We Study Billionaires - The Investor’s Podcast Network - TIP358: Inflation Hedging with Farmland w/ Carter Malloy

Starting point is 00:00:00 You're listening to TIP. On today's show, I speak with CEO of Eco-Trader Carter Malloy about the farmland investing opportunity. With rising inflation, and Bill Gates now being America's top farmland owner with a $690 million investment, but we want to understand the nuts and balls of the $9 trillion asset class. If you, like me, are worried about the inflationary impact on your portfolio, you don't want to miss out on this one. So without further delay, here's my conversation with Carter Malloy. to The Investors Podcast, where we study the financial markets and read the books that influence

Starting point is 00:00:38 self-made billionaires the most. We keep you informed and prepared for the unexpected. Hey, hey, hey, you're listening to The Investors Podcast. I'm your host, Dick Broterson, and today I'm thrilled to be joined by Carter Malloy. Carter, welcome to the show. Thanks for having me, Stig. I'm excited to be here. So, Card, I'm really excited for you to join us, Because inflation is something that everyone seems to be concerned about these days. One of the many reasons why we wanted to speak with you here today. And also because we studied billionaires, that's the name of the show.

Starting point is 00:01:20 And Bill Gates, he reportedly owns 242,000 acres of farmland. So a lot of things to cover here, a lot of things that really made us really interested into covering this topic. This is the first time we ever talked about farmland, and what a time to do that. So, our audience are typically stock investors. And right now, like I mentioned before, inflation is something we are concerned about. Could you talk to us about the investment thesis for diversifying into farmland if you're worried about inflation?

Starting point is 00:01:52 First to establish, it is a large asset class. There's $3 trillion of this stuff in the United States. So it is a very big asset class. And you're exactly right. I think most people are stock investors first and foremost. I personally, that's my background. I spent a dozen years in equities. most recently at a long short fund.

Starting point is 00:02:08 And I love investing in equities. But in the background, I've been buying and selling farmland. My dad's a farmer and mom entrepreneur. And always it was just intrigued by farmland, the financial performance, despite the really difficult transaction experiences that are out there. But one of the reasons that it has always been attractive, I believe will remain so, is that it can serve as an hedge against inflation.

Starting point is 00:02:31 And the reason is fairly simple. It produces a core component of inflation, Food comes off of farmland. That's one of the ways that we measure inflation. So over time, the data will show you that farmland has actually served as a similar, if not better, hedge to inflation than gold. The difference with farmland and gold is that farmland produces income as well. Gold does not produce income. You're holding a commodity and hoping somebody else is willing to pay more than you did for it. With farmland, it is an actual productive asset that produces rents for the investor. Importantly, while it can serve as a great inflation hedge,

Starting point is 00:03:04 And again, the historical data will show you that. It is a really fascinating standalone investment, right? So the underlying reasons to invest in farmland, the list is long. There are a myriad of reasons to invest, including it. It's not really diversified to other asset classes. It has put up some really great historical risk-adjusted returns, right? So low double-digit type of returns with low volatility as well. So you don't see it whip around like a lot of other asset classes, including stocks.

Starting point is 00:03:31 So there are a lot of really great standalone reasons to invest in farmland. And oh, hey, by the way, it can also serve as an inflation hedge. So, yeah, we are seeing lots of interest on our platform and demand growing on our platform as well from all types of investors. And some of those are certainly folks that are worried about inflation. I think we're seeing it more and more of the news. You may have seen yesterday, Deutsche Bank came out with a big call and a really large concerning headline around their concerns on inflation.

Starting point is 00:03:58 Whether or not those hold true over time, we will see. But again, we're excited about the asset class either way. And we're discussing some of the mechanics that drive the asset, but I want to quickly mention supply and demand. It is very important to understand that as well, that we only have so much farmland and it's shrinking. So in the U.S., as an example, farmland trust here or nonprofit here in the U.S. shows that we lose about three acres per minute of farmland. It's a staggering amount is disappearing, a due to development and a number of other reasons.

Starting point is 00:04:29 So supply shrinking, on the other side, demand growing. We have more people to feed. On farms, we grow food and also some fuel and some fiber. And the demands for those things continue to increase around the world. So the supply and demand setup is pretty straightforward to understand as to why the asset class can be attractive over long periods of time. And then again, on top of that, inflation is also a really interesting reason to look at the asset class.

Starting point is 00:04:56 I don't want to catch you off guard here, Carter. Whenever you're talking about the shrinking demand of farmland, is that being placed somewhere else? Like, is it so that it's shrinking with three acres per minute in the States, but then it's growing with five acres of minute globally? It's a really good question. We do see places where there's rainforest destruction as an example to create farmland. That's a rather unfortunate tragedy. But throughout the world, the farmland tillable acres per capita is the way to look at that. And same thing there. You're seeing pressure on a global scale as well. So the U.S. statistic

Starting point is 00:05:33 There's just more data on U.S. farmland is the reason I call that out. But that is a global phenomenon as well. All right. So let's talk about the business model for us as investors. As much I understand the top-down thesis behind it in time of inflation, my first question is, I guess not just for you, but for everyone we have on the show. And anything we talk about in terms of investing is, how do I get paid? So with farmland, just more to understand the business model, could you talk to us through

Starting point is 00:05:58 the cycle of the different cash flows? Absolutely so. and I think it's probably a pretty important question. How does this work? How do I actually make money here? With farmland as a general statement, investors have made money two ways. Number one is the asset itself appreciating. So the land growing in value over time. Number two is the farmer pays rent.

