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April 22, 2022
This is Brian Martinez with NuView Trust Company, and we have a special guest with us today.
His name is Artem Milinchuk and he’s with FarmTogether. He’s talked with us before, and right now is great timing for another discussion about investing.
This is because there’s a lot of volatility in the marketplace and a lot of people are searching for alternative ways to invest their self-directed IRAs.
So that’s why we brought in Artem. We want to give you a different perspective on something that we haven’t talked too much about, but a lot of people are researching right now.
Hey, Artem, how’s it going?
Hey, Brian. Good to be back.
Hi, welcome back, buddy. We are really happy to have you! Just tell the audience a little bit about yourself: who you are and where you’re from – and some background on FarmTogether.
Yeah, absolutely. So I’m of Russian & Ukrainian background, which is very challenging and very tragic these days… I grew up in Moscow and I moved to Canada in 2007. I’ve been working in finance in Canada for about 10 years, with a lot of focus on food and agriculture before starting FarmTogether in 2018.
All right. We have a lot of questions for you here. I’m just gonna dive right in – and these come from the requests we’ve been receiving. So right now, what does the size of the farmland market look like?
It’s a huge market! I mean, in the farmland market in the US alone it’s 3+ trillion dollars. Now, this is broken down between pasture land as well as crops.
And in crops you have what’s called permanent crops and row crops. Row crops such as your corn and soybeans. Permanent crops are your trees, you know, your fruit and nuts.
There’s roughly about 2+ trillion dollars in crops.
Very interesting. And, as you know, right now investors are looking for ways they can put their money in things that are – I want to say – a little less volatile, or something tangible, or something they can see.
So why haven’t investors had access to invest in farmland previously? Is this a new thing?
It’s definitely not a new thing. It’s one of the oldest asset classes. I think the new thing is that there hasn’t really been any platforms to invest in farmland. And so that was one of the primary reasons that I started this four years ago.
I think part of it’s just the emergence of alternative investments is a relatively new phenomenon and so farmland is just falling in that trend. And part of it is that it’s not a market that a lot of people know, so there’s not that many kinds of natural innovators…
Not to pat myself too much on the back, but I do have that unique venn diagram of experience in tech, in finance, in marketplaces. Before FarmTogether, I was also at a B2B marketplace for about a year in fruits and vegetables called Full Harvest.
So I think I just had this really good overlap of different experiences to start FarmTogether.
But having said that, I think the reason that we’ve been successful today is that there’s just so much going on. I mean, demand for alternative investments, demand for ESG centric investments, demand for investments that are inflation resistant.
As we’re talking right now, this March 2022 inflation is – I think – 7.9%, which is just absolutely insane. And so I think the demand is just skyrocketing for real assets – for assets that withstand what is a very, very tumultuous and very volatile environment. There’s so much going on on the demand side.
And then on the supply side, the key for unlocking tech has been the emergence of satellite imagery, emergence of digital documents, the automation of underwriting in other asset classes like real estate that is now passing over to farmland. We are collectively getting much more comfortable in using technology to actually analyze investments.
You know, if I look back at my job, 10 -15 years ago, I would open up good old Excel and I would get this information here, and this information there, and it would take me days and days to underwrite.
But now, information can easily be pulled from different sources. That’s so much technology! It’s getting cheaper and cheaper. There’s machine learning, AI, and natural language processing, where you can grab a listing and put it into a model in a matter of seconds. And so it’s just a night and day, four years ago. That’s what’s really unlocking a lot of capital for farmers and landholders.
Yeah, that’s totally interesting. We’re definitely in a different era right now, and things are evolving and things are changing. The way people invested their money 10 years ago has changed so much in such a small amount of time.
I’ve been with NuView and I’ve seen how markets can go up and they can go down and how people can panic and then lose a lot of money.
So this is why I love what I do, because I get to learn about all these different alternative assets that clients might not have known about or had access to by networking with people like yourself. I’ve learned a lot from having you on the show before.
