113 Farmland Investments with Artem Milinchuk of FarmTogether

Artem

You know, we all need food: whether it’s a recession; whether it’s COVID; whether it’s the 2008 Financial Crisis, people need to eat. So, during those periods farming has actually done tremendously well.

Intro

Imagine spending an hour with the world’s greatest traders, imaging learning from their experiences, their successes, and their failures. Imagine no more, welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level.

Before we begin today’s conversation remember to keep two things in mind: all the discussion that we’ll have about investment performance is about the past, and past performance does not guarantee or even infer anything about future performance. Also understand that there’s a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks, from the investment manager, about their products before you make investment decisions.

Here’s your host, veteran hedge fund manager Niels Kaastrup-Larsen.

Niels

Hey everyone and welcome to another edition of Top Traders Unplugged where today I’m joined by Artem Milinchock, who is the founder and CEO of FarmTogether. Today we are continuing our journey into the world of alternative investments.

First off, Artem, thanks so much for coming on the podcast. I’m excited for you to be here.

Artem

Thank you, Niels, I am excited to talk with you.

Niels

Absolutely, now, what’s really exciting for me about our conversation is that it’s a new asset class for me and, I think, for many of our listeners as well. I have a feeling that once we get into the conversation it will be surprising to most of us how similarly you can think about investing in farmland, compared to more traditional assets and the compelling arguments, of course, for doing so. I want to kick off by framing what we’re going to talk, together, about today and that is by better understanding your journey into the world of investing in the first place and also, specifically of course, how you came about choosing farmland as your focus area.

So, take us back to where it all began and what inspired you along the way to get to where you are today.

Artem

Absolutely, first, I would like to say that I was born in the Soviet Union and raised in Russia and it has really been crazy to see how Russia, at the end of the twentieth century, transitioned from the Soviet Union to the 90s, which was this wild, wild west. I know Russia seems exciting from the outside, but really it’s this very sort of boring, middle-class aspirations and getting more and more boring every year despite, sometimes, the occasional flare-up.

I think, for me, the journey to finance and Ag was really, in a lot of ways, influenced by that transition that I lived through as a kid. The “older” viewers will remember that in the Soviet Union it was really soil and food. I like to say that the West won the Cold War, not through Nukes but through food shelves. Because that’s what everyone, going back from the West to Russia said, “Oh my God, I went to Berlin, I went to Switzerland, I went to London and they had so much food in the stores.”

That’s really true. I remember with my grandparents, everyone would get this plot of subsistence land in the Soviet Union. Whether you were an academic or you lived in a small town, in the summer you would go there and plant it. That’s because otherwise you would be screwed because there wasn’t that much food.

So, I worked with my grandparents with their potato farm and chickens and all that stuff. I was spending a lot of time doing, what now would be called, organic agriculture. But really it was picking bugs and manually managing plants because we didn’t have money for fertilizer or pesticides. So, that was my early foray into organic culture, really trendsetting there.

I think what stuck with me, in that period, are two things. One is: no matter what happens, food and land are the immovable constants in our lives. It’s really something that everyone needs on a daily basis. I think it’s just really nice to be building your life, your career, and your investment portfolio (that I will get to) on something that is tangible, real, and will always have intrinsic value.

The second part of why I went into finance is also for the same kind of reasons: seeing how good financial economic systems can create prosperity. Right now, objectively, people in Russia are way better off than in the Soviet Union – miles and miles better. What changed? The natural resources didn’t change. If anything, science now is worse than it used to be before. It’s the economic system. It’s all in the markets. I think we now know that it’s one of our resources. It’s about the mindset and the mentality of the people and the system incentives that you put in place.

So, it was fascinating to me, and so I love the finance side. I got my Bachelor’s and Masters and an MBA in finance and economics. I moved to Canada in 2007 and then to San Francisco in 2016. In San Francisco, I am U.S. based.

Most of my professional life has been in finance. I worked for a number of years at Price Waterhouse and Ernst and Young, and then, in Canada, I worked mostly for a Canadian pension fund called Ontario Teachers which is, actually, an almost $200,000,000,000 pension fund. It’s a behemoth. It really is huge. Then, coming back to economic systems, all that wealth serves around 300,000 to 400,000 teachers, only teachers and only in the province of Ontario in Canada. So, teachers do very well when they retire in Canada, very well.

Niels

It’s quite interesting that they were, actually, one of my very early clients. They became a client in my industry back in the early 2000s. So, they were also trendsetters, to some extent, in that area. Not to spoil your story.

Artem

No, no, thank you for telling it for me because I’m glad you said it. I’m really proud of having worked at Ontario Teachers because they are trendsetters, and we’ll get to that in a little bit. They were early trendsetters in infrastructure, as an asset class, back in 2006 to 2010, when infrastructure had, maybe, $50,000,000,000 to $70,000,000,000 under management. Now they’re starting to trend set in farmland, where they have created internal groups to invest in that asset space where farmland, right now, is only about $50,000,000,000 in global assets under management.

My story, here, is partially that Teachers will now open up another asset class for people because now infrastructure is $600,000,000,000. But anyway, not to jump ahead.

Niels

Sure.

Artem

So, I worked for a number of years at Ontario Teachers with a lot of my work attached to food, agriculture, farmland; I worked for a private equity fund investing in farmland in a more involved, smaller fashion. I worked for a family office where we also invested in innovative food products in the food space.

Before starting FarmTogether, in 2018, my last foray into the employment world before striking off on my own, I was the CFO and VP of Operations at a company called Full Harvest which is a very interesting B2B marketplace for ugly fruits and vegetables. So, they would normally get thrown out at the farm level. What we did was buy them from farms and then sell them to, let’s say juice companies, where they don’t care what the fruit looks like, they just need to process it. It’s tremendous because food waste is actually such a huge issue. Coming back to the value of economic systems and incentives, there was a clear opportunity to do good for the world, good for the farms, good for the consumers because you lower the price, and to also make money.

