We Study Billionaires - The Investor’s Podcast Network - TIP477: Recession Proof Your Portfolio With Farmland w/ Artem Milinchuk

Starting point is 00:00:00 You're listening to TIP. My guest today is Artem Millenchuck. Artem is the founder and head of strategy and special projects at Farm Together. Farm Together is an awesome platform that brings high-grade farmland investment offerings right to you. As we keep exploring ways to hedge against inflation, we look to billionaires like Bill Gates and Warren Buffett who own hundreds of thousands of acres of farmland. In this episode, you will learn how farmland is a great hedge against both inflation and recessions, why Bill Gates is the largest,

Starting point is 00:00:30 private owner of farmland with nearly 270,000 acres. Which commodities are optimal? How to Assess a Farmland? Why Artem prioritizes U.S. farmland? Where it should sit in a portfolio and much, much more. This is a topic that I'm super interested in and I was really excited to chat with Artem. If you know very little about farmland like I did, you will learn a ton. Artem is highly knowledgeable, experienced, and explains things very simply. So, without further ado, please enjoy this conversation with Artim Milenchuk. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.

Starting point is 00:01:18 Welcome to the Investors podcast. I'm your host, Trey Lockerbie, and my guest today is Artim Millenchuk with Farm Together. And, Artem, this is a topic. You are doing something that I'm really excited about and interested in. So I've been looking forward to this conversation. Thanks for coming on the show. Thanks for having me, Trey. One thing I noticed when I was doing some research is that you grew up in the Soviet Union and at a time and place where food was not abundant, as it might have been at least in the U.S., especially today. According to Maslow's hierarchy needs, food, shelter, and clothing are the basic necessities for survival. And you'll notice that food comes first. So what was it like to not have food? basic staples easily available. And what impact did that have on you at an early age?

Starting point is 00:02:12 The kid, you kind of don't know what else is out there. So you sort of get used to it. It's really then seeing the contrast of what can actually be that I think had that profound effect. So around 91, 92, when the Soviet Union fell, Russia opened up, then you had an influx of goods. And then you sort of saw the difference of you had nothing. And suddenly the shells was just brimming with so many different options. You know, a story sometimes like to tell. I remember when I was like six, seven, I was standing in line for like bananas for two hours because they had bananas this didn't mind.

Starting point is 00:02:48 Whereas now, you know, suddenly you just go anywhere and you be like, I don't care. I mean, there's bananas everywhere. It's just such a easy thing to get. And so it's just crazy to think that it was all just due to different food systems and economic systems. Do you think that stuck with you? later on when you are becoming more and more interested around agriculture and getting, you've been into some ventures that are kind of based around the idea of getting food out to people.

Starting point is 00:03:14 Do you think that kind of comes from these early beginnings? Yeah, absolutely. I think the fundamental nature of food and land is connected to food is something that I'm really drawn to, especially the long I live, because you get this different waves and fats coming in and going and we always feel like we are inventing something new and then this time it's different. But sometimes it is different, once of the times it isn't. And so I think it's just been really nice in my professional career with Farm Together to build it on something that is so fundamental to who we are as humans, right? We need to eat food. We have this habit. So yeah,

Starting point is 00:03:54 absolutely. Well, that sounds like humble beginnings, you've gone on to have this incredible career and got your MBA and went to go work at one of the most prestigious and famous pension funds in Canada. Was that experience one of those where you were sort of just, you were honing your craft of investing and did you just pick up some tips and tricks along the way? Did it have a material impact on you as an investor early on? Absolutely. I would say Ontario Teachers is probably one of the best investment organizations out there. They've been around for many, many years.

Starting point is 00:04:26 They returns are absolutely stellar, especially given the size there, over $200 billion. or approaching that number. And so the way they think and work is so systematic because investing is just going to be so emotional, so volatile. So it's, you know, how do you consistently generate alpha and generate good risk adjusted returns for the pensioners, the retired teachers of the province of Ontario of Canada? And it requires a lot of skill, a lot of work. And so I was very fortunate to be in that organization for a few years and to soak it in from many different great investors and people I was fortunate to call mentors, friends, colleagues. You actually got your career started off as an investor and then went to become an entrepreneur,

Starting point is 00:05:09 which is always kind of interesting, right? Because I don't know, I feel like a lot of investors look at entrepreneurship like it's kind of easy or something. Maybe, I don't know, because maybe not, but I feel like, you know, when you're sitting on one side of the table, you're like, well, why aren't you doing all these things? And, you know, as an entrepreneur, you're like, because I'm doing a hundred other things. So when you flip the script a little bit and went in to be a more of your own venture. What were some realizations you had maybe early on or as you went along? Definitely entrepreneurship is one of the hardest things you can do, to put it this way. And I was also that kind of investor where I was looking from outside and going,

Starting point is 00:05:42 well, that's so easy. Why don't you do this? Well, you should just go this. Isn't it obvious? And then you start doing it. So yeah, it was definitely a picture. But I was able, I think for me, what was really fortunate is that our business is an investment business. So I was able to still use a lot of my skills to kind of make that transition to entrepreneurship a little bit easier. One of your kind of first entrepreneurial efforts that it appears to me was from full harvest, which is a really interesting business actually because it's connecting businesses with farms in this effort to use imperfect produce, which is becoming a little bit more well known these days that that whole concept, right? Just things that don't look good on a shelf but are still

Starting point is 00:06:22 useful and they would otherwise go to waste. And I find that model so interesting, both economically, and socially, what were some of the challenges involved in a business like that and maybe some learnings that you then took on to farm together? Yeah, absolutely. So I joined Full Harvest as its first employee, CFO and operations guy, kind of right-hand man to the founder in 2016. And it was just her and then me and then a few other people. I mean, the challenges are many.