Starting point is 00:06:19 So in the most simple version for row crops, and I'll delineate between row crops and permanent crops here in a moment, but in the more simple version of row crops, it's things that you plant every year. So rice, cotton, soybeans, corn, very simply the landowner or the investor, this is about 40% of U.S. land is absentee owned, meaning that it's not the farmer that owns it. The landowner charges the farmer a simple rent.

Starting point is 00:06:44 Similar to if you own an apartment building or a commercial building and you had a tenant, you own the building, they pay rent. That is the same thing here. Albeit, it is a little more simplified in that the farmer usually pays rent once or twice a year. It is a very straightforward agreement. Default rates and vacancy rates are extremely, extremely low, just exceptionally low across the industry. And so it's a very simple, straightforward relationship between the farmer and the landowner. So again, farmers paying rent. So you have a

Starting point is 00:07:13 cash component of the investment. And then the land itself appreciates over time. We've seen that over long periods of time, call it around 6% a year over the last 30, 50 years is what land has appreciated annually. So the underlying value that can compound underneath you, that being the land, to the asset and then the rent coming off the farm. What I've just described is row crops. That's the majority of farmland in the U.S. Most investment portfolios tend to be a majority row crop farmland. But then there is permanent crop land without at risk of becoming a little too complicated. I do want to bring this up as well because it's a different type of investment. Permanent crops are things that grow on vine, sometimes bushes, most often trees. So almonds,

Starting point is 00:07:54 walnuts, pistachios, pecans, apples, pears, oranges, things that grow on. trees. As the investor, you usually own that land underneath it, but you also own the trees. So, if you own almond trees, as an example, you are now exposed to the commodity itself, right? Because you own the trees, you own the land, and so you are paid more based on the productivity of that land. So that being the number of almonds or the pounds of almonds that come off of that tree, and then the price that is being paid for those almonds in market. So I'm sticking with this almond example for a moment. It helps illustrate a little bit of nuances and complexities with permanent crops, but they are also very interesting as an investment vehicle. You own the land, you own the trees.

Starting point is 00:08:35 The trees take a couple of years, maybe five to get the full productivity. They're baby trees, right? They have to grow up before they begin to shed fruit. And at that point, then, you're paid on the yield of those trees times a commodity price, but you are married to that tree. You've planted a tree, you've waited for it to grow. And if the price of almonds, between now and three, four, or five years from now, if it goes up dramatically great. If it goes down, that's also a risk you take as an investor. So you do have some commodity exposure when you own permanent crops. Now, to the investor, what this means is fluctuations in value or the fluctuations in income for permanent crops tend to be a little wider. So those almond trees are going to give you more variability in

Starting point is 00:09:12 income. But over a long period of time, they tend to show a higher absolute cash flow to the investor. So for every $100 you've invested, you tend to make more annually in cash off of those trees than you do off of the row crop where you're growing rice as an example. So that's the basic premise is for row crops, primarily looking for quality land that appreciates and then you get a little bit of cash on top. For permanent crops, you are getting more cash and a little less appreciation because while the land value is going up over time, can go up over time, the trees can go down over time because they have a useful life. With almonds that may be 20, 25 years, with olives that may be 75 years, but nonetheless,

Starting point is 00:09:54 the trees, their value does go down over time. So you have a little less appreciation, more cash flow. Again, that's describing permanent crops like fruits and nuts. With row crops, you tend to have more appreciation and a little less cash flow. Both have ended up over long periods of time, again, producing that 10, 11, 12 percent type of compounded annual return or average annual return to the investor over long periods of time, and done so, these assets have done so with a lot less volatility than comparable assets like the S&P 500 or commercial real estate, where the returns over a long

Starting point is 00:10:28 periods of times are similar or a little lower than farmland. The farmland does not tend to whip around in value like those things do. That's why we're so excited about farmland. Risk-adjusted returns can be very attractive. So going back to what you said about the difference between row and permanent crops and the timing on the cash flows, let's just... At least to make a simple for me, I'm sure the listeners follow this example much better than I do, is that's your, just a dividend payment compared to, like, the capital gain on your stock.

Starting point is 00:10:56 For like a better example, so would it be something to be said about timing that compared to taxes, like because one would be taxed immediately? Is that how it works? And then capital gains, you can sort of like push that. That's a long-term capital gain, or how does that work? I'm not tax advisor, and this is not tax advice. For most people, it tends to work just like stocks too. You've hit the nail in the head. Your dividends and or with a LLC, it's distributions, but same thing, right? The cash coming off tends to be taxed as ordinary income, just as it usually would be coming off of stocks. And then at time of sale, the money you've made off of appreciation tends to be taxed as a capital gain. So very similar to stocks for most people.

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Starting point is 00:15:48 Interesting. To another point that you mentioned before about 10-11%, you know, that as stock investors with the interest rate level we have right now, you know, we can't help but get a bit excited.

