ValueWalk’s Q&A session with Carter Malloy, CEO and Founder of AcreTrader. In this interview, Carter discusses his and his company’s background, generating income with low management fee for the farms, Michael Burry’s assessment of farmland, what you need to invest in farmland, orchards and row crops have stronger financial profile, the risks associated with farmland, the barriers to entry, and the long-term market fundamentals for farmland investments remain attractive.
Can you tell us about your background?
I grew up in a farming family and have always been interested in agriculture. Prior to starting AcreTrader, I spent 12 years as an investment professional – both as a Managing Director at Stephens Inc., and as an investment professional at a San Francisco-based long/short equity investment fund.
Q3 2019 hedge fund letters, conferences and more
What about your company? / What products do you offer?
AcreTrader has created an online platform for investing in farmland real estate. Through our portal, investors who want to invest in farmland can do so within minutes with low minimums, without facing many of the traditional challenges of owning and operating farmland. Investors can browse potential farm offerings, review due diligence materials of the farms, and if interested in investing in a farm, may transfer money and sign legal documents easily within the AcreTrader investment portal. Investing is currently available to accredited investors, and we are exploring products to open up the platform to all investors during 2020.
How do you make money?
AcreTrader has a small ongoing management fee for the farms that we manage, and we also have a wholly owned real estate brokerage. Our brokerage takes part in the real estate transaction for part of the commission, and we reserve a real estate commission to be split with the buyer’s agent when the farm is sold upon exit. This allows us to participate in fees that would otherwise be generated by the transaction anyway while often charging below-standard commission rates. We work hard to keep our fees low in order to pass as much profit as possible back to our investors.
Why should investors get into farmland?
Land is one of the oldest investment classes in existence, producing exceptional wealth over generations. We think United States farmland represents an attractive, long-term investment and it has also provided capital preservation or even appreciation during times of economic turmoil.
Michael Burry made headlines for getting into farm investments big time a few years ago, any knowledge on that topic?
Michael Burry has a strong focus on buying farmland with sustainable and renewable access to water, and we agree with his assessment of farmland. Water availability is absolutely top of mind for us here at AcreTrader, and each farm offering that we put on the site has been carefully considered regarding its water rights and access.
What about big investors?
Generally, we think that the professionalization of any asset class provides more transparency and efficiency to the market. While Institutional funds now make up over $30B in U.S. Farmland holdings, that is still only 1% of the three trillion-dollar market.
What have farm prices been doing since the latest floods?
While a flood can certainly damage and decrease the value of a particular crop during that given year, generally short-term events like floods or commodity fluctuations can have more of an impact on the annual income produced for the farmer than the overall value of farmland. The factors that have a greater impact on the price of the farms are the global trends of a growing population that needs to eat, and available farmland shrinking at 3 acres a minute in the U.S. These large macro economic factors appear to have had the largest long-term influence on the appreciation of land values. Further, as a landlord renting land to the farmer, the farmer often takes on the operational risk that results in them capturing both production upside and downside while paying the investor a steady rent.
There are many types of crops, what does “farmland” entail? Everything from wheat to almonds?
Farmland can generally be categorized as one of three types: Pasture land for animal grazing, orchards or vineyards for permanent crops, and arable land farmed with annual row crops. Generally, at AcreTrader, we focus on orchards and row crops because of their stronger financial profile.
Same question in terms of geography from across America many different climates how can individual investors analyze that?
Each region has attributes that are great for some crops and unsuitable for others. For example, the clay in Arkansas soil is great for rice fields, but wouldn’t support an almond tree that grows well in California. The cold winters in Iowa kill off many of the pests, so less fertilizer is necessary and organic farms have a higher success rate.
In addition to soil makeup and weather patterns of a region, there are also factors at the local level like sustainable and renewable water access, tenant reliability, or development potential.
There are many factors at play, and often a lack of transparency that can make it very difficult for an investor to know whether or not they are buying at a fair deal. This is especially the case if they are buying land in a county they’ve never actually been to, and dealing with farmers, land managers, and brokers they’ve never met. At AcreTrader, this is core to what we do. We have an incredibly thorough due diligence process that evaluates all of the aforementioned factors, and many more. Ultimately, we do not pursue investing in over 99% of the properties that we evaluate. Once a farm meets our strict underwriting standards, we present the farm information and financial profile in a digestible manner on our website for investors to evaluate.
Water and soil are the two biggest factors for any given farm. Additionally, when we are evaluating a farm, we heavily research the income producing capabilities of the property. The percentage of tillable acres on a given farm disproportionately effects financial returns. While 20 acres of trees, a creek running through the land, and an old barn could all be nice features for recreation and beauty, none of those areas would be very profitable to a farmer renting land. When evaluating a farm the three main factors we’re looking at are the soil quality, water access, and the financial profile of the farm.
Farmland is an under-invested asset class, why do you say that?
To invest in farmland, most investors would have to purchase an entire parcel of land. This requires a level of upfront capital, management experience, and time that presents too large of a barrier to entry for most investors. A popular alternative for adding farmland to a portfolio would be investing through private equity funds, however, minimum investments and fees often make this option a non-starter for many investors.
Is farmland really less risky than stocks? It is a very illiquid asset. Please explain your point of view.
There are risks that are associated with any given asset class, however history has shown us that the volatility associated with farmland has been much lower than that of stocks. Additionally, when you examine the underlying asset of a stock, history shows that these can and do have the potential to move to $0. While there have been some farmland bear markets, we are not aware of a circumstance where the underlying land value has gone to $0.
Farmland has historically been a very illiquid asset, sometimes changing hands just once a generation. One core part of our mission at AcreTrader is to bring more transparency and liquidity to this asset class. While we do ask investors to invest for the long term (typical duration of investments on our platform are 3, 5, and 10 years), they may be able to sell their ownership privately after a 1-year lockup period.
How big are barriers to entry? Can’t anyone buy land and start growing crops?
Anyone with enough capital, time, and experience can buy land and begin growing crops. Unfortunately, the combination of those three hurdles prevents most people from attempting to start their own farming operation. Currently 2% of the U.S. population is employed in the agriculture sector, which is down from nearly 50% of the population a century ago, and we would anticipate seeing that trend continue to grow - a potentially lucrative opportunity for good farmers. Famous investor Jim Rogers is widely quoted on the subject of the declining farmer population, saying “Eventually it will be the farmers driving Lamborghinis… Mark my words.”
Farming trends outside the US do you focus on just US or international?
Currently we are only focused on the land in the United States. There are roughly 300 million acres of farmland in the United States, and that land includes some of the most fertile soil in the world. Additionally, the title laws in the United States are very reliable and favorable to the landowner, which can decrease the risk of an investment relative to some foreign countries.
Final thoughts
Farmland, while an impressive and sizeable asset class, remains under-invested and the market appears very inefficient. With a physical supply limitation and growing demand for food, we think the long-term market fundamentals remain attractive, and we are excited to help bring this asset class to market.