Starting point is 00:06:54 When you're trying to fix such huge problems as food waste, which is a huge problem. when we waste a third of our food, and if we wasted just a quarter left, we could actually feed all the hungry people. I just keep coming back to a major, sort of like a bigger philosophical point that we do live in a world of abundance. And it is the systems and us as people that make things scarce. Like there's more than enough on this, God given earth for everyone. So full harvest is near dear to me and the company is doing incredibly well.

Starting point is 00:07:23 And just for the listeners, so the business has really take the imperfect produce that farms always have because guess what nature doesn't produce celery hearts in plastic bags of three. You have to make them shelf ready. And while you do that, a lot of food gets wasted. And so full harvest would connect the farms directly to buyers that don't necessarily care if the food is picture perfect. These companies, for example, that process now and found out it's a massive business. It was a three-sided marketplace, logistics, buyers and sellers. And through that experience, well, one, I was just able to see much more the farm side of things because before that I was looking more at the investor side. So I was able to meet a lot of great farmers, go see farms,

Starting point is 00:08:01 and also understand the, you know, the challenges that go into building kind of two, three-sided marketplaces because farm together in a way is a marketplace between investors and landowners farmers. So the marketplaces are notoriously hard. They have something that are very hard to stand up. But once you do, then they're also equally hard to displace. Because once the marketplace gets going, the flywheel gets going. And so yeah, yeah, the opportunities in the food system is absolutely massive because they know. That's sexy, right? Not a lot of people look at them. And so my investor had is, I want to look where no one's looking because everyone is looking at Apple stock at crypto. So that

Starting point is 00:08:37 should have sailed. In food, like, I mean, try a few last five people and be like, what do you know about food investing, farmland investing? No one will be able to tell you. So, and yet it is so vital, right, to our lives. It's health, it is nutrition. It is food security, as we're learning right now from the conflict in Russia, Ukraine. So there's a lot that is connected with food. And full harvest really opened up my eyes to everything else beyond just kind of the investment thesis that I had around farmland. Well, you're thinking kind of like I would say Bill Gates and maybe even Warren Buffett are thinking, right, with buying up so much farmland builds. Gates, you know, by proxy through his foundation

Starting point is 00:09:14 as largest single landowner, I think, in the country, which we should talk about a little bit. Yeah. But I'm kind of curious, you know, this moat, you kind of mentioned, this ability to this defense ability, let's call it. It seems to kind of play into the thesis here as it's, it's well as the performance, which I also want to kind of cover. From what I've seen, and you can correct me with maybe more recent data, but farmland has been posting an annual return of around 11.2% for a 25-year period that ended in March 21. And that was compared to a 9.6% gain for the SP 500 during the same time. So it's also worth noting that the S&P 500's return is much more

Starting point is 00:09:50 volatile. So I think it's actually twice as much as farmland. So you know, you mix together the the sharp ratio there, the yield and the defensibility. And I'm like, well, this is classic Buffet, classic Gates, right? So is that kind of the thesis here? Are there other things that play into it? That's absolutely part of the thesis, farmland. I think most people don't realize how good Iran has had in the last 20, 25 years. So the returns, very solid. That's true. They also less volatile, you know, in farmland, especially if you're building a somewhat diversified portfolio. You can expect sort of high single digits, maybe low double digits, but you're not investing for 10x return that that's not going to happen. But when we think about

Starting point is 00:10:32 investing and when we think about sort of how people go about meeting their goals, there's other things that farmland provides as an investment product. Because remember, no one invests for like the sake of investing. Everyone invests to meet a certain financial, personal organization goal they have pay pensions, save for retirement, safe for college because like, because I want more money, although that's, you know, that is the basic idea. And with farmland, you also have something that is extremely pertinent in these days. It is a fantastic hedge against inflation, at least it has been historically. During periods of high inflation, farmland has performed very well, done better than gold equities. And that's because

Starting point is 00:11:11 by its very nature, you know, farmland is something that is inherently very hard to create. In fact, we're losing farmland. We'll talk a bit about that. And it's super basic. So when you think about inflation, it's really, well, there's now, more paper to buy the same amount of goods. Well, farmlands not magically going to double triple and so it just has to move with inflation. Also, hundreds of farmland products actually go into the CPI. That's what we call food fuel fiber feed. It's not just cereal. It's a lot of other things that farms produce. So that's a major, major factor. Seems like after inflation, we're going into recession. Well, that's what actually farming has done quite well in periods of recession too.

Starting point is 00:11:46 In 2007, eight, it was up 20 plus percent when everything was down 50 percent. In the latest blipish crisis we had, the fastest crisis I've ever seen, well, most people have been in COVID Q1, when everything was down, majorly farmland was also fairly flat. And during the tech boom of 2000, 2001, Farland was up when everything's down. So that's another big factor. And then the last one I want to mention for your listeners and just in general, there's a big ESG component here. So when we talk about sustainability, regenerative agriculture, water scarcity, as well as now more and more farmland actually becomes. this optionality play with solar and wind. And there's a lot of things that come into play where

Starting point is 00:12:26 you go from being like a pharma that wants to just extract the maximum possible of field, which by the way, nothing is wrong with that, right? People have to eat to someone that is more like a steward of land where you have this additional responsibilities around carbon, around being good to the local ecosystem as well as the local communities. So it's really, you know, when we talk about land, the reason it's so fascinating is because it's like so central just to our existence. Is that performance mixed with the volatility a result of illiquidity? And in this instance, is illiquity sort of more of a feature than a bug? Partially, yes.