Starting point is 00:15:58 And so the other thing is that I went to website and there was one thing, well, there was a lot of interesting things, But there was just one thing where I was like, I really need to speak to cover about this because it said that with these 10, I think 11.5%, that's the number I found in the white paper. There hasn't been a down year since 1990. So, to me, with the volatility I'm used to in the stock market, it seems, well, almost too good

Starting point is 00:16:22 to be true. Could you talk to us about how do we measure the return on farmland as an asset class? And also tell me, is that statement true? That statement is true. The problem we have with farmland is that there is not a lot of data, despite how big it is, it's a pretty closely held asset. So that's why we use that reference date of 1990. That's when the data collection became far more professionalized with NC Reef, NC-R-E-I-F, or NACR-R-R-Reefe is what a lot of people call it. It's a private equity measuring stick effectively. So it's used for measuring private equity performance in apartments and commercial real estate and also

Starting point is 00:16:58 farmland. And so there have been major contributors to that now for 30 plus years. And that's what we refer to often for the data. The USDA has some data that is similar and goes back further in time. It's survey-based, so the accuracy is not going to be quite as great in most cases, but it would also support that same notion. You are right that since 1990, we have not had any big down years in farmland. The statement is also somewhat true. If you look at bonds as an example, or fixed income, tends to be pretty consistent performing over time. And that's okay. The tradeoff you're making and the reason that statement can be true is because this is not a get-rich-quick scheme. You are not going to go buy a piece of farmland and turn around the next year and sell it for

Starting point is 00:17:39 double or some other astronomical gain that you can do if you're out jockeying for individual stocks or playing in venture capital or taking on more risky assets. You can earn some zeros and you can earn some 10xs, sure. That's great in some of those asset classes. With farmland, we kind of aim to be the opposite. It's all about compounding over time, call it old school Buffett mentality of buying quality assets that are simple and allowing your money to work for you rather than constantly chasing the hottest new thing. And so that's really what we're about with farmland is compounding of capital, trying to be as risk averse as we can be, preservation of wealth, that type of thing. So we are never out arguing, put your whole portfolio

Starting point is 00:18:21 in this, not at all. What we see it as is an interesting thing to actually. to a portfolio for diversification. And there are some great white papers on this online outside of our research, some third-party validation put out by Nuveen, T-I-A, Prudential, so some very large funds that are also active in the sector and have some great research out there that you can find online with a few searches or we referenced them on our website as well. So we are talking about positive returns here, but there have been some years that performed significantly better than others.

Starting point is 00:18:51 Whenever I look at some of the years where the returns haven't been doing that well, 2001 sticks out. What is that? 1%, 2%, and then 9, there was a big slide compared to 2008. I can't but help but think, well, I remember the stock market did those years. Was that just investors just pulling out because now they were getting afraid? Is that what happened? It's often related more to farmers than investors. They are the extreme majority of buyers and sellers. in our industry within farmland. And so often it's a barometer on their healthiness and the way they're feeling. And you see that similar lower return period.

Starting point is 00:19:30 There's a big commodities boom in 2010 to 2014, call it. And you see for 2015 to 2020, it slowed down quite a bit as commodity prices were under pressure and there was less activity and less appreciation or growth in the asset. And then we have been seeing it really pick up here again in the last six to 12 months as commodity prices have begun to rally again. So it does tend to move in those longer cycles. So let's talk a bit more about inflation. I can't help but going back to that. But the numbers you see coming out right now is just seems like it's on everyone's mind. A conversation that I hear among investors right now is that giving the interest rate levels right now, of course, we also

Starting point is 00:20:11 have fear interest rate rising because of inflation. A lot of people are talking about let's take on debt. You know, why wouldn't we do that? Because right now, Now it's cheap to borrow, it might be more expensive shortly, and if we have inflation on the way, a lot of that debt can be inflated away. You use little to no debt for your investments on acre trade. Why is that? A big part of that is just conservatism. I think that is one of the great appeals of the asset class, is that we said this moment ago,

Starting point is 00:20:39 that compounding of capital over time and being conservative with this portion of your investments, and that's a mentality that we maintain here internally. I think, frankly, is maintained throughout the entire farmland system in the United States. So loan to value or LTV is a term or an acronym used throughout real estate investing, whether that's commercial or residential or farmland. And that is if you have $100 worth of real estate asset and you have $50 of debt, you've got a 50% loan to value. If you have 80% loan or $80 of debt and the $20 of equity or cash you put in,

Starting point is 00:21:14 then that LTV is 80, right? You've got 80% debt. So when people buy a home, they usually buy it around that 80% mark. That is very levered. And what that means is if the price of the home goes down 20%, assuming you have to sell, you've lost all your money. That is not a favorable outcome. And sure, that debt amplification can improve returns. And we're not completely that averse. I'll describe that in a moment. But throughout the farming ecosystem, the loan to values today are something like 13 or 14% LTV throughout U.S. farmland. It's staggeringly low. And so very unleavened asset class, I think that is also good for the health

Starting point is 00:21:51 of the asset class because in times of problems, in problematic economic times, there's not the necessity to sell because the bank's not calling most of the farmers and farmland owners because they don't have a bank. And so that is a very positive thing for the larger ecosystem. Now, back to Acre trader and how we approach the asset. With row crops, we almost never put any debt on row crops. And part of the reason there is the cash flows aren't that big anyway. And so what we want to be cautious of is if there's a hiccup in cash flow for any reason, we don't want to have to refi or have a bank chases or anything like that. And again, throughout the industry is very uncommon that that occurs. But still, we want to be cautious. With permanent crops, where, as we