So, that last experience really gave me a great hands-on entrepreneurial mindset. The founder there was phenomenal in just being this relentless executer. She was fearless, completely unfazed in the face of any danger and it really inspired me to adopt that mindset.

Niels

That’s a great mindset and a great skill to have, especially when you’re building something new from scratch because there is always going to be a challenge that you didn’t think about coming your way.

Artem

It’s also surprising how clear it can be in your head, and clear from first principles that this already exists in your head. It’s already functional and you sometimes just get baffled why people can’t catch up. Then you have to be patient and educate and prove.

Even with Full Harvest, right now, it sounds like the simplest idea, right? Here is an apple that is slightly deformed. It’s still a great apple. Nature naturally doesn’t work that way, but it will never make it to the shelves of Whole Foods, Safeway, whatever retailers you guys have in Switzerland. Then you just take it and you sell it to a processer. But, even today, there are still people who say, “Wow, how innovative!” We face the same with farmland.

I don’t blame anyone, but, for example, people say, “Oh, this is such a new and exotic idea.” [When really] this is the oldest asset class. This is how civilization started. Everything else that you have is a novel, new idea. This is a very old idea indeed.

Niels

Yeah, you’re absolutely right. It is fascinating how these things are perceived differently by various people. Now, we obviously are going to go into the weeds of investing in farmland, but I want to explore the asset class itself a bit beforehand. So, maybe you can tell us a little bit about the history of farmland as an asset class; maybe, how it’s grown over the years and, perhaps, why it seems that it’s becoming more popular with investors these days.

Artem

Absolutely, so, what’s interesting about farmland (and we’re just going to talk farmland in the United States and let’s just set some stakes), this is a 2.5 trillion dollar asset class. That’s the value of just land. When we say farmland what’s also important to note is that we don’t talk about processing capacities, meatpacking houses, it really is mostly land with sometimes a little bit of improvements on it, but, investing in the soil.

In the United States, you have about 600 billion which would be pasturelands. So, this is where you would graze your cows. We don’t typically touch that. Then the rest 1.9 trillion or so is harvested croplands. So, this would be everything else: it’s your corn, your soybeans, your almonds, your fruits, you name it. When we say ‘investing in farmland’ what we mean is that you get a claim to the movement in the asset price. So, if the land prices go up and the benefits go down, you suffer – income from farmland. Income is generated, typically, through a rental model to farmers where you act, essentially, as a landlord. It’s a very common practice. Actually, 40% of farmland, today, is rented.

Now, talking about history. For the longest time and why it’s only happening now, but farmland would typically get passed on from parents to children and children to grandchildren and they would continue farming it. Sometimes, with smaller plots of land that you would rent out to maybe neighboring farms, and you would do it for generations. Sometimes you would come in for the summer, you would hire a few farmhands, they help you plant it.

It was sort of this, not quite a hobby, but not really a professional thing that you would do. You would have another job and sometimes your family would come at different times. So, it was like this semi-artisanal endeavor.

What has happened in the last forty years or so (and especially the trend today) is that everything is moving towards cities; urbanization; everyone wants to live in cities. Kids don’t want to be farmers and, at the same time, the average age of farmers in the U.S. is approaching 60. What that leads to is that, as farmers retire and kids don’t want to farm, that leads to huge amounts of farmland coming to the market – the outside market, outside investors, no one farms for the very first time. We’re talking a tectonic number. This is 70% of farmland, which is 1.5 trillion-plus, is going to change hands in the next twenty years.

So, we’re talking something like 100,000,000,000 to change hands in the next couple of years. So, the history of the asset class has been that it wasn’t that accessible before because there wasn’t enough volume going to outside investors. Then, initially, some insurance companies and some banks that happened to come into farmland possession would start investment funds.

The early players in the space that have now formed the Ncreif Farmland Index and institutionalized the market and really brought a lot of very professional aspects to measuring, auditing, and investing in the asset class and the following players. You have UBS Hancock, you have Prudential (which is a huge insurance company), Nuveen which is a true lender asset manager, MetLife, and then you have the pension funds now. There are now about a hundred private funds which are smaller. We’re talking 30, 50, 100, 200 million, maybe half a billion, but nothing close to the behemoths in real estate and infrastructure.

Then you have a couple of public stocks, two actually, that you can invest in to have exposure to farmland. So, the history has been that we went from about, in ’91, maybe a few hundred million in formalized assets under management to now 50 billion globally.

The Ncreif Farmland Index, which is the U.S. institutional index, is now about 11 billion, or so, under management. We are seeing, almost every month, and sometimes every week, announcements about this player has raised a new fund; this pension fund has acquired a property; this fund is looking to deploy capital into farmland.

So, there are a lot of new players coming in, the Canadian pension funds being some of them. Surprisingly, actually, a lot of my friends that I worked with at Teachers or elsewhere, are now principals in farmland investing groups. So that’s something about my career.

Niels

First of all, just something for me since I don’t know much about farming, but, to me (for example) if you have, I think you call it a permanent crop, right? So, apple trees or whatever it might be, is that even a full-time job? As you said, they had a second job or something like that. I imagine that some farms are very seasonal in terms of the workload. Is that one of the reasons why people haven’t really taken it as (as you say) a professional type of business.

Artem

Yeah, that’s part of it. Part of it is sometimes… There are still a ton of farmers that do it professionally. All the ones that we work with, they are multi-generational professional farming businesses. It has been a mixture of, yeah, sometimes it’s seasonal and there’s more work to do in say the summer with the harvest versus the winter. Some of it is if you want to do farming year round then you have to have different crops that have different cycles. You can stay busy the whole year which requires you to have more capabilities, more capital, which is harder to do.

Part of it, sometimes, is purely emotional which we help with that as well. How do you maintain ownership of a family farm that has been in your family for generations? It’s actually a big issue because oftentimes what happens is that you have, for some reason, it’s always three siblings in the farming families. Two don’t want to farm and one wants to farm. How do you cash them out and how do you keep the farm in the family? That’s, for example, something that we actually look to help with. So, sometimes you get lots being sliced up where there will be conflict within families so they’ll have this lot or that lot.