Starting point is 00:13:03 So there are two publicly traded farmland stocks, farmland partner can black on. And indeed, we see they stock be much more volatile versus the underlying asset and the farmland index. And even what we see, you know, in our work. So it's a feature because it's more liquid indeed. And it's like it's a buggy feature because you have the stock not represented times, the underlying asset. And so you are able to enter into the underlying asset at an intractive price if the markets

Starting point is 00:13:36 have been too panicky. But you also sometimes don't have that ability. You can sell that stock when the price has run up too far. So look, I think in general, every asset will become more and more liquid because liquid is just, you know, us being able to trade in something. I see nothing wrong with that, right? I think more and more assets should be liquid. So as that happens, Farm will absolutely become all volatile. But, Tray, if I can use this as a jumping point to talk about volatility as a proxy for risk, because when we talk volatility, we kind of think risk. And I think it's funny because

Starting point is 00:14:07 investing is very common sense. When, you know, you and I think about risk, I think, like, how much money am I going to lose? Or did I get more than I put in? And then you get this Chicago PhDs and this brainy scientists and I know I was one of them. And they will have this insane models on computer and they say the same thing, which is basically, am I going to lose money? So farment, I think, why it's less risky is because, not because of like volatility, there's that, but because risk is a function of uncertainty. All right? When you invest in something like to what extent is this uncertain?

Starting point is 00:14:40 So volatility is really that uncertainty. And with land, there's been only two quarters when the index actually lost money. And when you think about it, like you invests in a corn farm in Illinois. I mean, you fly over Illinois. It's just farms, farm, farms. So there's, first of all thousands of them. You have really good sense of your price. It is unlikely that that farm will lose its inherent asset value because that means that people stop eating, I don't know, corn and soy, and there's suddenly like fewer people and more land. That's just not a reasonable base case. So when we talk about farmland being less risky, it's that the inherent value and ability to maintain that value long term is very, very clear.

Starting point is 00:15:19 We've been farming for thousands of years, probably will farm, I don't know, until we'll go to Mars or something on virtual. We're going to keep farming. And so to me, you know, when you're investing in like some crazy crypto coin, like, have no idea what's going to be, right? In farm, you know exactly what it is, exactly what it's going to be. So anyway, that was a very, you got me very philosophical here, but. I love it.

Starting point is 00:15:41 I appreciate that. Before I move on from Bill Gates, and I mentioned. he's a largest farmland owner. He's invested over $100 million. I think last time I checked it was something like 200,000 acres, you'll know better than I do, I'm sure. But give the audience a little bit of an idea of what the total addressable market, though, of farmland is in the U.S.

Starting point is 00:16:00 And how it compares to what Bill Gates owns and giving them a sense of the market here. Well, first of all, I want to give a shout out to not only Bill Gates, but to whoever outed him out, because in the farmland investing space, It's been a well-known secret that Bill Gates is the largest farm owner. And then somehow it just became public and everyone knows this. Like, it's really been incredible in terms of generating interest, that one fact. But Bill Gates, I think, owns something north of 200,000 acres, I believe, like 230,000,000, which sounds like a lot.

Starting point is 00:16:32 And it is in the billions, not in the millions. But let's, let me just paint a picture, how tiny it is. US has 900 million acres of farmland. So that 240,000 is like 0.0 and then you just, it really is around the air. So the market is absolutely huge. And that is broken down between what's called pasture land. That's where you know you graze your livestock and crop plant where you grow crops. Yeah.

Starting point is 00:16:56 Let's talk about that. What are the different types of farmland and which ones are the most optimal in terms of margin or ease of operation, a number of other factors I'm sure that play into it? Yeah. So those are the two major types, the pasture land and the cropland land. Now, within crop plant, you have permanent crops. So this is crops that are permanent. So your trees, you know, your apples, your citruses.

Starting point is 00:17:19 And then you're what's called raw crops or annual crops that you have to plant every year. So corn, soybeans. It's hard to say like which one is better because it seems like in which food is better. Well, they all play a different role. But broadly speaking, in the raw crops, you have low risk, low return investment product that typically, you know, we target anywhere from six to seven, eight total turn net of fees. And that is something that is fairly stable, unlikely to lose money in the long term, unlikely to make a lot of money in the long term. We heard investors compare

Starting point is 00:17:51 raw crops to a mix of like gold with a coupon or sort of investment-grade bonds, sometimes compare that to timber or real estate or like inflation linked bonds because typically the rent and the land prices tend to move when inflation moves. Let's take a quick break and hear from today's sponsors. All right, I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is.

