Carter Malloy (03:39):
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 news. You may have seen yesterday, Deutsche Bank came out with a big call and a really large concerning headliner around their concerns on inflation. 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.

Carter Malloy (04:15):
So in the US as an example, Farmland Trust, a nonprofit here in the US shows that we lose about three acres per minute of farmland. It’s a staggering amount that’s disappearing due to development and a number of other reasons. So supply is 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 demand 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.

Stig Brodersen (04:56):
I don’t want to catch you off guard here, Carter. So whenever you’re talking about the shrinking demand of Farmland, is that being replaced somewhere else? Is it so that it’s shrinking with three acres per minute in the States, but then it’s grown with five acres a minute, I don’t know, globally?

Carter Malloy (05:14):
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 US statistic, there’s just more data on US farmland is the reason I called that out, but that is a global phenomenon as well.

Stig Brodersen (05:39):
All right. So let’s talk about the business model for us as investors. As much as I understand the top-down thesis behind time and inflation, my first question is, I guess, not just for you, but for everyone we have on the show, and in anything, we talk about in terms of investing is, how do I get paid? So with farmland, just more to understand business model, could you talk to us through the cycle of the different cash flows?

Carter Malloy (06:02):
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 in two ways. Number one is the asset itself appreciating, so the land growing in value over time. Number two is the farmer pays rent. In the most simple version for row crops, and I’ll delineate row crops and permanent crops here in a moment, but in a 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, and this is about 40% of US land, is absentee-owned, meaning that it’s not the farmer that owns it.

Carter Malloy (06:41):
The landowner charges the farmer a simple rent, 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’s a very straightforward agreement, default rates and vacancy rates are extremely, extremely low, just exceptionally low across the industry. So it’s a very simple, straightforward relationship between the farmer and the landowner. So again, farmers paying rent, so you have a 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 as land has appreciated annually.

Carter Malloy (07:25):
So the underlying value that can compound underneath you, that being the land, 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 US, most investment portfolios tend to be majority row crop farmland, but then there is permanent cropland. 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, walnuts, pistachios, pecans, apples, pears, oranges, things that grow on trees.

Carter Malloy (08:00):
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, 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.

Carter Malloy (08:34):
You own the land, you own the trees. The trees take a couple of years, maybe five to get to full productivity. They’re baby trees, 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 of commodity, 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.

Carter Malloy (09:01):
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 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 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.

Carter Malloy (09:36):
For permanent crops, you are getting more cash and a little less appreciation, because while the land value 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, 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, a little less cash flow. Both have ended up over long periods of time, again, producing that 10, 11, 12% type of compounded annual return or average annual return to the investor over long periods of time.

Carter Malloy (10:19):
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 period 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.

Stig Brodersen (10:40):
Going back to what you said about the difference between row and permanent crops and the timing on the cashflows, let’s just, at least to make it simple for me, I’m sure the listeners follow this example much better than I do, is that’s your dividend payment, compared to like the capital gain on your stock. For lack of a better example, would it be something to be said about timing that compared to taxes? Because one would be taxed immediately, is that how it works? And then capital gains, you could push that as long-term capital gain, or how does that work?

Carter Malloy (11:10):
I’m not a tax advisor and this is not tax advice. For most people, it tends to work just like stocks, you’ve hit the nail on the head. Your dividends, with an LLC, it’s distributions, but same thing. The cash coming off tends to be taxed as ordinary income just as it is 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.

Stig Brodersen (11:37):
Interesting. To another point that you mentioned before about 10, 11%. As stock investors with the interest rate level we have right now, we can’t help but get a bit excited. The other thing is that I went to your website and there was one thing… well, there was a lot of interesting things, but there was this one thing where I was like, I really need to speak to Carter about this because it said that with these 10, I think 11.5%, that’s the number I’ve had 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 almost too good to be true. Can 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?

Carter Malloy (12:20):
That statement is true. The problem we have with farmland is that there is not a lot of data. Just by 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 NCREIF, N-C-R-E-I-F, or NCREIF 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 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 it 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.

Carter Malloy (13:06):
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. It tends to be pretty consistent performing over time. And that’s okay, the trade-off 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 it around the next year and sell it for double or some other astronomical gain. But 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.

Carter Malloy (13:44):
With farmland, we aim to be the opposite. It’s all about compounding over time, call it old school Buffet 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 in this,” at all. What we see it as is an interesting thing to add to portfolio or diversification.

Carter Malloy (14:16):
And there are some great white papers on this online, outside of our research. Some third-party validation put out by Nuveen, TIAA, Prudential. So, 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.

Stig Brodersen (14:35):
So we are talking about positive returns here, but there have been some years that performed significantly better than others. 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 ’09, there a big slide compared to 2008. I can’t 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?

Carter Malloy (15:04):
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 then you see that similar lower return period… 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 the last six to 12 months as commodity prices have had begun to rally again. So it does tend to move in those longer cycles.