I think it just, honestly, comes back to how the U.S. was settled. How it developed. A lot of it was, for example, we have something called the Homestead Act where you showed up and you would get a parcel of land and you would keep moving west – the last frontier, the western frontier, where you’d move and get a piece of land. It’s very fragmented whereas, for example, you go look at a place like Russia or Brazil it is sometimes much more industrial. So, there’s also this fragmentation issue and economies of scale that make it harder, sometimes, for farmers to do it on a large professional scale.

Niels

Sure, now I want to take you back to what we were discussing just a second ago and that is this thing about the motivation for these investors, now, to be looking so seriously at farmland. Of course, on one side, you could say, “Well, a lot of investments are becoming more interesting given the environment we’re in right now with no yields, so to speak, worldwide.” Also, I think the sophistication of many investors in terms of understanding the power of non-correlation, etc. etc. So, talk to me, from the inside and (obviously you have done it) also from the institutional side what do you think is the main driver now for these investors to move into farmland?

Artem

Niels, you actually touched on some of the main ones, but I’ll just run a list next to it. Here’s just a little bit of history: farmland, actually, has performed tremendously well in the last thirty years, from ’91 to 2018, the returns have been 10.5% which is actually higher than most other asset classes. Comparing farmland to U.S. equities, international equities, global fixed income, it has really done quite well. So, returns are actually part of it.

It’s also, definitely, a low volatility investment. If we look at farmland returns from ’97 to 2018, which is the longest period we have, the volatility has only been 7%, which, compared to U.S. equities/ international equities/infrastructure even, it’s much higher than that. U.S. equities have been, like, 17%; international equities 20%. So, part of it is the desire to achieve attractive risk-adjusted returns. Those numbers broadly hold whatever period you look at in the last ten years farmland has done 11%, slightly outperformed by stocks at almost 12%, and kind of in line with real estate. That’s been a big driver of interest.

I would say that the non-correlation has been huge as well. When you look at professional investors and, really, when you look at how (I think in my view) individuals should construct their portfolios when they are trying to meet financial goals, diversification is the name of the game. You are able to achieve better returns with low volatility, with less risk, and also, honestly, less risk of losing principal. That’s really important. Risk isn’t just about how volatile it is, but can you actually lose money and how much money? So, I think that’s really important.

Farmland is phenomenal in that regard because of its unique underlying nature. We all need food: whether it’s a recession; whether it’s COVID; whether it’s the 2008 Financial Crisis, people need to eat. So, during those periods farmland has actually done tremendously well. In this period it has been flat versus real estate, for example, [where it] fell into trouble in the 2008-2009 crisis, where farmland was actually up almost 20% (20% plus) from Q4 2007 to Q4 2009. When we look at the correlation of farmland to other asset classes it’s negative, to zero, to the highest correlation from ’91 to 2019 would be to real estate which is 0.4%. So, it’s somewhat correlated.

My view on this is that once we look at the 2020 numbers we will see that correlation decouples completely or comes down significantly because, as you can imagine right now, due to COVID, what was considered safe, triple-A, cannot go down: New York apartments, New York office, San Francisco, has just collapsed. I tell you, first hand, San Francisco rental rates for studios have fallen by 30%. That is just an incredible number. So, the non-correlation part is important.

The way the pension funds right now or any professional portfolio manager, when they sell, the way they do it right now is that they couldn’t care less individual stock, individual risks, or even asset class risks. What they look at is adding this particular investment, what does it do to my total portfolio? Farmland, has tons of academic research, in that it improves tremendously your Sharpe ratio, your return to risk ratio. That’s, honestly, for the institutional players, been hugely attractive.

Then, lastly, I think that in the last six months what we have seen personally, with our clients (these clients include high net-worth individuals, family offices, investment advisors) is a deep desire to have a portion of their portfolio (at least) that is inflation-protected.

There’s a segment of the market that is really worried about this money printing. They worry about runaway inflation, and farmland has done better during inflation than anything else except maybe gold, and even better than gold, yes actually, better than gold. That makes a lot of sense because inflation is composed, in a lot of ways, of the farmland products: food, feed, fiber, fuel (as we call it). A lot of that goes into inflation. So, people want to have real assets that, over a course of several decades or ten years, will preserve and grow in value.

Niels

I was listening to a couple of podcasts in the last couple of weeks and I think it was Dr. Pippa Malmgren and also Dr. Marc Faber who talked about how, especially the high net-worth individuals but even the ultra high net-worth individuals, have really, in the last couple of years, started to add hard assets like land and farmland to their portfolios. Of course, all the things that you have mentioned just now are obviously very good reasons. Now, one thing that I have learned from my thirty plus years in this industry is that investors like to look at long pieces of data in order to make any decisions. So, how far back can you go in terms of reliable data for farmland as an asset class, and how frequently is this data “updated” (if I can even use that word)?

Artem

Yeah, absolutely, you can go back to 1991. That’s when the institutional index started and even if you look at the last twenty years there are tons of good data; not just the industry kind of investment manager’s data, but you also have very sophisticated, very detailed information from the USDA, the U.S. Department of Agriculture. They have phenomenal sets of data. So, you can go back, you can triangulate against different data sets, different metrics to verify the returns and the performance of farmland. So, all that is fairly available.

I think that’s partially what I love about farmland. At the end of the day, you are really looking at soil and its yield potential. What it means is that you can also do a discounted cash flow analysis and just take a look at, “OK, if I buy this field today, this is the price of, say, almonds; this is how much it costs to grow them. What are my forecasted returns?”

So, you don’t need to necessarily look at history, you don’t need to necessarily look at comparable pricing, you can take a look at, “What am I projected to return, and is this reasonable? Are people going to continue eating almonds? Are people going to continue eating food, corn, other trans, and organic food? Is it going to be a long-term demand? Is it going up? (Which it is and it’s insatiable.) What does it mean for my value of land?”