Starting point is 00:22:36 discussed earlier, if you're planting trees, the banks are very oftentimes, they tend to be excited about lending against that because the LTVs are still low and you can go get some debt to plant the trees as an example. And even then, though, the loaned values tend to be 50% or lower, which is lower than you'll see it on just about any publicly marketed real estate deals. So throughout the asset class, there is real conservatism. That is part of the reason why you don't see as much volatility in farmland prices is because the leverage is not there to swing it around. And that's something that we frankly like. understand that, you know, speaking of that conservatism and that mindset, you know, here on the

Starting point is 00:23:17 podcast, we are heavily influenced by Warren Buffett and his investment philosophy. He's famous for saying that if you focus on the downside, the upside will take care of itself. So let's talk a lot more about the downside. And the listener out there might be thinking, oh, my God, stick, you've been talking for so long about all the inflation and all the other things that you're so worried about. But like in this climate, like we, as always, we should be focusing on the downside, but definitely right now. And so let's talk about the various risks. Let's start with crop risk. So as investors in farmland, do we have any crop risk from a, say, a bad harvest or is the rent fixed? For row crops that we discussed earlier, the rent is typically fixed. In some contracts,

Starting point is 00:23:59 lease lease contracts, there may be a fixed base rent and then some flex upward if the farmer has a good year. Like right now where commodity prices are, the farms with flex leases will likely see some upside to the lease this year. But those leases tend to be fixed, and they tend to be at least half paid up front. What that means is the farmer gives you the money before they put a seat in the ground. So if that farmer does not pay you, that tenant does not pay you in honor the contract, then you have the ability to go out and find another farmer before the season begins. So that's, I mentioned earlier that default rates tend to be fairly low. That's why. Vacancy rates low also. So occupancy very, very high. And the reason is pretty straightforward. Most

Starting point is 00:24:39 farmers want economies of scale. They already own the tractor and the equipment. They've got the labor force and the software. Having more land to farm gives them more buying power to go out and buy more seed or inputs or whatever that may be to run their business. So we do see very low vacancy and default rates. Those things can happen, though. Those are still a risk, certainly. The farmer in the back, if they pay half the rent up front in March, in some cases, in many cases they pay the full rent in March, but in some cases, they may pay half up front. They can still default in the back half. There's a contract. They owe you the money, but that can happen. Beyond that, so that's row crops where it's fairly straightforward, lease agreements and you look for good tenants to pay their

Starting point is 00:25:20 bills on time and most really do. If you buy a lower quality farm, that could be a risk that it won't appreciate as well. If you buy a farm prone to flooding and it floods, you know, it's next to a river and it floods often, then the farmers may not want to rent it from you. And so that may hurt your income. If you buy a farm without water, there's a lot of risks. We really want to have water, and I'm staying on row crops and I'll go over to permanent crops and the risk there in a moment. With row crop farmland here in Arkansas, where I live, at Mississippi River Delta, getting water onto your crops really does matter. You need to have wells or pumps or reclamation systems or have access to water to pump it on during those really hot summer days. You also need to be able to get

Starting point is 00:26:02 the water off. Going up to Illinois and Iowa, some of the most amazing soils in the world, actually. And they have water problems. It's too much water, and the water stays on the farm. That also can be ruinous to a crop. If the things, your soybeans are staying underwater for two weeks, then they don't have any more soybeans. And so making sure you get water off there.

Starting point is 00:26:21 I'm giving along with the answer to, diligence is incredibly important, and buying high-quality assets is very important. And if you don't, then the risks increase pretty meaningfully. There is what's called dry crop land, land that is not irrigated. So think Nebraska, North Dakota, South Dakota, especially more of the center parts of those states,

Starting point is 00:26:40 where you're relying on the weather and rain cycles. And that's fine. There can be some attractive investments there, but it's certainly a new dynamic when the farmers having to do rain dances to hope that you get rain some years, because that will affect the farmer's outcomes if you have a drought or if you have a flood,

Starting point is 00:26:55 that can be a negative for them and ultimately for the landowner and the value of the land. So long-in-answer to, there are certainly risks in the world of road crop. But again, without running leverage, it's not like we're seeing row crop farmland go to zero. So I think Nebraska is a good example. They did have the most recent measurable bear market. It got super, superheated some of the prices there in the mid-20 teens.

Starting point is 00:27:21 Like probably 2012, 2014. Like crazy speculations, prices went up big. And after that, they had a subsequent five-year period where prices went down, the value of the land, went down something like 17%. But in to end, the investors, remember, they were still getting the rent check from the farmer. So the investors nominally made a couple of points over the life of that investment. So when we speak to risk, especially on row crop, it's seldom that you hear somebody getting wiped out, right? That is, which is a real risk you take in investing a lot of other assets. So I want to make sure I contextualize the risk here. You definitely did that Carter.