Stig Brodersen (15:45):
So let’s talk a bit more about inflation. I can’t help but going back to that. With the numbers you see coming out right now, it just seems like it’s on everyone’s mind. The conversation that I hear among investors right now is that given the interest rate levels right now, of course, we also have fewer interest rate rising because of inflation. A lot of people are talking about let’s take on debt. Why wouldn’t we do that? Because right 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 AcreTrader, why is that?

Carter Malloy (16:22):
A big part that is just conservatism. I think that is one of the great appeals of the asset class, is that we said this a moment ago, 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 and I think frankly is maintained throughout the entire farmland system in the United States. 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 assets 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, then that LTV is 80 if you’ve got 80% debt.

Carter Malloy (17:07):
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 debt-averse, and I’ll describe that in a moment, but throughout the farming ecosystem, the loan devalues today something like 13 or 14% LTV throughout US farmland, it’s staggeringly low. And so very levered asset class. I think that is also good for the health of the asset class because in times of problems and 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.

Carter Malloy (17:57):
Now, back to AcreTrader 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 chase us or anything like that. And again, throughout the industry, it’s very uncommon that that occurs, but still, we want to be cautious. With permanent crops, whereas we discussed earlier, if you’re planting trees, the banks, 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.

Carter Malloy (18:37):
And even then though, the loan to 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.

Stig Brodersen (19:00):
I understand that. And speaking of that conservatism and that mindset, here on the podcast, we are heavily influenced by Warren Buffet 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, Stig, you have been talking for so long about all the inflation and all the other things that you’re so worried about.” But in this climate, 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 risks. So as investors in farmland, do we have any crop risks from, say a bad harvest, or is the rent fixed?

Carter Malloy (19:44):
For row crops that we discussed earlier, the rent is typically fixed. In some contracts, 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 who have 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 upfront. What that means is the farmer gives you the money before they put a seed in the ground. So if that farmer does not pay you, that tenant does not pay you and honor the contract, then you have the ability to go out and find another farmer before the season begins. I mentioned earlier that default rates tend to be fairly low, that’s why. Vacancy rates, low also. So occupancy, very, very high.

Carter Malloy (20:27):
And the reason is pretty straightforward. Most farmers want economies of scale. They already own the tractor and the equipment and 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 upfront in March, in some cases, in many cases, they pay the full rent in March, but in some cases, they may pay half upfront, they can still default in the back half. There’s a contract, they owe you the money, but that can happen.

Carter Malloy (21:04):
So that’s row crops where it’s fairly straightforward lease agreements and you look for good tenants that pay their 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 is 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.

Carter Malloy (21:35):
With row crop farmland here in Arkansas where I live, in 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, but you also need to be able to get the water off. Going up to Illinois and Iowa, some of the most amazing soils in the world actually, and they have water problems of too much water and the water stays on the farm, that’s also can be ruinous to a crop if your soybeans are staying underwater for two weeks, then we don’t have any more soybeans. And so making sure you get water off there.

Carter Malloy (22:11):
I’m giving a long-winded 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 cropland, land that is not irrigated. So think Nebraska and North Dakota, South Dakota, especially more of the central parts of those states, 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 are having to do rain dances, 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, that can be a negative for them and ultimately for the landowner and the value of the land.

Carter Malloy (22:49):
So the long-winded answer to, there are certainly risks in the world of row crop, but again, without running leverage, it’s not like we’re seeing row crop farmland go to zero. 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, probably 2012, 2014, crazy speculations, prices went up big. And after that, they had a subsequent five-year period where prices went down, the value of land went down something like 17%. But in the end of the investors, remember they were still getting a rent check from the farmer, so the investors nominally made a couple of points over the life of that investment.

Carter Malloy (23:30):
So when we speak to risk, especially in row crop, it’s seldom that you hear somebody getting wiped out, which is a real risk that you take in investing in a lot of other assets. So I want to make sure I contextualize that the risk here.

Stig Brodersen (23:43):
You definitely did that Carter. If I can try and then relate it back to stocks or in this case, real estate, I’m definitely not saying that I know a lot about real estate, even though that compared to my agricultural knowledge, it seems too much to me right now. But as a landlord, I don’t want bad tenants. I don’t want tennis who are messing up the place. That’s the last thing you want as a landlord. And I’m thinking if I have a tenant as a landowner, perhaps I don’t want them to grow potatoes because potatoes just suck all the nutrients out of the soil. Is that how it is? Or is it just outlined in the contract, this is what you can or can’t do?

Carter Malloy (24:24):
The contract certainly is there to protect you, and you specifically sounds like you do in a lot of that culture, is to 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 too 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 that the 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.

Carter Malloy (24:56):
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, 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.

Stig Brodersen (25:25):
That’s a great quote. Fantastic, because as you were saying, it produces something for you. That’s what it’s all about. Carter, shifting gears here a bit, as I understand it, whenever you invest with AcreTrader, 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 10th of an acre. So if you buy 100 shares, you own 10 acres. To me, it feels good. It feels like if I can relate to something else, it would be like 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, but for me as an investor, I would say, “Well, it’s good. I know I own this land in Nebraska, whatever that might be, but what happens if AcreTrader defaults?”

