Farmland LP is a regenerative agriculture fund manager with a recently-launched $250 million REIT in the market and a fully-deployed $50 million fund that closed in December. Here, Craig Wichner, managing partner, describes why he is pursuing a regenerative agriculture strategy and the history behind US monocropping.
What motivated you to establish Farmland LP and what are the pitfalls of conventional farming?
We were originally just buying farmland for ourselves, to bring livestock back onto cropland. Running through the numbers showed that farmland was a great asset, and we could increase cash flow by converting it to organic farmland, but the business benefited greatly as scale increased.
The key insight is that farmland is most productive when growing a variety of crops and livestock in synergistic, multi-year rotations, as proven by over 10,000 years of agricultural progress. Farmers, however, are most operationally efficient when they specialize in a single crop year after year, like a factory. And this need for operational efficiency has meant that over 53 percent of US cropland produces just two commodity crops – corn and soybeans.
This monocropping system does not use farmland to its full potential by producing low-value, low-margin crops with high, recurring costs for synthetic fertilizers, pesticides and genetically-modified seeds. It also degrades soil over time, reducing its productivity and creating a dependency on costly synthetic inputs.
Chemical companies today make more money than commodity farmers.
I grew up owning and managing real estate, and we saw that looking at farmland as a multi-tenant office building solves many issues: it lets farmers gain the benefits of specialization and scale; the crop and livestock rotations provide the farmland and soil with the biological diversity it requires for maximum health and productivity; and it provides investors with professionally managed, low leverage, value-added farmland.
Why did the US agriculture industry become almost entirely a monocrop system?
Our country-wide monocropping experiment started about 65 years ago. Monocrop systems require chemical inputs, and the need for these inputs increases as the soil degrades. After World War Two ended, the factories that produced ammonium nitrate explosives for bombs figured out that the nitrogen could also stimulated crop growth.
Abundant use of what was a cheap chemical at the time eliminated the short term need for livestock and legume, or nitrogen-fixing plants, rotations. And of course the fertilizer stimulated weeds, so the defoliants, or chemicals, used in the Vietnam war came in handy as herbicides – they are just now bringing back 2,4 D, otherwise known as Agent Orange. With endless fields of a single food type, insect pests boomed, providing a customer for WWII’s nerve gasses.
The Cold War helped too, as the in the early 1970s the US government reversed 40-year-old policies that were established after the dust bowl to preserve soil quality, and told farmers to “plant fence post to fence post”, and “get big or get out”. This was all a ploy to undercut the value of corn that the Soviets were producing.
And this remains the government policy to this day, supported by subsidies and crop insurance. Farmers are further locked in by the large capital costs of specialized planting and harvesting equipment.
So now in 2014 we have decades of overproduction of corn. Many farms produce corn four or five years in a row. The soil has no time to recover and farmers need to add increasing amounts of fertilisers, herbicides and pesticides. These inputs are no longer cheap, plus they further degrade the soil biology and so it’s a vicious cycle. It is hard to imagine a worse way of managing farmland, economically or biologically.
Growing one crop year after year is easiest for the farmer, but it is a very poor way of managing farmland as an asset.
What regenerative agriculture strategy have you pursued and what are the benefits?
The primary problem is that farmers need to specialize their operations under the current system, and yet farmland needs a diversity of crops and livestock in rotation to be healthy.
We will use our REIT to get the best of all worlds. Nearly40 percent of U.S. farmland is leased, but unlike other forms of real estate, most farmland is leased to a single tenant and generally by an absentee landlord.
Instead we aggregate large tracts of farmland into a multi-tenant land management system that identifies the highest and best agricultural use of farmland and combines it with the large-scale desired by crop and livestock farmers. We actively manage the farmland, collaborating with multiple livestock and crop farmers per property, and often with multiple tenants per field. This more intensive utilization increases lease income while spreading risk across a diversified pool of tenants and crops. Our farmer-tenants gain access to large tracts of organic farmland without cost or debt for purchasing or improving the land, and without spending three years on organic conversion. In addition, each farmer can specialize in his or her area of expertise, such as cattle, sheep, poultry, vegetables, grains, etc, without worrying about crop rotations – that is our job.
This way, the farmers we work with gain price premiums for local, organic and GMO-free food. Our livestock rotations on cropland adds about $180 of soil fertility per acre each year…fertility that a chemical-dependent farmer would have to buy. So our system is more complex than just growing one kind of crop, but it generates more revenue per acre, with lower input costs, and is both more profitable while creating about three times more jobs per acre than commodity systems.
There is $2.4 trillion worth of farmland in the U.S., and we hope this REIT will help show investors how sustainably managed farmland is good for both their portfolio and their world.