Starting point is 00:27:55 And if I can try and then relate it back to stocks or, again, in this case, real estate, which is, I'm definitely not saying that I know a lot about real estate, even though that compared to my agricultural knowledge, it seems to me right now. But as a landlord, I don't want bad tenants. I don't want tenants who are like messing up the place. And that's the last thing you want as a landlord. I'm thinking if I have a tenant as a landowner, perhaps I don't want them to grow potatoes because they were just suck all the nutrients out of the soil. Like, is there such thing as, is that how it is, or is it just outlined in the contract, this is what you can or can't do? The contract's certainly there to protect you. And you specifically, it sounds like you do know a lot about agriculture, you specifically hit nutrient mining is what it's called when a farmer comes in and runs the wrong kinds of crops back to back that are bad for your soil. And there are guards against that in relationships and in contracts to avoid that occurring. So I'm going to clean up a little bit on risk because I still want to make sure to spell out

Starting point is 00:28:54 But with permanent crops, there are a little more risks, as we discussed earlier, because you're exposed to the commodity price. If the commodity price goes down or if you have a bad year of yields, those things can influence your income in a more meaningful way. But interestingly, you started this conversation with Warren Buffett's philosophy around focusing on the downside and the upside takes care of itself. And I wanted to bring up, while his name was mentioned a moment ago, he has one of my more favorite quotes on farmland, which is, I believe I'm going to botch the quote, sorry,

Starting point is 00:29:23 But Buffett quote on farmland was something to the tune of, I would rather own all the farmland in the United States than all the gold in the entire world. I thought that was a pretty great contextualization of where his mindset is on the asset. That's a great quote. Fantastic. Because as you were saying, you know, it produces something for you. That's what it's all about. So Carter, shifting gears here a bit, as I understand it, whenever you invest with acre trader,

Starting point is 00:29:48 what happens is that you're creating an LLC for each piece of farmland. And then as an investor, you buy small pieces of that LLC. So each year is worth one-tenth of an acre. So if you buy 100 shares, you own 10 acres. To me, that feels good. It feels like, if I can relate to something else, like it would be like an ETF. I actually own that stock, even though that ETF would blow up. So I'm not trying to bet against you in any way as I'm saying this.

Starting point is 00:30:17 But for me, as investor, I would say, well, it's good. I know I own this land in Nebraska or whatever that might be. But what happens if acre trader default? Because you are the person in your team securing like all the practical details, managing the found man. So I guess a word that I might legally have the right to piece of land with a bunch of other investors who might know as little as me about found man. What's going to happen without you and your team? In the unlikely event that me and our team are not here, And first to clarify as a company, we've just closed our Series A funding. We've raised $18 million as a business. We have most of that still in the bank. We are conservative by nature,

Starting point is 00:30:58 if you couldn't tell from the conversation already. We are going to be, we plan to be here for a very, very long time. In the event that we are not here, so each LLC is governed, right? So as you mentioned a moment ago, LLC, so call it acre trader 150. It goes out and owns a piece of land, and the investors own that LLC. Our management company is a a manager of that LLC, and that's our relationship with the LLC. But we don't own it. The investors do. And each of those LLCs are governed by a set of documents. It instruct what is to occur with that LLC and the outcomes that are sought. And there is specific language in there of if AcreTrader gets hit by a bus, what happens? To make sure those LLCs are, there is continuity there,

Starting point is 00:31:40 there is continued management of the land, there's legal representation for the LLC. So that's all spelled out in the event that we are no longer here, the investors should have the same experience. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. Vanta automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving.

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Starting point is 00:34:47 return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund's prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. Let's talk about disruption. And going back to Warren Buffett again, that was actually not the plan with the original outline that we discussed before, but now we're talking about Buffett. We always want to use that as an excuse to talk more about him. So we have some hardcore Warren Buffett followers,

Starting point is 00:35:31 including me and the other host here on the show. Warren Buffett recently has his annual shareholders meeting in Nebraska of all places. that we just talked about. He showed a presentation before the Q&A session where he showed the 30 most valuable companies in 1989. And then he fast forward to today and then showed that list of the 30 most available companies. And there were no repeats. None of the companies were on the same list. And so to me, I think it was an eye-opener in many ways, because we have talked here on the show about how companies have shorter and shorter tenure in the S&P 500. 100. And so, you know, one of the things I really like about farmland as an asset class is that

Starting point is 00:36:15 at least at the face of it, it seems like there is less disruption. But also, as I've started to read up on farmland as an asset class, I just thought of, you know, so many different potential disruptors just popped up. Global warming could be one, new types of fertilizer could be another GMO crops? Could you please discuss how we as investors should look at disruption in farmland investing. You name the big one there, which is global warming. It is really affecting farmland today. It's affecting farming regions and farming zones.

Starting point is 00:36:47 For the most part, you can adopt practices to that. But in some places, it is more threatening. I was just talking about water in California. That is also true Arizona, New Mexico, California. When it's warmer outside and there's less snowpack on the mountains, there is less water that comes off those mountains when the snow melts. And the rivers have less water coming downstream to your farm. that is a material threat. And again, that's why water diligence is so incredibly important.