So, in our underwriting, as well, (and I hear you completely) we are institutional investors within FarmTogether we all come from institutional backgrounds, what it means is that we apply science and discipline to our underwriting, not just art and running around trying to find deals. It’s a very systematic approach. So, we look at all of that as well and we triangulate every deal with different valuation methods to answer the question that you always ask and rightfully ask as well.

Niels

So, we talked about some of the key drivers, or you mentioned some of them: the decreasing supply of farmland; the fact that you have an aging population. I guess also, demographic shifts in general, where we all want a better quality of food, etc. etc.

There are a couple of ones that I think are interesting that I wanted to hear your take on. One thing, of course, that we hear a lot about, whether we’re on one side or the other side of the Atlantic, and that’s something like climate change. I want to hear your thoughts about climate change.

Another thing (and this might not be a U.S. thing but only a European thing), but over here in Europe, when I was growing up, I remember watching on the news that farmers were always complaining about the prices and they wanted more subsidies. In particular, in France, they were very good at taking those challenges to the street. They would just block the streets if they didn’t get it their way. So, I wanted to just touch on that a little bit.

The final one that I want to ask you about is 5G. Somewhere I picked up something that with 5G, you might even know what that is, I can’t remember now exactly, but that also could have an impact as a driver of future demand for farmland.

Artem

Yeah, absolutely, so those are great questions. Let me start with the first one which is climate change. It’s really important. Our COO, actually, has a major in atmospheric sciences from Cornell. So, he went into farming, in a lot of ways, as a way to battle climate change.

Farming is a unique industry in that there’s what is called regenerative farming, which is just a little bit more sophisticated, more integrated approach to farming. This approach allows you to recapture carbon into the atmosphere. In theory, agriculture can actually be carbon negative, not just be carbon neutral, but be carbon negative, recapturing carbon: going on the attack with climate change.

Because of our personal convictions and motivations and because of the expertise that we have in our COO, we have really taken charge of two things. One, on integrating climate change into our underwriting. So, when we do our underwriting, when we do our analysis, we’ll look at the climate change patterns via the already amazingly sophisticated but easy to use models that we can overlay to understand what it means for your farm in ten, twenty years. This includes things like chill hours: how many cold hours are there to grow almonds? What is the temperature going to be and the precipitation? This allows you to then say, “OK, well, this farmer is actually not a good investment because in ten years things are going to change, and in twenty years even more so.

We look at those horizons because we and our investors are long-term investors. It’s important for us to make sure that the value of the asset not just stays, but increases. So, by that token, we also look at areas where climate change will actually be positive for the farmland values. The more north that you go in the U.S. and starting to go into Canada, the more you see that. Places like Michigan or Ontario are set to benefit from an abundance of water, cheaper land, but increasing the number of growing days. I think something like every five years you get another growing day which is a lot when you start looking at it. So, we do look at that, and that is probably one of the first things that we look at when we decide which sectors to invest in.

Now, secondly, talking about (to expand on your question a little bit) the pricing, the political aspects of farming, and how it plays out in the U.S., I would say that it suffices that there are a lot of segments in farming that don’t have any or little political backing: almonds, pistachios, walnuts, this is not corn and soybean farming. You are taking way more risk and it’s kind of up to you to make your destiny.

The reason that we have seen, around the world, this explosion of almond products is due to the work of the Almond Marketing Board which is a body in California that represents and markets and creates products around almonds. What a lot of people don’t know about California is that it produces about 80% of the world’s almonds. So, it’s really an industry that has taken charge and built their own destiny.

So, not only have growing capabilities but marketing and distribution capabilities in the U.S. farming industry as well. That’s why the U.S. farmland is so attractive. It’s not just the land, it’s also the people who farm it. Then, of course, you have other sectors such as corn and soybean that does have more political backing. With that, the way to think about it as a potential risk is, “What if that goes away? ”

Every single country has some sort of protection and political backing for its farming industry. It’s vital to national security, it’s vital to your independence and to ways of living. For example, Canada has a fascinating quota system for egg producers. So, you get a license, you can only produce so many eggs, but you have very stable pay. So, it’s a good living.

In other places like the U.S. have subsidies, mostly for insurance and for crop loss – insurance for farmers for corn and soybean. Yes, those subsidies (in theory) could go away. In practice, it has such bipartisan support, both Democrats and Republicans, that it would be political suicide to touch it. When you look at it, there’s a recent Financial Times survey that said that farmers were the most respected profession in the United States above veterans, military, firefighters, you name it. So, [there is] wide social support as well. So, I don’t think that is going away anytime soon. So, within that, we definitely see that sort of political support.

I think it’s wrong to somehow [lean too heavily on the politics] where a government says, “Oh, we’re not going to underwrite it, or that’s a risk, we are only going to invest into pure market companies.” Everything has government [influence], especially for farming and for food. You get regulations on oil and that will influence. You get regulations on plastic bags or recycling of clothes. It doesn’t matter. You have to understand how politics and government work as well. I think, if anything, in farming it’s probably a constant that it will enjoy political support from the U.S. government.

So, we definitely benefit from that as an industry and I don’t think that’s going to go away ever, honestly.

Niels

Yeah, and then I have this thing that I must have read it somewhere about 5G, do you know what I might be thinking of?

Artem

Yeah, so the 5G is next-generation wireless connectivity. It improves, tremendously, how much data you can carry at what speed.

Niels

Of course.

Artem

The way it can really help with farming, first of all, farming is a rural economy, of course. So, connectivity for farmers is really important for the quality of life. So, you’re not disconnected. You can watch the same shows, you can play video games, you can chat on Zoom with your family. It’s really important.

The current U.S. Department of Agriculture is investing heavily in this and 5G is going to be part of that solution. Secondly, what this will do is that it will allow you to do remote farming, whether it’s drones, sensors, irrigation, it will allow you to do farming from the comfort of your chair or maybe on a hammock in the Dominican Republic and still farm.

That’s going to be a total game-changer where it will bring more people into farming. It will improve the productivity of the farm which will flow to the value of the farm, of the land. If your land is more productive it’s worth more. It will allow for better portfolio management and oversight by FarmTogether, as well, by you (as an investor). In the future, we would love that there would be commerce and drones on the farms so you could plug in anytime.