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Starting point is 00:22:07 Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. I asked because I was researching here and it appears that apiculture, which I'd never heard that term before, but essentially beekeeping, is one of the higher margin businesses,

Starting point is 00:22:28 I think just because of the scarcity of it and the honey market, which I haven't looked into. And the margin thing is interesting. to me because, you know, you see how Michael Burry went on to do a number of things after the GFC, but one of them was investing, I believe, in water farms. Because, you know, California, for example, there's a lot of almond trees, Albon farms, but you also hear that California doesn't get a lot of water and almonds need a lot of water. So to me, I would just think subconsciously that that's a low margin business. Why get involved there? So what are some aspects around

Starting point is 00:22:58 commodities and margin and where you should kind of focus the most of your energy when you're an investor. Yeah. And I think Michael Berry, I mean, obviously I haven't seen his portfolio, but he should have done quite well with his portfolio since the rate financial crisis. So the highest margin farms would be your tree nut farms and your fruit farms, namely like apples, cherries, and organic, of course. But that is because again, you have more risk and more volatility. So let me use almonds, maybe, and apples as an example. So in almonds, you have indeed more volatility in water. You have a fairly, like as we've seen in the last few years, the markets can be quite volatile

Starting point is 00:23:38 for the almonds themselves because it's an expert product. California grows most of the world's almonds. And so because of that, you get higher returns. But it's a very mechanized type of farms. You can do a lot with a few people. And there's continuously gained efficiencies in genetics, in how you plan, So you know, you talk about the bees and some of the more recent almond varieties are self-pollinating, meaning that you're not as reliant on bees.

Starting point is 00:24:03 And with apples, you also have this interesting situation where you have different varieties coming out all the time. And if you can get on that variety and write the train, then you actually can get some amazing margins. One of the farms we have, I mean, it's projecting margins in some years as high as 40%. So it's not going to be forever, but you know, a few years where you get incredible returns. And then it's also, you know, it's not just the margins themselves, right? in the point of time.

Starting point is 00:24:28 You know, we're all lazy. We just want to invest and forget. So is it going to deliver those margins consistently over many years? And yes, once you plan the trees and they get going and everything is set up, it is a money making machine. You know, some trees like pistachios last, like we don't even know how long, 40, 50 years, right? So you have this, your planted tree and then for generations, your portfolio and your kids will do well from having that investment.

Starting point is 00:24:51 No, 150 years ago, almost 70% of people were working on farms. And by 2020, it's gone down to 1.4%. So clearly a sign of technological advancements and higher standard of living, I imagine. But in contrast, the ownership of land, which still consists of individual owners, has hardly changed. So I actually find some solace in that, to be quite honest with you. I like the fact that individuals own farms. To me, it just kind of, I don't know, I signify higher quality. For whatever reason, I, you know, Juxposed to maybe Monsanto owning all the farmland in the U.S. or, you know, some corporation. I find it interesting. But what does that do to the supply side if there's all these individuals, is there less selling going on, which is then kind of upping the value of this land? There's actually more selling going on because a lot of the farm owners in U.S. approaching 60.

Starting point is 00:25:45 A lot of them in the 70s, 80s. And as they retire, you know, kids don't want to farm. So you get this consolidation and turnover. of farms. As you kind of move land through generations, first of all, you just get more and more airs and then you get into, some of you listen to since succession, you get the same fighting for who gets to keep the farm and what to do with it between a lot of different people and it can be a mess and a lot of fun as well. So now there's more turnover happening because of that kind of transitioning in how we live, how we the rural and urban divide and split. So the estimate is that

Starting point is 00:26:21 about 70% or more of land in the US will change hands in the next 20 years. You know, going back to California and needing a lot of water and that being an issue with droughts and everything climate related, I mean, you're in Portland. There's a lot of farmland up there, but it was the hottest year on record recently or hottest area of the US at one point in the recent past. How much do the climate-related factors play into your investing thesis when you're assessing a farmland? Yeah, I mean, you have to think about climate when assessing farmland. And so you look, of at high level where we will model additional water needs and water of operating because

Starting point is 00:26:59 of a hotter surface. We look at things like chill hours where almonds, they require a certain number of cool weather, but not too cool. That's why California is so unique, very specific climate. So that changes, you have to move up further up north. You have things like historical things happening in Colorado River, I think, for the first time had to curtail its water allocations kind of down the river, which I don't believe. have ever happened. So it's just, I mean, trade's such a huge question that hard to answer it,

Starting point is 00:27:26 give it proper time here, but in short, absolutely, we pay attention to it and it's a lot of fun. It's very interesting. And it's very specific to different regions and crops. And there's opportunities and challenges there. You mentioned succession. There's another show called Yellowstone, which I've been saying is like the succession and just put in Montana, right? And the idea is there's this farm being passed down by generations and they don't want to give it up, there's all these people trying to make developments on it and take it away from them. So I imagine that's a very real problem. And I read that over the last 20 years, more than 11 million acres of US farmland were also lost to development.

Starting point is 00:28:03 So is there a certain rate of decline or I guess rate of supply happening? That's also a factor here. Yeah. So and I think it's even accelerating if I'm not mistaken because if you look in the last five years, I think, but yeah, it's urban development, it's climate change. It's not wanting to farm as much. all of those factors come into play. It's also on the flip side,

Starting point is 00:28:25 we do have increasing efficiency of land we use. So we are getting better and better there and that plays the role. What about things like Kimball Musk's brothers investing in square roots where they're creating containers

Starting point is 00:28:40 and growing crops and containers that could just stack up high in New York City, for example. Is this a real risk in your opinion at this point? Is it too far into the future? Would it help in any way? to disrupt in any way, any general thoughts on that?