Starting point is 00:37:12 Likewise, in dry seasons and drought years, again, water becomes really, really important. So we are actively seeing the impacts of that already today. And it's something to be very aware of. Invest in a farm for 10 years, how much different will this region look in 10 years? And for that next person who's purchasing it for 10 or 20 or 50 years, you know, will they be comfortable if that region is stable? And so that is an important consideration when looking at farmland, certainly. Beyond that, it advances in technology, whether that is through seed genetics or biology, some really cool things happening there, or artificial intelligence and machine learning

Starting point is 00:37:50 and computer vision, there are some really cool things happening on farms today to improve technology, to reduce the waste and improve the profit margin of the farmer. Those are a good thing. We like improved yields. We like to improve profit margins for the farmers. That's positive for our tenants, and so ultimately should be positive for us as well. I like that you said that. I don't know if I'm too much of a value investor.

Starting point is 00:38:14 I tend to be very pessimistic. Because one way to look at those technological changes is that it's good. Like we get better yield. But we're not looking at the index here. We're looking at a specific project. And I guess one thing that I would be concerned about is that I would invest in this piece of farmland. I would get a low cap rate because it's a Class A.

Starting point is 00:38:33 I'm sure if it's called Class A, this is like from commercial real estate, I would say that. I got a low cap rate, but you know, it's really good with irrigation or whatnot. And then Bill Gates, we also talked about before, his team is doing a lot of research in terms of developing crops that really can resist droughts, which is a big thing in Africa, for instance. And so a lot of that in Africa, they have all kind of issues like with fertilizers and even if they could afford it, they can't get credit. I'm trying to reel myself back in here. So since this is on a per project basis, is there such a thing as this is good as a whole, but perhaps it's not good for our project.

Starting point is 00:39:09 It's limited. I think as a whole, look, like, especially with Africa, something like 10% of the world or upwards of 10% is malnourished. So my goodness, yes, we want to see continued improvements to be able to grow crops in places where it's difficult to grow to improve the livelihood of people around the world. But beyond that, remember, we have more and more people and oh, yeah, they are consuming more. And then we have a growing middle class. Think about China alone and the imports necessary for them to grow their massive herd of hogs

Starting point is 00:39:38 is a big deal for agriculture. And so not just growing number of mouths to feed around the world and people to support, but also growing consumption among that population. So we discussed earlier supply and demand, right? Finite amount of supply of land that is shrinking. Demand for the goods on that land is growing. There is certainly a third factor that you're speaking to right now, which is yields, which is how much can you squeeze off of an acre of land?

Starting point is 00:40:01 And we really saw revolutions in this over the last 30 to 50 years, dramatic improvements in yield around sea genetics in particular and breeding and GMO to improve the amount that's produced on a particular acre of land. That's a good thing for that piece of land like you described. When you look at the entire asset class, it does that hold it back, right? Because that's effectively capping out your price. Over time, inflation would show you it's not. And beyond that, you know, again, those improvements we've seen our last 30 to 50 years, have slowed in terms of the yield per acre on certain commodities, it's harder and harder, incrementally harder and harder to squeeze out gains is the best way to say that, right?

Starting point is 00:40:39 There's only physically so much you can actually grow on a square of land. And so those are material considerations. And as a whole, we like continued improvement in overall yields. And especially as it relates to what we view as the more modern farmer and the types of farmers we partner with, the ones that are adopting these software on-farm technologies to improve their own yields and their own profit margins. And that way we feel if we partner with the right farmers, then we do that much better. Let's say right now we are 8 billion people on the planet. And let's say that we're going to grow to 16. That's not double the amount of food that needs

Starting point is 00:41:15 to be produced. As rich you get, you eat more calories, but you also eat, say, for instance, you need meat from cattle and that has a 6 to 1 ratio. So you would need to feed that cattle with six times the amount of calorie that goes out in the other end. So it's not a It's not a one-to-one ratio. And I think, and you'll probably know the exact numbers with Hawks is like 3D-1 or something, like Catalyst at the very top. But regardless of what you're looking at, you know, it's not a one-to-one basis. So we're looking at a lot more production that needs to be called online.

Starting point is 00:41:44 So the audience out there might be thinking, well, why is Dick so interested in farmland? Like he's been running this podcast for, what, seven years now, and he never talked about farmland before. And so I already talked about, you know, inflation is one reason. I'm looking at it, Bill Gates, you know, as someone who followed closely, like his investment to farmland. But the reason for it is actually a bit more anecdotal. And I sort of like wanted to bring that in transition then into another question. Because earlier this year, I had a business case presented to me, and it was a farm in Saskatchewan with a, they had a reliable and long-term

Starting point is 00:42:18 tenant, the landowner wanted to retire, and his sons weren't interested in taking over the family business. And so, as the audience can probably tell, I don't know close to anything about agriculture. But whenever a case like that is presented to me, I'm thinking, well, credit to premium, that's one thing I'm thinking about. I'm thinking that might be a motivated seller, which could also give me an interesting superior return. So in this specific case, the landowner was looking for someone to take over, and he didn't want a big corporation to take ownership of that. I thought to myself, well, perhaps I need to educate myself more into this field and perhaps I needed to find more motivated sellers. I need to find other places

Starting point is 00:42:59 for that liquidity premium, which could be farmland in North America. But I also think that as more as I've been digging into this, it seems like perhaps that was an exception to the rule. It might not seem as scalable as I thought it would be, because it does seem like it's quite professionally managed farmland as an asset class. We previously talked about Carter that it's a $3 trillion asset class in the US alone, nine trillion globally. Could you talk about it? Could you talk about Talk to us about the different place in the market, the market share. And if this story, like my personal story is, is it scalable for a motivated investor? To put a wrapper on that previous conversation, you mentioned the necessity of so much