Niels

How far away are we from all of this, Artem, happening?

Artem

We’re actually there, already, and this is on our roadmap for 2021. So, there’s nothing preventing us from that. 5G will just make it even better, faster, cheaper. We do drone flyovers; we’re looking to put in water and soil sensors; we’re looking to put in remote irrigation systems; we already use satellite data to look at vegetation maps; we use multi-spectrum analysis.

The self-driving cars will be a game-changer. It will just allow you to go in your car, fall asleep, wake up at 5 AM, drive to the farm in two hours, wake up, do work, and then nap or chat on the way back. It’s a total game-changer. Talking about that as well, with 5G remote solar, self-driving cars will, I think in general, increase the value of rural living. Especially with COVID, I think we’re rediscovering nature and the countryside.

I think that’s going to tremendously increase the value of land, now, back in the rural areas. We might see a structural shift from the cities with pricing kind of stabilizing or going down. It’s insane, right? In London, Berlin, Zurich, it’s really expensive to live there. If you can add more benefits to living remotely, maybe in a smaller community, maybe those prices might go up by a lot.

Niels

I completely agree. Living in Switzerland and living in a small village, firstly, I would say that farming, over here, is very different from what you described, quite interestingly. But I completely agree and what’s happening this year is certainly changing a lot of things.

I want to stay on one thing that you mentioned very briefly and I don’t think we talked about it. We talked a little bit about the returns, but what about the risks? What are the risks that you consider when you look at a new property or a new farm, both in terms of (it could be) geographic location, what kind of crop, whatever? What are the things that you have to consider?

Artem

Yeah, absolutely, as with anything in investing, farmland investing doesn’t come without risk, and there are certain risks that we focus on. We also, in every deal, will have at the bottom of the page a risk section where we rank every deal with our risk/reward rating and we outline the eight main risks in that farm. You can read a white paper on our risks as well on Farmtogether.com.

I’ll kind of run through them. So, just going top-down, we mentioned climate already. The second kind of macro factors that we look at is the state of the end market for a particular produce item. So, if it’s in almonds, pistachios, walnuts, apples, what is going on in the market? Is there a demand going up? What’s going on with supply? What is the pricing that we feel comfortable with long-term? So, we look at that.

Then from that, we look at water, especially in a place like California, [we look at] water availability. We do tons of work on making sure that there is a long-term availability of water. We then will do our due diligence on the operator, especially for permanent crops, in particular longer-term relationships. We’ll look at the production history and their reputation. That’s really important.

Farmland, in a lot of ways, is like real estate investing where price is important. What price do you get it at? We look at the price we’re paying and we triangulate this price with comparables in the area. We look at the discounted cash flow model. We take a look at what this land can produce looking at the yields.

Then, depending (more specifically to the deal), some deals will have debt on it and our investors want us to put debt on because debt is very attractive in terms of pricing and enhancing returns. But, if a deal has debt or doesn’t have debt – with no debt you have no bankruptcy risk. With debt, however remote, you would have some bankruptcy risk. So we highlight that. We typically are fairly conservative with debt. We never will take on your crazy private equity-type financing, only something very moderate and very reasonable.

One thing that we care about, which is more qualitative, is [hold periods]. So, our hold periods are typically eight to ten years. Although we’re working on liquid secondary markets (and we’ll, hopefully, chat about that) where you can exit before that period. But we look at the exit as well. How do we sell this? To whom do we sell this when the deal comes due? So, for that, we’ll look only at areas that have vibrant farming ecosystems.

What you don’t want to have happen (and the biggest risk in farming) is that there is great land and there’s no one to farm it. That’s probably the biggest, biggest way in which you can lose money. It’s hard to lose money in farmland investing when you look over the long periods. It’s really that the index has done quite well. But, one way to do that is to buy a stranded asset, somewhere (for example) in the middle of Kansas where people are leaving and farming is dying there. So, we look at (as we mentioned) California and 80% is almonds. So, when we buy an almond orchard in California it will be next to another hundred orchards in the immediate vicinity, which means that there is a liquid market for it: if you want to buy, if you want to sell, if you want to farm it. It’s very clear. It may be a bad example these days but buying an apartment in New York City where there are 50,000 other apartments helps you to kind of really understand the value of that.

So, I think that one is really important. You know, risk is another way to say uncertainty in a way, right?

Niels

Sure.

Artem

With farmland, I think you have a lot of certainty which is reflected in the volatility where the certainty stems from really knowing what your asset produces: food (is there constant demand for it and there is); and the pricing and the productivity it has. So, there’s not that much variability in your uncertainty (if that makes sense) and that, I think, leads to farmland being this safe, stable, attractive, long-term asset. You have that certainty of the underlying nature. I know I’m getting very philosophical, that’s my academic nature.

Niels

No, no, it sounds to me (I’m again no expert here, right?), but it almost sounds to me that if I was going to pinpoint one of the things that you just mentioned as the biggest risk factor and the hardest one to get your head around it’s climate change.

Artem

That’s right. That’s exactly right. I think that’s what… Especially when people ask us what makes a difference, what is your secret sauce? Part of that is that we are very data-driven. So, we haven’t touched on it at all, but actually, our value proposition as a tech-enabled farmland investment platform – there’s a tremendous amount of tech and data that we use to source, underwrite, and analyze farmland at scale because it’s a very fragmented market. You are exactly right, climate change is probably the biggest thing that people are thinking about now. So, when we look at this, it’s something like, “Does this farm have abundant water; two sources of water?”

Talking about water is a whole other hour-long podcast.

Niels

Sure, sure, sure.

Artem

That’s something that I think is vitally important. You can rest assured that the farms that we source for FarmTogether go through that analysis of what does it mean in terms of climate change?