Starting point is 00:28:55 Yeah, I get this asked a lot and more broadly about, you know, vertical agriculture. And I think it has its place for certain uses, for example, for leafy greens, for herbs, where it's a high value product with a small footprint or where you need to be near a big city where the freshness of it and the transportation costs can be, you know, take at all versus being able to go somewhere right in Manhattan and get your lettuce growing on the Empire State Building. I don't know. So there's definitely some benefit there, but it only plays a role at margins, because at the end of the day, I always like to come back to fundamentals. So when you talk about the farm, you're talking really about free water that falls from the sky because a lot of

Starting point is 00:29:33 farms in the US actually rain irrigated, free energy coming from the sun versus having to put the right light in place. Increasingly with regenerative agriculture, it's also the vibrancy of the soil and the additional benefits that you're giving back to the ecosystem. And just like economies of scale being able to drive their tractor through huge field and make it much cheaper. So it's just physically hard. We're talking about Elon Musk and for the Musk's and thinking about first principle. There's just too much from basic physics that I don't think will, in the near term, at least, make that sort of container growth or vertical farming a threat to the more sort of land-based

Starting point is 00:30:12 farming. People like to kind of shorthand think about that stuff where it's like, oh, this is just going to take over. but when you go back to your point about there being 900 million acres of farmland, that's quite a feat, you know, to disrupt. So going back to Buffett here, he's frequently used farmland to illustrate a simple business and he even refers to the different business silos at Berkshire Hathaway as his orchards. Are farms really as simple as Buffett would suggest as a business or as it more complicated than we think? Yes and no. So on the one hand, for us for farm together. One of our investment products is a raw crop farmer.

Starting point is 00:30:51 We buy it, we rent it out to someone they pay us a fixed fee. And by the way, it's very common. So 40% of land in US has rented and mostly it is between individuals. And then we maybe get sort of a function of a crop revenue share or price appreciation share. So it's very, very simple for us. We pay, I think, only a few payments a year. We get out check. We know the farmers, typically the multi-generation.

Starting point is 00:31:15 And so it's dead simple for us. Now, for them is probably quite complicated, right? And then when you go into permanent crops where you have trees and you have to take care of the trees and you have to water them, right? You have to make sure that you have the right pass control protocol in place. I don't know. I wouldn't say it's difficult than any other business. And a lot of other businesses, weather doesn't play a role where it's here you'll be like,

Starting point is 00:31:38 oh, I want to do something today. Well, no, you have to actually go to the farm and switch on the sprinklers and cover the trees because we have unusually cold weather. things like that. So there's more and more technology coming in that is making things easier to predict to manage. And so I think farms will definitely get simpler. But yeah, I don't know if I would go as far as to say that it's simple. Well, similar to Buffett who typically likes to stick to the US when he's investing. You often focus on US farmland. But you know, some of the best produce comes from Europe and say Italy or volcanic regions, South America even. Why just stick to the US?

Starting point is 00:32:13 Well, this is where we start thinking about farmland as an investment product. And so when we think about it that way, we use the real estate lots quite a bit than the analogy of real estate. And by the way, farmland, if you think of it as real estate, is the third largest real estate market. So we have multi-family or single-family housing in US, which is tens of trillions that just dwarfs everything else in the world. You have multifamily housing about three trillion and then farmland, also three trillion. So it's a huge real estate market. So the reason for that is, and when you invest in real estate means you cannot move it. So you're the total mercy of the country, of its laws,

Starting point is 00:32:49 of its infrastructure, it's labor. And US is just absolutely a beast in that regard. Despite what the issues we have with infrastructure, it's still like killer infrastructure with great ports and railroads. Coming back to Buffett, Buffett also likes railroads. And we have Mississippi River is just a wonder. The transportation is so cheap. I mean, in ways, responsible for like US as what it is today. You have extremely. productive workforce and farmers that are very innovative. You have the rule of law, right? No one can take that farm away. So that's super important because yes, Latin America, you're absolutely right. A lot of great countries there, great farms. Do we feel as safe about the laws

Starting point is 00:33:28 and regulations there long term? This is a long term investments. The only other country that I think like two countries that we're looking at in terms of that think gives similar level of safety is Canada and Australia because we're talking about this is a safe investment, safer, called investment product. Nothing is safer to an investment rate, but farmland is on that low risk, low return spectrum. And so we want to play it as such. We don't want to make it Bitcoin. We want to make it the boring thing you invest in from yet. The US is the best for that. You know, speaking of Bitcoin, it reminds me of gold. I saw this chart today actually showing that commodities have outpaced gold in this high inflation environment by double.

Starting point is 00:34:08 I just found that so surprising, you know, that's more about gold. I think than anything else, but it shows you how farmland can keep up a lot. I imagine with inflation just because of the increase in pricing of the commodities it's producing. But sticking with Buffett there for a minute, he likes to buy and hold forever typically. What is the typical duration when you're investing in farmland? Is it buy and hold or when you're investing in a product offered by farm together? Are there end dates to those investments?

Starting point is 00:34:35 Yes, we would like to hold forever as well. Actually, we do have a fund that is an open-ended fund where we want to hold. the land forever, but most our deals are 10-year hold. And that's just a compromise between finding the right sort of level for our investors. But yeah, farmland is absolutely great investment. So in fact, my alma mater, Ontario teacher's pension plan has quite a sizable farmland portfolio now because they have to think in decades, right? The duration is 70 years plus where they think about the daytime horizon. That raises an interesting question about farm together and the the cohorts involved using the platform.

