American farmers are torn between abundant demand for organic food and a scarcity of land on which to grow it. Enter Craig Wichner, co-founder and managing partner of Farmland LP, based in San Francisco. Farmland is a $62 million investment fund that buys up conventional farmland--the chemical-blitzed, single-crop variety that’s been dominant for decades--and manages it for maximum productivity, as other REITs do with different types of real estate. That management includes converting the soil to organic and returning to traditional methods of rotating crops, pasture and livestock. With acreage in California and Oregon, Farmland is attracting both established farmers and newcomers with the chance to get back to the land, at scale, and with margins as healthy as their produce. I spoke with Wichner at the recent Social Venture Network conference in Connecticut.
Farmland LP is a hybrid of the real estate and agriculture businesses. Which side do you hail from?
The real-estate side. I grew up with my family owning and managing apartment buildings. Before Farmland LP, I did private equity focusing on capital-intensive assets. Kind of like other forms of commercial real estate but slightly more quirky: like shipping containers and forests. I did spend 10 summers on a great farm in southern California when I was growing up. But I am not a farmer. My partner, Jason Bradford, is the one with a PhD in biology and an expertise in sustainable agriculture.
How did you arrive at farming?
After the credit crash, it was very clear to me that assets were overpriced by 40% around the world because the pricing had been based on debt. Also, I had a daughter--she is 8 now--and the moment she was born I knew my life became about making her dreams come true. I was two years into this inquiry about how I could make a difference in the world when Jason and I and some other folks took a road trip to Oregon to look at buying farmland for ourselves. We realized farmland was a great cash-flowing asset that we could add value to by bringing back livestock and converting to organic.
But you didn’t mean to farm it yourselves?
That was the original plan for the road trip, but it was clear it wasn't going to work at the scale we were looking at. It may help to understand some of the history here. In 1862, Lincoln signed the Homestead Act giving away 160 acres of land to people who would convert it from prairie to crops. Between then and 1934 the country went from 100 million acres to over 500 million acres of cropland. Today that farmland is worth $2.4 trillion. At the same time, less than 2% of the population is in agriculture, whereas it used to be 49%. And the average age of a farmer is 58. Most kids of farmers are not farmers. They live in cities. So we want to get that next generation of farmers back on the farm. It’s one of the biggest societal problems that we are not doing anything about.
Besides the draw of city life, what makes farming unappealing?
The low revenues and high costs of commodity agriculture squeeze the farmers and also set people’s opinions about the value of farmland. That’s where we come in. We are basically switching from commodity crops to much higher-value forms of agriculture.
How does it work?
As a business owner, if I want to expand I don’t buy an office building. I just rent more office space. But if farmers want to grow their businesses they actually have to double their land holdings. Organic farmers have to double their land holdings and then spend three years getting that land certified organic. It’s not until the fourth year that they double production and sales so they can start recovering their capital costs. It’s very inefficient.
We buy commodity cropland that is generating very low returns. We determine the highest and best use for that land: which happens to be sustainable agriculture. Then we make improvements, including getting the land certified organic. The market for organic food is over $35 billion and growing at 14% per year. The supply of organic farmland is only 1% of U.S. farmland, growing at 8.5% a year. There is simply not enough farmland converting to organic to meet the demand, which is being filled by imports.
The demand for sustainably produced foods is a fairly recent trend, but sustainable agriculture is the oldest form there is, correct?
Sustainable agriculture is what we practiced for 10,000 years. I’m going to give you some more history, if that's OK. In 1950, the United States produced an average of five crops per farm per year. Each year, farmers had a portion of their land producing livestock, a portion producing vegetables, and a portion producing grains in rotation. That’s how things were done since the 1600s. Today, farms produce just 1.2 crops per farm per year, so they are degrading the soil with each crop cycle. They try to mitigate the damage by adding chemical fertilizer and spraying insecticides. They get the biggest equipment they can and need to have economies of scale. That is operationally efficient for the farmer but the worst way to generate returns from the land.
After we buy the land we plant two thirds of it in pasture and bring in great cattle and sheep and poultry farmers. The livestock provides meat and eggs and fertilizes the soil. We also bring in farmers to plant grains and vegetables: we have about 20 different crops growing on 7,000 acres of farmland. After three years that land is certified organic. After three to seven years we plant pasture on the cropland and rotate the livestock in there, and rotate the crops onto the soil where the livestock were, which has now reached peak fertility. It is the best way to maximize productivity and revenues from the land. We are demonstrating that sustainable agriculture is actually more profitable than chemically dependent agriculture.
What is the revenue model of Farmland?
We have 21 farmer-partners. Those are technically tenants with whom we are establishing long-term relationships where we expect to see a lot of synergies over time. We typically do either revenue-sharing or profit-sharing leases. We try to align our interests with the farmers’. As they increase production and revenues, we participate in that as well. Bill Niman [who split with his celebrated meat company, Niman Ranch, after losing control of its management to majority investors] is a tenant on our land with his new company, BN Ranch. We are able to offer him the amount of land he needs to really scale that business.
What are your plans going forward?
Over the past four and a half years we raised a fund, bought $50 million worth of farmland, and increased revenues per acre by 54% per year. This year, we launched a $250 million fund that is doing the same thing. The plan is to aggregate that land, increase the cash flow on it and ultimately take it public, so anyone can invest in sustainably managed farmland. We estimate there is a greater than $80 billion gap between the amount of organic farmland available today and the amount there could be just to serve the U.S. market.
We want to provide great farmland to our farmers. They are the ones who get the glory. They are the ones who grow the extraordinary crops and have their own brands and build their own businesses. They are the ones who do the hard work. We are content to focus on having really great healthy wonderful soil.