Niels

Absolutely, so, I want to shift gears a little bit with you and talk about how you (FarmTogether) make the investments, so to speak. We talked about what you focus on, that’s great. Of course, I can’t help thinking that, in my world where we are also completely data-driven, we always say that one of the things that you shouldn’t do is you should never fall in love with your own position. I think that might be a little bit difficult if you find a very picturesque farm on a beautiful piece of land but I’m sure you have ways to deal with that side of the emotions as well.

Tell me a little bit about the process. Do you buy the farm before you sell it on or do you have to get the money from investors beforehand? How does it all work?

Artem

Yeah, it’s actually surprisingly not that complicated. Farmland sales have 60 to 90-day escrows, meaning that you have about 60 to 90 days to close after you deposit your escrow. We deposit the escrow using our own capital. So, we put our own capital at risk at first. That escrow becomes non-refundable after 45 days, typically.

During that period that is actually plenty of time to do all the due diligence we need and then to syndicate deals out on our platform. So, we started doing larger deals because our previous deals have sold out sometimes in days and minutes, literally minutes. So, we started doing larger deals that take longer to close. People were just scooping them up.

We have, so far, closed every single deal that we put on the platform. Occasionally we might run into issues where we think it’s an attractive deal, the investors think otherwise, and still being somewhat early, we try to triangulate that and figure out what is attractive to our investors. We’ll probably have a few blunders along the way. If that happens, all of your capital will be returned to you in full. We hold it and it doesn’t go anywhere. So, if we’re not able to syndicate all the capital we’ll just return it. But, so far that’s not been the case and we don’t expect that to be… Maybe there will be a handful of cases early on just because we’re trying to really understand our investors. But overall it has been a very fast indication for most of the deals.

Niels

Yeah, you know I’m also curious a little bit for the investor, so to speak. This is a new area for many people listening to us talking today. So, it can be very hard to know where to start, who to trust, find maybe some third party type places to go, and do their own research, so to speak. What do you typically say to people who just want to get their feet wet and look into it?

Artem

Absolutely, yeah, if you want to check out third-party data the best one would be the USDA. You can just download the 2017 Status Report that is 700 pages of data on farmland. This is from the government.

You can take a look at Ncreif, or this would be Ncreif Farmland Index. This is an independent farmland index. So, you can verify my claims there. You can take a look at Nuveen, it’s a huge asset manager, one of the pioneers in the space, and have done a phenomenal job institutionalizing and popularizing the asset class. They put out a lot of good data and are very reputable there. I think the best way to at least get your feet wet is to invest a little bit. So, I would put, maybe, a minimum amount into a couple of our deals, get quarterly updates, learn a bit more about what’s happening on the farms, and go from there.

Niels

Sure, so, you obviously, before you can put the properties that you have identified on your platform how do you source them? How do you decide on putting your own money up first? Do you do that by investment committee or how does that work inside your framework?

Artem

So, here’s just a little bit of background on the other members of the team. Our Investment Director comes from Prudential, which is one of the oldest and largest investment funds in farmland in the United States. At Prudential he deployed over a quarter billion into farmland deals. So, he knows this space extremely well. He’s also very hands-on, very practical, and pragmatic. So, he brings tremendous expertise to the table. He works with us in sourcing the permanent crops side. Then we work with an amazing asset manager who has done tremendously well in the last ten years on the row crop side, so corn and soybeans. So, we rely on people that have many years of experience in this space.

Now the way that we do the sourcing and underwriting is that I always say that we’re institutional investors. I come back to the point that means not falling in love with your position. So, more broadly it’s a scientific disciplined approach to investing where we have almost a hundred step checklist that we go through: everything from climate and water to this particular deal and operator – all of those things.

We go through, literally, sometimes a hundred deals a week and only maybe one or two makes it to the platform. It’s thousands that we have gone through so far. The ones that we look through, and how we decide, they just need to meet all of our criteria for underwriting: so, high-quality farmland, good price, good water, right produce item, right operator, right price. It’s a comprehensive checklist. We describe all that and the attractiveness of the deal on the webinars. When we present the deals there is a lot of information that you can read as well. It shows our thinking about why this deal.

That’s when we (to your point about an investment committee) have a three-person investment committee: myself, the Investment Director, and our COO. On some deals (depending on when we need to bring in outside expertise which we often do) we work with really experienced farm managers, farmers (some of them have farmed for generations) to further fine-tune the thesis.

So, it’s a fairly comprehensive process that, at the same time, is getting faster and faster because we have built tech to streamline and empower ourselves so that we don’t need to do things that don’t require human brains, such as taking a listing and typing it into an excel table. It’s all very non-automated. You’re not looking at Bloomberg, you don’t get fancy PPFs. Sometimes it can be literally a phone call from a farmer saying, “Hey, I’m selling my property nearby. Here’s some data.” Then you have to find everything yourself: satellite imaging, local county records, things like that. So, instead of spending your precious time collecting information we have the tech to do it so that you can focus on the art of investing (I know I keep saying science but, of course, there’s an art as well) and doing what only humans can do.

Niels

We’ve been talking about this, now, for a while. I’m sure there are a lot of people out there thinking, “Well, you know, when I hear about buying farmland and property, I have to have a million dollars to do so.” So, I’m curious to find out a little bit about the platform and how low, essentially, are the investment offerings that you do. Also, in terms of what people actually end up owning, I would love to know what that is, as well as if they have any say (like voting rights or whatever) in terms of when to sell or liquidate. I know you said that you were talking about coming up with a secondary market. That, obviously, makes a lot of sense, but talk to me a little bit about that.

Artem

Yeah, absolutely, you hit the nail on the head earlier when you said one million dollars. That’s probably on the lower side and will get you one farm. That’s why you’ve seen it also in other types of investor merging, it’s about billionaires. It’s sort of a well-known secret in this space is that one of the largest farmland owners in the United States is the Bill Gates Foundation. They love it for the ecosystem but there are also other wealthy people buying farmland and investing in it because it’s a great long-term investment.