Starting point is 00:35:11 You know, it seems like it's a great resource for everybody, including pension funds. But, you know, when I'm a retail investor and I'm going on this platform to buy some farmland, am I going up against pension funds and the like who are outbidding out, you know, sweeping up these products? And yeah, well, how can I compete there? So you only compete with pension funds when you buy in really large properties. And that is the beauty of farmland market or farm together as well. So you mentioned that most land is owned by individuals.

Starting point is 00:35:41 So indeed, 98% of all land in US by acreage, by number of farms is owned by families. The market is very fragmented. Most farms are in less than $10 million in value, less than a few hundred acres. So what it means is that for large buyers, like pension funds, it is very hard to build anything that moves the needle for them. That's why we haven't seen actually a lot of those players in the space yet, because they will figure it out because the asset class is just that good. So for now, what I like about this is that in a way we're like front running, the institutional

Starting point is 00:36:13 market that will, it's coming in already in the space and will come where I think the whole farmland market actually in US will reprise to this diversified portfolio level, whereas right now it's being kind of, it's detached to the broader capital markets, which I think will benefit actually the farmers and landowners because it's really important coming back to risk volatility and uncertainty to price assets correctly that don't want to get into economic theory, but it really helps everyone when your assets are priced well, fairly transparent. 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

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Starting point is 00:40:07 Well, let's talk a little bit about that theory where, you know, I've heard you say that you can build a quote unquote pleasantly boring portfolio using farmland. But what are, you know, given that it's low risk, low return as you put it, where does it fit in a portfolio typically? Is it sort of like in that all-weather sense where you've got that 5% allocation to gold for the same reason? Are you kind of thinking about that or is it taking up, given that it is such a great asset class as you put it? Is it something that should be considered almost like an allocation you would put towards stocks? So portfolio construction in general is an evolving science where before we used to have this control, you listeners know, 60, 40 portfolio stocks and

Starting point is 00:40:47 bonds. And then at some point we started adding real estate. And we used to be like, oh, that's so exotic and risky of real estate in your portfolio. And now it's like everything, right? the emergence of alternative investing out going mainstream. You know, it's when you stop. I like to tell this joke is that the difference between like if alternative medicine worked, it just would be called medicine. So the alternative investments, one day will be called investments. So the, I would say to answer your question where farmland belongs in you, I cannot give investment by, so I'll just muse a little bit on that. There's elements of inflation-link bonds in farmland. There are elements of real estate. There are elements of timber,

Starting point is 00:41:23 elements of gold as well. And so Novin, kind of granddaddy of farmland investing, did research essentially modeling farmland performance against historical stock bond portfolio, measuring that sharp ratio, that performance and that portfolio with farmland added, did better than without farmland. And they, I believe we're using something like 5, 10 percent in their allocation. And we have this information on our website, so people can take a look. But I mean, yeah, I cannot really give investment advice on how much you should put because it's So depending on individuals, but I hope what I said can kind of help a listener think through their portfolio.

Starting point is 00:41:59 Absolutely. That comparison to real estate is super interesting. And with real estate, especially lately, the issue is that the prices are rising so fast and it's bringing those yields down. So in a high inflationary environment like that, let's say for real estate, are we seeing the same thing with farmland? Are the yields kind of coming down because the price of the land is going up so much? Yeah, yes.

Starting point is 00:42:23 What's the context of that? Are we at historic lows on yield versus farmland or how does it kind of compare to the past? Right now we're definitely, I would say, at the, yeah, the sort of on the lower range of yields. A lot of what we see is like 2%, 1.5. And so that's definitely kind of on the lower side. The yields have been going down quite a bit. So I think what we'll see is either all asset classes will kind of correct or kind of state

Starting point is 00:42:52 there but for prolonged period of time. But look, it's hard to predict the cycles. The thing to mention about farm is that you have two counter forces. You have the inflation that's pushing farm prices up, but then you have the interest rates going up which any long duration asset is going to fall on farmland. You can think of as a long duration bond, so it's more sensitive to interest rates. So it's kind of, it'll be interesting. It's actually, we haven't had this in 40 years.

Starting point is 00:43:15 Like the economist in me, I have a master's in economics, kind of more academic, is fascinated to see like what's going to happen with this inflation with interest rates. Like it's a fascinating time. That was my next question exactly is that the interest rates rising is what's that going to do? Is there an opportunity there? Once you own the farmland, what's the future this look like? Are there going to be derivatives based off of this kind of thing of these products? Are there secondary markets coming? What's the future of this look like? Yeah, absolutely. We like to say that farmland is 20 years behind real estate.

Starting point is 00:43:48 And if you see at this, look at this cornucopia of real estate products and offerings, I mean, you can sell, you'll be like, I'm selling a quarter share of my shower online. Like everything is so a fraction like financial life. And so Farland is moving in that direction in the sense that you will have a secondary market. You will have additional financial products. We're working on some stuff right there. It's sad to see that farmers have so few options to finance their business and think about their business from, you know, transitioning to organic. expanding succession planning. And there's nothing really out there in terms of financial products that real estate has. And so there's just a lot still missing there.