Starting point is 00:43:37 more input to provide an ounce or a pound of meat. I think in America, people are used to eating protein three meals a day and probably have it as a beef jerky in the afternoon in between. That is not the way that most of the world eats their meals. It sounds tasty. Many of them are moving that way, but that requires real capital. And so as you're seeing global GDP growth and a rise of middle class, that protein demand is certainly an interesting part of the demand side story for the case for farmland. So something that certainly pay attention to, and I love some of those stats you were naming

Starting point is 00:44:08 earlier. To hop into, is there enough of a market here, you know, and why aren't we talking about farmland much? I think you've hit the nail in the head. It's hard. For most people, it's impossible. If you want to buy a piece of farmland, you've got to go out to account. Johnny, you've probably never heard of, meet with a broker you certainly never met,

Starting point is 00:44:25 plop down a million dollars. Oh, and now you get to manage a farm. That is just not a thing that most people in their right mind would do if they even could. And most can't do that either. That was really the reason why we built this business is to provide people another option. So on our platform, it's easy, right? It takes a few minutes to do it all electronically inside of our application to go invest in farmland and you can put in $20,000 rather than $2 million. dollars. And then it's passive after that. We take care of the investment, the management, payments, facilitation of leasing, insurance. You know, in the end, we are there to support the investors and farmers both to reduce the load to near zero for those investors. It's truly

Starting point is 00:45:06 passive. So first, sort of naming off the, you called out the difficulties of land investing, and that's exactly why we are here as a business. Beyond that, it is a closely held asset, right? That's the other reason you don't hear much about it in the financial news. One is it's really hard to get involved. And two is it's mostly closely held. There is now something like $35 billion of private equity. So formal private equity in farmland, that's up 10x or so over the last decade. There's a lot of growth in professional investing.

Starting point is 00:45:34 But to contextualize that $30 billion, they were talking about over $3 trillion asset class. So still like 1% is those private equity funds. And then you have large individual holders, like you'd mentioned, Bill Gates and certainly the other renowned investors active in the asset class, but it still represents a tiny fraction of the asset class. Most of it is owned by farmers and within farming communities or by individual investors or people that have inherited that farmland. There is real active liquidity in the market, and that's growing. So $50 to $100 billion of it trades hands every year. So as a company or as an industry of farmland investing, it does not seem that there is any

Starting point is 00:46:15 discernible impact from the buying action within the industry and take a really, really long time for that to matter, in our opinion. Wow. 50 to 100 billion. You also have a background, as you mentioned before, as an equity analyst, but it's not a lot. It actually a very low volume. Warren Buffett would probably be proud because you would be like, yeah, you're trading real businesses, so it should be low.

Starting point is 00:46:40 Coming from the stock market, it's like, oh, my God, that's slow day. Again, we have to compare this $3 trillion asset class. Of course, it's not a one-to-one basis. But if we say the U.S. global market cap for stocks or what, $4 trillion, you know, it's just something for an investor to consider if they don't like that volatility. One of the things that's been interesting and exciting for us as investors to observe here is the increasing democratization of asset classes through new investing platforms, for instance, like Ager Trader.

Starting point is 00:47:09 Previously, we've talked multiple times with our friends that were at Crowd Street, which is a commercial real estate platform. And we also twice called with Masterworks, which is an investing platform that allows investors to buy into fractional shares artwork. And so I'm definitely not going to say that it's the same. It's the same in the sense that you can typically invest for a lot less than you otherwise would. And people like you, Carter, makes it a lot easier for investors to invest in those asset classes. Because previously, it is primarily high, net worth individuals. And you of course have a lot of high-near individuals and major companies, of course, too, in that industries. But one of the things that I've learned from listening to the interview that my co-host Trey Lockheby did with Masterworks is that the CEO said, we're the biggest player in Outwork. And I was like, what? I never heard that? Because they pool so much money from their investors that they're actually the biggest buyer now. And also because they have to put that money to work all the time. I thought about how does that apply to Acre trader? So I've heard that you had close to $100 million on the management. Please correct me if I'm wrong in that ballpark.

Starting point is 00:48:17 And I can't help but think if Acre trader will drive down yields. If not today, then in years to come due to price competition, also because it's not as liquid, as we also talked about before. So keeping that in mind, and I know it's going to be like a long-winter question, but I also read on your website that you only invest in 1% of the land review of you, which I presume would be the best investments. And as an investor, of course, I like that because I only get presented the very best projects. But I'm also thinking with that amount of money come into it, giving the low amount of liquidity, and only having like a small sliver of the market, are you driving down yields already? Firm no today. I think if we were buying a few billion dollars in land a year,

Starting point is 00:49:02 than that may be a consideration. Today, let's fast forward to next year. Let's say in 2022, we buy half a billion dollars of farmland. So 500 million on maybe 100 billion that's sold that year. We would be 0.5% of the total market of buyers. So it's highly unlikely we would affect outcomes or prices or yields throughout the industry with that. Now, again, if we're buying $5 billion of farmland a year, then that may become a different

