial price premiums due to great demand for organic crops. In fact, domestic production of organic corn and soybeans remains well short of demand, which led to a sharp rise in organic grain imports into the US in 2016, according to a report from CoBank released earlier this year. US farmers have a great opportunity to fill that void.
Organic crops also continue to draw a significant premium. Conventional corn, wheat and soybeans are currently fetching about $3.50, $4 and $10 per bushel versus $8, $13 and $16 for organic, respectively. That said, the latter prices come with less certainty (essentially no futures market exists for organic) and demand is regional.
High demand for organic crops and price premiums could ultimately pay off for investors, but the transition process is complicated and labor-intensive. The decision requires extensive due diligence. But just like holding that piece of organic fruit at the grocery store, you might never know if it was worth it until you’ve taken a bite.