What are some pitfalls? If I was a new investor learning about investing in agriculture, what kind of due diligence can I do to make sure I’m making a good investment?
With a lot of other types of investments, in a lot of ways, you have to have a certain level of trust in your investment underwriting team.
Now, our team comes from funds where we invested in farmland on behalf of large financial institutions. We do have that institutional kind of systematic way of thinking about investing that is unemotional and data driven.
We believe our track record of what we have done to date – both personally and as a company – is strong enough due diligence for you. But if you want – and we will always encourage you to dive deeper – then here’s how to think about due diligence on farmland investing:
When we think about farmland, it’s this really interesting asset class. It’s something in between real estate, infrastructure, timber even, and bonds to some extent. So how do you analyze this?
I think real estate is the best lens through which you can look at farmland.
One, you have to look at the price you’re paying for farmland. Cause if you’re overpaying, then it’ll be harder for you to make money.
What we do is look at comparables in the space: what this kind of farm is selling in other places?
We do what’s called the DCF, or discounted cash flow analysis. We forecast the future cash flows of the farm – because at the end of the day, the asset is the cash flow – and then we do what’s called the cost replacement analysis.
Cost replacement analysis examines the costs if we had to replace this farm, replant the trees, how much would things like that cost.
So that’s step one and that’s what we do, and you can take a look at how we do in our materials.
After that, it’s also a matter of making sure that you have a good grasp of where the crop prices are and where they’re going to go. For us, we typically take a historical 10 year average of the crop price and make sure that our forecasted prices are in line with that 10 year average.
So we are not suddenly going and saying: “Hey, we’re gonna put Al prices at four bucks. The historical price has been like two and a half to three…”
The crop price is really important. The exit price is now driven by the price appreciation of land. So to give our audience a sense of this: the average price appreciation for the last 50 years or so has been about 5.9%.
It’s been quite strong and that’s been driven by inflation, increase in population and decrease of farmland supply and increase in farmland productivity. It’s a fairly good number to use kind of as a baseline.
We use something around – it depends on the region – usually four, five, or six percent land price appreciation. Last year it was over 10% in a lot of places. It’s been quite a strong year. And then, of course, you have to take a look at the farmer operating the land.
In our case, we typically work with really experienced farming families, or farming groups, that have been in the business for generations. And we are using a full-time farm management team whose entire job is just to oversee the performance of the farm, as well as an accounting and finance team.
So we make sure there’s a lot of people working and overseeing your farm. And that’s what you want to make sure is the case.
Then for California – everyone is an expert on water in California it seems – we make sure that the water is secure.
One of the few ways that a farm can lose value is if it doesn’t have water. It’s hard to grow a farm without it… So in this case, we do a lot of due diligence on water.
Oftentimes we want to make sure there’s at least two sources of water, the wells have sufficient depth, the water table is right, and the water rights are correct. It is a Byzantine network of water laws.
I could probably write an exciting thriller that would focus on just the water rights and the water training in California. It’s a fascinating space, but we have really good expertise there.
There’s some other things; just making sure that the financial model of things like the input costs are right of sufficient resources. Things like the headwinds like the one we have today, fertilizer prices, and gas prices right now are up substantially.
Our models are budgeted for that and we have put up sufficient reserves for this type of scenario.
There’s a lot that goes into it, but to summarize, if you go to our website and go through a deal page, we put together a summary of key risks and you can read them in a more accessible manner. We just rank the different risks, like eight of them, so you can make a quick decision on that as well.
So there’s actually options that investors can choose from? Is it dependent on the type of agriculture that they want to invest in?
There’s different types of agriculture and types of setup of the farm. And there are different types of financial products that we offer farmers. It can be a rental model, it can be a direct-operated model. It can be everything in between, like a fixed lease or variable lease.
Sometimes a farmer wants to buy the farm back. We do that. And so there’s a fixed price at which they buy it back.
There’s a lot of different scenarios that exist on the farming side and then the crops themselves. The farm can be for corn and soybeans. It can be almonds, it can be organic. Think California, Oklahoma, Washington. Think apple variety. You can pick and choose.