Starting point is 00:44:27 Going back to those individual owners and how few of them there are, it also is reminding me at the labor market. I mean, how many people are wanting to work on these farms? If you don't have workers, it's hard to have a farm, right? So is that a risk, in your opinion? Are we seeing a decline in the interest of farmland work? Yeah, absolutely risk. And that's why we need, I think, better, laws and more streamlined ways to bring in seasonal workers to US, although it's working pretty good as this, but that's a big one. And then automation mechanization of farms that's helping alleviate some of those issues. But also, I think the farmers we work with, they enjoy the lifestyle.

Starting point is 00:45:06 They actually make quite good money and they get to spend their time outdoors, having fun. They'll have dogs, they'll fish, they hunt. I mean, wherever we go see them, kind of like, want to stop staring at the screen and get out there. So there's a lot of that farming can offer. When you talked about that, that was reminding me of the state-by-state nature of the US, let's say. So for example, when you're looking at farmland, are any states more amenable, more welcoming to, are there more subsidies involved? Are there any particular benefits to one state over another when it comes to investing in farmland? In short, yes, but if you ask me to be more specific, you would have to spend an hour just on that.

Starting point is 00:45:45 I will say that in California, of course, you have the, I would say, does feel that it's less friendly to farming than it used to be. And I think sometimes for wrong reasons and misinformation. Of course, like Midwest states, you know, Illinois is a great farming state. One that I want to give a shout out to is Oregon. So it's a great state for hazelnuts, great water, great workforce close to transportation and to the coast. So that's a really great state in Washington as well. As climate change happens. You have the Columbia River, which is just abundant water for anything you want to do. And really, I know, the weather is starting to become more and more amenable to more crops and longer grown seasons. So when I go on to the Farm Together website and I'm looking around the platform

Starting point is 00:46:29 and a deal is offered, what else would I be assessing there to know this is one of the better deals that's coming on the platform versus something else? And what would be a bad deal than just, you know, a very low yield? Well, we don't put bad deals in a platform. So we, we really break it down into risk return spectrum. So we show that classification and we walk you through how we think about risk, why does it fall on the risk reward kind of spectrum we have? And so it is really, while we do offer individual deals, that's just the way it's working right now in the future, we'll have diversified portfolios. But the idea is that you would build a portfolio of many farms, where you would have the low yield farms, high yield farms, you'll have

Starting point is 00:47:10 your apples, you'll have your almonds, pistachios, so that you have that broad, you have that broad exposure to farmland. But then you can also play around with, hey, maybe you want the highest risk stuff only, right? You don't, you're like, you're young, you're risky, like a 7% return doesn't sound too good to you, even though it's low risk. So we have all kinds of investors, but most investors invest in more than one farm. Are there any commodities to avoid? Like, for example, I grew up in Indiana where it just seemed like the entire state was cornfields, and that's good, because there's a lot of supply. Corn seems to go into almost everything or a lot of things, right?

Starting point is 00:47:48 The sucrose especially, but does that bring the price down, right? Just because there's so much supply of it and so many people are doing it. Would that be a commodity that you want to maybe shy away from and focus more on something like hazelnuts or, you know, that's more a little bit more optimal? So we don't touch cannabis because of regulations. We don't touch dairy right now because there's so many headwinds and it's in a way not even land and then within the crops, I mean, there's certain varieties of apples that are kind of going out of business, but I can't really tell you which ones that are at top of my head.

Starting point is 00:48:22 The thing is like, not really. It's you have this fundamental issue of growing population, improving diets where everyone wants to eat like we do in US. And that is a huge lift, by the way. And then you have decreasing supply of farmland. So yeah, there might be specific varieties, maybe geographies that kind of, you know, on the going down. Yeah.

Starting point is 00:48:42 overall, I can't even think of something. Well, it's like, oh, no, don't, don't touch that because it's all food that we've been eating for thousands of years. Well, as you mentioned, you don't put a bad deal on the platform. I'm curious how many deals you're looking at in the ratio as to how many your vetting versus how many actually get put on the platform. Hundreds and hundreds versus one. It's really, we look at so many.

Starting point is 00:49:03 We have an internal AI engine. I mean, AI is still a bit of aspirational term, but like a fairly sophisticated tech system that allows us to continuously proactively as well as inbound, analyze, source a lot of farms. So we have a good sense of the market and do a rapid underwriting process that allows us to move much quicker or smarter on a particular opportunity. So yeah, it's hundreds. You mentioned everything's going to become financialized over time. And real estate, obviously, you can find reits for portfolios on real estate. I'm curious about farmland. Are there any ETFs that are just bunches of farmland put together?

Starting point is 00:49:38 There's just two reeds, FPI and Gladstone, thicker land, and FPI, that's the only two, I think. And what's the benefit or tradeoff between just owning an ETF of a bunch of farmland or going into one of these deals? Is it just that kind of diversification and even less volatility? Or what are some other factors playing there? Well, there's a number of factors. So one is you have no say on the properties in the portfolio. You need to really be very certain that the price that you buy in the stock is not too high because we just talked about how they can run up too quickly.

Starting point is 00:50:17 You have no say over leverage. And so we talk about farming being kind of safe and stable. There's one major way you could lose your money if you take on too much debt. And so what's the leverage on those farms as well as just seeing the how much the ability to add more farms to the asset base and being able to add good farms there? So you kind of, I think because of that diversification and liquidity, we feel at least that we can offer potentially a more custom solution for you where you're able to kind of choose and pick different farms.