You do need at least a few million dollars, and that’s for one farm. If you want to build a diversified portfolio of farms, well, suddenly you’re talking 10, 15, 20 million dollars. Now, even if you have a few hundred million, do you want to put 20% of your investment portfolio in farmland (or 30%)? So if you’re one of the wealthier people, it’s hard. With FarmTogether you can invest with as little as $15,000 in one farm and it keeps getting lower and lower. One day we’d like to make it like five bucks and you can diversify your portfolio with farmland.

To answer your question of how does it look, legally? What are you actually getting? We wanted to give our investors as direct of an ownership in farmland as possible. So, we have created what is called Bankruptcy Remote Vehicles. Here’s what that means: every farm is purchased at 100% of the farm. So, we always buy 100% of the farm and we buy the title: the ownership document of the farm. The farm is put into a single property Delaware LLC (a legal entity in Delaware which is one of the most common states in the United States for the best corporate rights). It’s very, very plain vanilla. That LLC has a management agreement with FarmTogether.

We provide management. By management I mean finding the operator, overseeing them, distributing cash and administration (meaning your tax documents) By the way, this is completely open to all international investors – it’s not that complicated. The taxes are not that much of an issue. We have tons of people – investors from Europe, from Asia, from Africa. It’s completely easy to do. I just don’t want people to be scared of that.

Niels

That was one of my questions but you have already answered that.

Artem

We’re happy to work with anyone with a tax counselor on that. Then, what you do is you buy a unit or a share and ownership percentage in that Delaware LLC. Then you receive payouts every year, or sometimes every quarter, semi-annually, depending on the deal.

The administration is also done by a third party called Assure. It’s a well-known administrator in the United States. They have over five thousand actual entities that they service, so this is very standard for them. They provide tax documents. They actually will do the payouts. When the need arises they are the ones doing that administrative legal work. So, between them, the operator (being on a long-term contract), even if we all get hit by a bus or something, your property will still operate according to the contract, according to the investment memorandum: the payout, the operation, will all continue.

Hopefully, none of us get hit by a bus but if something happens and FarmTogether is no more, you should consider that option as well and we are always very open to talk about it. Likely what is going to happen is that we all want to, and will stay in farming investing for many years. So, the management fees, likely, will go to some sort of third party administrator or one of us, or the operator (in our case) to just continue making sure that all your farms perform as needed. We could give it to other funds or to other players.

Some people think that all that hustle is overkill but it’s not overkill, it’s really just to give you, an investor, complete confidence that you own the land. You have that land ownership and it’s not tied to FarmTogether’s other deals. So, I think that gives just a lot of confidence.

Niels

Have you structured your own, since you’re fulfilling that role that, in a sense, managers do in the hedge fund world? How do you price yourself? Do you price yourself as a hedge fund would?

Artem

We’re not hedge fund greedy, like 2 and 20, or whatever it is right now. It’s actually a very simple fee model because we also have a lot of different investors and we just want to give something that is clear to everyone.

We charge, right now, two simple fees. There’s a one-time administrative expense reimbursement fee at close. That is typically between 1% to 2% of your invested capital of the deal size which sometimes includes that. Then we charge an annual fee of about 1% to 1.5% of the total GL size, so equity plus debt and that’s it.

So, we don’t charge performance fees or capital gain fees. We plan to start doing that because we want to show investors that we are aligned in the fee structure. Also, talking about alignment, we personally invest in every deal as well as principles. Especially the early deals we’re going to be charging by the investment performance. Right now we’re really focused not on trying to maximize the fees. We’re in this for the long run. We really want to show the returns.

Niels

Did I hear you say, earlier on, that you might, at some point, consider also opening a kind of fund where people put in $20,000 but they get exposure to a number of different farms, so it’s not just one property, or was that something that I heard in my own mind?

Artem

That’s right, some investors don’t want to be sitting on the website investing and reading every deal. They say, “Look, I trust you guys. I want a diverse portfolio.” So, we plan to roll out pull vehicles, diversified portfolios, and other structures that allow someone to invest and forget and just get that diversified portfolio according to their criteria. So, someone might say, “I don’t want anything in California, or I don’t want anything in Illinois, or I don’t want this type of farm.” Then we’ll just deploy the capital automatically into every deal.

That’s something that we’re very excited to do. I think that if you ask me, personally, how I am building. If I was an outsider and I was building my portfolio I’d say, “Yeah, I want ten or fifteen farms. Make them diversified across geographies and crops and just here’s your $100,000, $200,000, and please go and invest and don’t bother me with every farm.”

Niels

Yeah, exactly, exactly. I have got one more question and then I have got some personal and fun questions just to round it off if you don’t mind.

So the final (more normal) question is where do you, with this new way of giving access to investors, where do you see the demand coming from? Is it geographically, types of investors (right now, at least)?

Artem

Yeah, honestly the investors are coming from everywhere. It’s all types of investors. We have farmers, we have people from the Ag community, we have tech people, finance people, COs, lawyers, dentists, McKinsey consultants.

Niels

Any podcasters out there?

Artem

Podcasters, yeah, I think we’ve got some podcasters, family offices, wealth managers. I’m so grateful to see that because that was my belief all along is that this is an asset class that belongs in everyone’s portfolio. I think the same of real estate, the same as stocks and bonds, if you’re building a diversified portfolio you should have a little bit of farmland. It just makes sense. We’re seeing that right now with our investor base.

Niels

Sure, it really does sound like that. Then I want to move on to the final section which, as I said, is called personal or fun so I hope you don’t mind. First thing, what was the first farm you ever invested in, and at what age did you get into this, yourself?

Artem

Oh man, let me think, so, this was 2013 and we invested in agriculture and food companies for Ontario Teachers but they were just looking to look at farmland. Just to show you how I knew the space and it’s where innovative teachers got into a few years ago. But this was 2013, so, we already were invested in it but I was analyzing and providing portfolio oversight of farms in Uruguay (of all places) and Canada. So, really it was a mixture of grains and cattle in Canada and sort of the innovative approach of also building a brand around the beef which they have done somewhat successfully. There is more to it. It’s really, even in Canada, farmland investing has taken off massively. Yeah, that was fun.