That’s pretty cool. What makes this type of investing recession proof?
Historically, farmland has done really well in periods of recession. I look at the two latest ones. We had the COVID in 2020, and then the great financial crisis of 2008.
During the great financial crisis, when everything was down 40-50%, farmland overall was up almost 15 to 20%, which is a really strong performance. And during COVID, farmland was essentially flat but a little high, and with sort of modest increases while everything else plummeted.
You remember March and April of 2020: everything was down and people felt like the world was ending. It’s the same for other less-acute financial crises, but farmland overall has quite low volatility. It’s a kind of steady-as-she-goes type of investment.
The reason for that is that farmland kind of marches to the beat of its own drum and when you think about it, for farmland to fail, people need to stop eating. That doesn’t really happen even if they have a financial crisis, and that’s great.
I mean, God forbid you got fired, but you still have to go home and eat. You might not be buying organic sustainable elements and so that’s where your elements might be a little higher volatility, but you’re still going to eat bread. You’re still going to buy pasta.
The basic commodity things are quiet and the demand for them doesn’t really change that much in the grand scheme of things. So that’s why, in my view, farmland is recession resistant.
Secondly, I think what people don’t realize is that farmland overall actually has a very low leverage. If you look at stocks, if you look at real estate, leverage is like 50%. There’s even 70% real estate leverage and you can do real estate deals like 95%.
But farmland is only 13% leverage. That’s an extremely low leveraged asset also with low but fixed interest rates supported by farmland max. Another thing to consider is the debt ratio on the farm. A lot of farms don’t have leverage like on our broker deals. We don’t have leverage. And that just makes it a very resilient investment.
I didn’t know that the leverage is so low. I really didn’t. That’s a cool, fun fact you just shared there. Congratulations on the wine deal, also.
I can’t tell you too much about deal specifics in public. But I encourage people to go check out the deal on our website, and in short it’s an organic wine-grade deal that was sourced by a new team member, Gretchen, who is a vineyard aficionado and a vineyard professional.
It’s our first wine deal and we think it’s going to do quite well. It’s got kind of modest returns, but also what we see as an appropriate amount of risk at about 8-9% target net RRs, and good cash flows. I wish I could say more, but the lawyers…
No worries, I understand. I appreciate the little snippets you gave us and information on that. This was a great interview! You gave me a lot of really good things that the clients can take away with them and they can do their own due diligence and their own research. You shared your expertise in the field and I think it’s gonna go a long way.
Do you have any questions for me?
Brian, I’d love to hear what your investors are most interested in? How is NuView doing?
NuView is doing well! Things are changing, you know. Two years ago we were seeing many, many people wanting to buy real estate with their IRAs, but now more people are looking for more passive types of investments that don’t require the landlording and having to keep up with properties.
Right now we’re seeing a lot of people doing more private lending. We’re seeing a lot of more people buying into more investments in private companies, and private equities, LPs, and things like that.
It’s just a trend, it’s always up and down and the markets change and I think it has a lot to do with inflation right now because of the recession we just passed.
People are saying that the real estate market is going to be changing. We don’t know if we’ll see a dip in real estate right now in Florida. The market’s pretty good, but it’s low inventory, especially in a lot of the big cities.
It’s definitely a seller’s market more than a buyer’s market. So I think that’s what’s keeping our clients from buying more real estate at the moment. But personally, I like the passive way of investing as well. I don’t like to have to get my hands dirty; I just like my money to be able to work for me, even if it’s not as high returns that I’m gonna get, if I were to do the work.
And using a self-directed IRA, keeps the passive investments at arm’s length.
Things are changing, evolving, and we want to get the word out on a variety of alternative assets that more clients can get involved with.
Well, I appreciate you coming on the show, and reaching out to me. I’m glad we got to connect and we’ll definitely be in touch.
Great, thanks Brian!
Thanks for reading this post with Artem Milinchuk from FarmTogether.
If you’re interested in looking at farmland as an investment vehicle, give us a call at NuView Trust Company.
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