Starting point is 00:50:50 There's also some other things. This is where I have to give the obligatory, I'm not a tax attorney, consult your own tax attorney, but the farms, because it's a pass-through vehicle and LLC that issues a K-1, you're able to offset losses in the early years that happened when you do development. should be able to offset them against your passive income 1K1. You get that additional benefit. It can be quite substantial, right? People pay up to 50% marginal tax rate that you don't get with the public stocks.

Starting point is 00:51:15 And then look, we're also not to be too self-serving, but we'd like to think we're really good at our job and we keep getting better and we keep using more and more technology. We're kind of the young and hungry, scrappy company. So you get that passion and drive from us as well. And look, we send also updates from every farm. It's kind of fun. get some videos, so there's that emotional aspect to it. That's fantastic. Going to the tax portion, I imagine there's not a lot of depreciation

Starting point is 00:51:43 with the farm versus something like even a piece of real estate. Is that a factor at all? Is the soil degrading over time? There are different factors around depreciation? So soil can degrade, absolutely, but land does not depreciate and IRS even says there's no land depreciation. If the IRS says it, then we get of course land and decrease in value and So it can get depleted in this, the kind of agronomical facts. But what I mean by depreciation is the following. When you plant trees, so trees do have any certain depreciation schedule. You also, when you put up trellis, you drill a well.

Starting point is 00:52:16 So there's a bunch of improvements that happen on the lens. So it's a fairly favorable treatment of those CAPEX expenses where a lot of them can get depreciated almost 100% year one. So you can get a very nice, very quick offset for your income when you invest into a farm like that. So for people being like very smart and sophisticated about the tax planning and strategies, that can be a very meaningful additional bump that public stock just will not provide to you. So when I'm investing on farm together, is there a minimum maximum going to investments? And is farm together investing alongside with its own vehicle? What does that look like?

Starting point is 00:52:53 Yes. So the minimum is typically 15,000. Farm together does not invest, but the principles. So the key execs do put our money in every deal. Look, it's not a lot per deal, but it's a lot to us because we still like to think of us as kind of, well, we are a early stage company, meaning that we're not paying ourselves much. We want to make sure that we deliver the value to investors first to our shareholders as well, oh yeah, we put money into every deal. So I've been enjoying it right now because I get this little coupons from farms I invested in and it's nice to have passive income, can I tell you. Are farms typically high dividend paying assets? Yeah, they pay every year.

Starting point is 00:53:32 That's fantastic. And then are you guys dueling these investments with any leverage behind it? What does that typically look like? We do for some farms, especially development and other farms, really improve returns at that additional kind of potential tax component and help us invest in larger farms that we couldn't otherwise. We are using less debt right now just because where the interest rates are, it's still being accretive on a lot of farms. So yeah, we probably won't see that for a while.

Starting point is 00:54:00 I think you're alluding to a secondary market coming down the road there, but I'm kind of curious about that because, say, for example, I go into this investment. With the secondary market, would I be at any kind of risk of a worse return? I mean, it's a secondary market, but my point, I guess, is the volatility there being so low is kind of, we talked about earlier about the illiquidity being a feature. So things start trading around a lot, discounts and nav come to mind, things like that. Are you at risk? for a worse performance, actually, if you get too busy with it. You could. Yeah. And we definitely want to introduce that the question of timing.

Starting point is 00:54:32 So we'll be very careful with it and intentional. And we'll be looking at what other markets exist that have that, but there's a lot of demand for it. And you could lose a bit of that buggy feature, as we said, of Farland being illiquid. It's almost like a psychological thing where you know you cannot sell. So a lot of losses happen with people. They sell at the bottom. They buy at the top from hold of the former or from fear or greed. So the, that illiquidity portion, I think can be nice. Like, it's almost not, you know, when you know, not that it's my kind of area. I know well, but in casinos, you can put yourself on like a no gamble list.

Starting point is 00:55:06 And so it's a little bit like this where like this markets, for example, I mean, so many of my friends that just get too nervous and they go, which is out. And then it just becomes like you're working for your investment, not your investment is working for you. And here, you know, like, yes, maybe it might be a little down record. There's nothing you can do. It's locked in for another eight, 10 years. Over a long period, things will be, okay, we believe. So I hear your concerns on the secondary market.

Starting point is 00:55:31 Very interesting. Well, Artem, this is super fascinating. Before I let you go, I definitely want to make sure you have a handoff to our audience where they can learn more about, Arm Together. Appreciate the time. Waiting for everyone at Farmtogether.com. It was really good to be here, Trey. Fantastic.

Starting point is 00:55:49 Well, I encourage everyone to check this out. I think this is such an amazing asset class, and you're doing such a service here to D.E. democratize it a bit more. And I really enjoyed it. I've been very impressed with the platform so so far. So thank you so much for coming on the show. And best of luck. And I'm excited to see where this goes. Thank you, Trey. All right, everybody, that's all we had for you this week. If you're loving the show, don't forget to follow us on your favorite podcast app. And if you'd be so kind, please leave us a review. It really helps the show. If you want to reach out directly, you can find me on Twitter at

Starting point is 00:56:16 Trey Lockerby. And don't forget to check out all of the amazing resources we've built for you at the investorspodcast.com. You can also simply Google TIP finance initiative pop right up. And with that, we'll see you again next time. 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. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. 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 - TIP477: Recession Proof Your Portfolio With Farmland w/ Artem Milinchuk

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