Niels

OK, now, both as an entrepreneur, but maybe also as a PM, so to speak, is there anything that keeps you up at night? Are there any risks that you worry about?

Artem

I think it’s more about building the business and the team. I want to make sure that our people are engaged, motivated, always developing, always stretching themselves. I spend a lot of time these days more on talent development.

From an investment perspective I am always analyzing the monetary side, but what I think I like about farmland is that there’s not that much that keeps you up at night. If you bought a farm at a good price and you’ve got all the right things in place there’s not much that can really happen there.

With the farms, that’s the thing as well, if you’re buying (let’s say, from maybe a very conservative perspective) a cornfield in Illinois. The farmer pays you rent upfront for the year and you have, then, zero exposure to the harvest, to what happens, you’ve got your payment. The next year you rent it out all over again. So, unless someone shows up and dumps nuclear waste on your farm there’s not much to worry about there.

We have great partners as well and great farmers that have been doing this for decades so there’s nothing there. This volatility in let’s say almond prices, right now, where we had a record harvest and the prices have gone down but also yields are probably going to be higher than expected, I think that worries me a little bit more. So, just making sure that our investors are diversified. They understand the risks when they invest and that they understand that there is going to be volatility. Some years might be better than projected, some worse but it’s all in our expectation in underwriting we’ll even out. So, I would say that is a little bit of a worry.

COVID has obviously been a concern. Actually, farms have done really well by just making sure that the farmers that we work with, the operators, that they treat their workers with care. So, far we have had zero issues. All the farms have been operated as expected. Farms are naturally remote. You don’t hold hands. You don’t sit in the office when you do farming. So, it has kind of been fairly safe, and thankfully, thank God, because we’re not anywhere close to being done with the Pandemic. There have been no issues with our team or with the farmers we work with. So, knock on wood, everything has been good so those are just regular kinds of ‘staying up at night’ things, nothing crazy.

Niels

Absolutely.

Artem

That’s what I like about farms. It’s a safe and stable asset class.

Niels

Right, yeah, sounds like it. Also, I have one question I’d like to ask you and that is, with potential investors, what are the key questions that they should be asking, do you think?

Artem

I would say it would be just making sure that they read through the materials and understand what they’re buying. Understand the risks, the hold periods, but also understand the benefits. Make sure they’re looking, as they’re deciding (overall), making sure that initially that you try before you buy and make a few small investments in order to get to know our team; listen to our podcast; listen to our webinars on the deals.

Niels

Webinars, yeah, you mentioned that.

Artem

I would say, just as in any investing, take the time to understand the team, understand the market, understand the risks. It was great all the questions that we went through and looked at before you invest and just making sure that you’re comfortable with that. I’m an investor in my heart. I wanted to build this. I don’t really like selling. I like explaining, educating, and then letting people make their own decisions. I hope we’ve done a lot of that on the website.

Niels

Sure, sure, sure, finally, I wanted to ask you to finish a statement for me, if you could. That’s going to be the last one. The statement that I’d love for you to finish is, “I know I’m being successful when…”

Artem

I know I’m being successful when (maybe a little bit more ambitious for me) farmland becomes a staple in everyone’s portfolios.

Niels

Perfect answer. Now, we’ve come to the end of my long list of questions, but of course, I want to make sure that you feel we’ve covered all the important points. So, let me just ask you if you think that there is anything that I have missed today in our conversation? Is there anything that you… I’m going to ask you later about where people can go [to get your information], but just generally, is there anything that I have not covered?

Artem

I think we covered almost everything. This was a very thorough conversation, so, thank you, Niels.

Niels

Good, you’re very welcome.

Artem, it has really been fascinating. It’s a fascinating journey that you have had into the world of farmland. Of course, before we finish, do please tell the audience where they can learn more about FarmTogether and the investment opportunities that you offer. I think we’ve also talked about, already, other places they can go, so maybe you just want to provide them with your details, so to speak.

Artem

Absolutely, so, our website is FarmTogether.com. You can also reach out to me, personally, at Artem@FarmTogether.com. So I’ll just spell it ‘A’ as in apple, ‘R’ as in Romeo, ‘T’ as in Tango, ‘E’ as in Echo, ‘M’ as in Michael, at FarmTogether.com. [Use] Info@FarmTogether.com for more general questions.

We reply to all emails, all phone calls. We love talking to our investors as well as people just interested in the space. We’re always looking for collaborators, people that want to do research, that want to do internships with us, that are looking for jobs, that would like to maybe write with us, that would like to help us source deals – so explore new venues. It’s just such a new and fascinating space and you don’t have to have a farming background having grown up on a farm.

If you’re interested in the space there is so much going on – regenerative agriculture, organic agriculture, sustainability, agriculture technology, new types of produce coming to the market, new types of grains, ancient grains, all kinds of things. So, please reach out. We just want to participate in the conversation and help you on your journey (whatever it is) as well.

Niels

Sure, that’s excellent. It’s very clear that you are very passionate about this so that’s fantastic. On that note, we’re going to wrap up this great conversation today. Artem, thanks so much for being on the podcast and sharing your thoughts and experiences with me. It has been a really open conversation and opened my mind about this as an investment opportunity and to hear your story. As I often say, it’s so important to have practitioners like you share these ideas because when ideas become conversations that lead to action that’s when real change happens.

To all of you listening today, I hope that you were able to take something away from today’s conversation onto your own investment journey and if you did, please share these episodes with your friends and colleagues and send us a comment to let us know what topics you want us to bring up in the upcoming conversations with industry leaders in the world of finance and investing. From me, Niels Kaastrup-Larsen, thanks for listening and I look forward to being back with you on the next episode of Top Traders Unplugged. In the meantime, go check out the show notes for this episode and all the other resources that you can find on our website.

Ending: Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today’s episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you’ll be sure to get all the new episodes as they’re released.

We have some amazing guests lined up for you, and to ensure our show continues to grow; please leave us an honest rating and review on iTunes. It only takes a minute, and it’s the best way to show us you love the podcast.

We’ll see you next time on Top Traders Unplugged!