Starting point is 00:49:30 story. Although I would imagine at that type of volume, we would likely be in other countries and other types of farmland rather than the strict guidelines we have today. As the listeners can probably tell, I've been very interested in farmland this year. I haven't made any investments for different reasons I chose not to invest in that project in Canada, also because I think I've said repeatedly, I know very little about this. And again, buying a piece of a farmland through someone like you compared to a project. actually being the landowner in Saskatchewab. I've never been. By the way, it's just very different. I just couldn't help but be interested in that. And so I thought about different asset

Starting point is 00:50:11 classes, giving everything we talked about and not just for our listeners, but also for me personally. And a lot of those, the investing platforms that we talk about here in the show, but also because we are a US show, of course, that's available for accredited US investors only. So we have a lot of wealthy international listeners. And I can't help but ask, why is it so difficult to get access to investments like Agastray? Because I would imagine that it might be a legal thing, probably more than you guys imposed. But also, even you still have affluent U.S. citizens who might be interested, but might not qualify for being a quote unquote accredited investor. So why is it so hard?

Starting point is 00:50:51 A number of reasons. One is compliance. That's the biggest one. And it's something that we take incredibly seriously. Today, we allow accredited U.S. investors only on the website, and that is someone here in the U.S. basically that is accredited. Accredited means you make two or three hundred thousand dollars a year, or you have a million dollar net worth excluding your residence, or you have a professional designation like you're an investment advisor, or you have your Series 7 as a professional investor, if you will. The reason for that, and some companies take a different approach. Some companies allow international investors as well. into their individual deals.

Starting point is 00:51:28 We today do not, for a simple reason of compliance, and that you have to be, it's a whole other podcast talking about compliance, but something we are just ultra-risk on because we don't want to put any investors capital at unnecessary risk, and we view that as an unnecessary risk for a lot of people involved.

Starting point is 00:51:45 Now, we will be opening up to individual countries as we go forward. We do like speaking those international investors. We can accommodate them if they want to, if they're making large investments, They want to acquire a whole farm as an example. It's something that we do quite a bit of work on. If somebody just says, hey, look, I want to buy my own farm and have you guys manage it,

Starting point is 00:52:03 then we can work with folks outside of the country. We love the conversation. We'd be happy to have it. And again, bring it to more international people, especially Denmark's dig. We're coming for you. Our last major podcast host actually invested on the platform. And so we hope to have you someday soon as well. Right.

Starting point is 00:52:23 Well, you put in a lot of pressure on me, but it sounds like I need to buy the actual farm because I can't just as accredited Danish investor invest. That's interesting because being in Denmark, I'm sure that some of the other listeners would feel the same way, like surrounded by farmland, but we don't have the same critical mass as you do in the US, so we don't have a, with the size of Maryland, right? So we don't have like a platform for Danish farmland where you can go in and invest for $200,000 whatever.

Starting point is 00:52:50 It would be like, yeah, you have to come with your briefcase of money. I mean, be like, yeah, I've got to buy the farm. By the way, I don't have no clue how to do that. So for those reasons and also because of language, a lot of people are looking towards the U.S. And I'm like, yeah, that sounds like a great product. Oh, by the way, I can't. I don't have access to it. So I really appreciate that you shed some light on that. I'm sure that's something that, or I know that something some of our listeners have been asking about. You said the word earlier, democratization, right? The idea is to open it up for everyone to have access. And so our goals are not just to be accredited U.S. investors only by any means. And also,

Starting point is 00:53:26 and you said put pressure on you. I want to be clear, if you call us, we do not have salespeople. We have investor education folks on staff, and they are here to help share information. But we are not a sales organization. That is just not how we operate. With that set, kind of laid on us, because as we're rounding off the show here, we definitely would like to give you the opportunity to tell the audience, whether they can they look more about You, but perhaps as important or even more important about AcreTrader? First, go to Acretrader.com. There's a wealth of information there.

Starting point is 00:53:58 For us as a company, we have three core commitments, and that is access, liquidity, and transparency within this industry. That last word is really key. And I think you have learned that. Others will learn that as they work with us and get to know us. Beyond that, what really sets us apart as a company is the intense diligence our team is doing here every day all day, the expertise within our team, the transparency we provide externally, as I had mentioned, the network that we have, I mean, our farm team alone in the first quarter,

Starting point is 00:54:28 I give you an example, made over a thousand, had over a thousand connected calls with farmers and landowners, qualified calls with individuals here that could be partners or farmers or sellers of farmland, and we only did a handful of deals. Again, that gives you a sense as to how large our network is and how big our efforts are. Our company structure sets us apart as well. The way that we are set up as a business, certainly the amount of velocity we have in growth we have as a company, some amazing venture capital investors in our business, the support that we have, the board of directors, advisors we have on board with us here. It's just a great company and we invite you to come and get to know us. Come to our website, spend some time, give us a call anytime, chat, email,

Starting point is 00:55:08 however you prefer to communicate. We love speaking to people about this. This is what we do, farmland. Wonderful. Thank you so much for taking time out of the business schedule to speak with me here today. Thank you, Steve. All right, guys, make sure to follow the We Study Billioners podcast on Spotify, Apple Podcast, or wherever you listen to this. We'll be back next week. Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn how to achieve financial independence.

Starting point is 00:55:40 To access our show notes, transcripts or courses, go to The Investors Podcasts. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP358: Inflation Hedging with Farmland w/ Carter Malloy

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