Stig Brodersen (26:16):
Because you are the person in your team securing all the practical details, managing the farmland. 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 farmland, but what’s going to happen without you and your team?

Carter Malloy (26:33):
In the unlikely event that me and our team are not here, then 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 a conservative by nature if you couldn’t tell from the conversation already. We plan to be here for a very, very long time. In the event that we are not here, so each LLC is governed as you mentioned a moment ago, LLC, so call it AcreTrader 150, it goes out and owns a piece of land, and the investors own that LLC. Our management company is a manager of that LLC, and that’s our relationship with the LLC. But we don’t own it, the investors do.

Carter Malloy (27:12):
And each of those LLCs are governed by a set of documents, it instruct what has to occur with that LLC and the outcomes that are sought. And there’s specific language in thereof if AcreTrader gets hit by a bus, what happens, to make sure those LLCs, there is continuity there, there is continued management of the land, their 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.

Stig Brodersen (27:43):
Let’s talk about disruption, and going back to Warren Buffet again, that was actually not the plan with the original outline that we discussed before, but now we’re talking about Buffet and we always want to use that as an excuse to talk more about him. So we have some hardcore Warren Buffet followers, including me and the other hosts here on the show. Warren Buffet 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 fasts forward to today and then showed that list of the 30 most valuable companies.

Stig Brodersen (28:20):
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. And so one of the things I really like about farmland as an asset class is that 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 and asset class, I just thought of, 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?

Carter Malloy (29:07):
You named the big one there, which is global warming. It is really affecting farmland today. It’s affecting farming regions and farming zones. 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 in Arizona, New Mexico, California, when it’s warmer outside and there’s less snowpack on the mountains, there’s 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.

Carter Malloy (29:39):
Likewise, in dry seasons, in 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, investing 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, will they be comfortable with that region is stable? And so that is an important consideration when we’re looking at farmland certainly. Beyond that, advances in technology, whether that is through seed genetics or biology, there’s really cool things happening there, or artificial intelligence and machine learning 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.

Carter Malloy (30:27):
Those are a good thing. We like improved yields, we like improved profit margins for the farmers. That’s a positive for our tenants, and so ultimately, should be positive for us as well.

Stig Brodersen (30:37):
I like that you said that. I don’t know if I’m too much of a value investor, I tend to be very pessimistic, because one way to look at those technological changes is that it’s good, we get better yield, but we’re not looking at 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 class A. I’m sure it’s called class A, this is from commercial real estate, I would say that. Forget about low cap rate, but 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.

Stig Brodersen (31:17):
And so a lot of that in Africa, they have all kinds of issues with like with fertilizers and even if they could afford it, they can’t get credit. I’m trying to reel myself back in here. 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?

Carter Malloy (31:36):
It’s limited. I think as a whole looks 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 is a big deal for agriculture.

Carter Malloy (32:07):
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, finite amount of supply of land they’re 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. And we really saw revolutions in this over the last 30 to 50 years, dramatic improvements in yield around seed genetics in particular and breeding and GMO to improve the amount that’s produced on a particular acre of land.

Carter Malloy (32:42):
That’s a good thing for that piece of land like you described, when you look at the entire asset class, does that hold it back because that’s effectively capping out your price? Over time, inflation would show you it’s not. And beyond that, again, those improvements we’ve seen our last 30, 50 years have slowed in terms of the yield per acre on certain commodities. It’s incrementally, harder and harder to squeeze out gains, is the best way to say that. There’s only physically so much you can actually grow on a square of land. And so those are material considerations.

Carter Malloy (33:13):
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.

Stig Brodersen (33:33):
Let’s say right now we are eight billion people on the planet, and let’s say that we’re going to grow to 16. Let’s not double the amount of food that needs to be produced. As richer you get, you eat more calories, but you also eat, say, for instance, you need meat from cattle and that has a six to one ratio. So you would need to feed that cattle with six times the amount of calories that goes out in the other end. So it’s not a one-to-one ratio. And I think, and you’ll probably know the exact numbers, with hogs is like three to one or something like catalyst at the very top, but regardless of what you’re looking at, it’s not a one-to-one basis.

Stig Brodersen (34:06):
So we’re looking a lot more production that needs to be called online. So the audience out there might be thinking, well, why is Stig so interested in the Farmland? He’s been running this podcast for what, seven years now and he never talked about farmland before. And so I already talked about inflation is one reason why I’m looking at it, Bill Gates is someone we follow closely, like his investment to Farmland, but the reason for it is actually a bit more anecdotal. I wanted to bring that and 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…

Stig Brodersen (34:43):
They had a reliable and long-term tenant, the landlord wanted to retire and his sons weren’t interested in taking all 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 there might be a motivated seller, which could also give me an interesting superior return. So in this specific case, the lender was looking for someone to take over and 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 all the places for that liquidity premium which could be farmland in North America.”

Stig Brodersen (35:29):
But also think that the smallest 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. [inaudible 00:35:43] talked about part of that, it’s a $3 trillion asset class in the US alone, nine trillion globally. Could you talk to us about the different players in the market, the market share? And if this story like my personal story, is it scalable for a motivated investor?

Carter Malloy (35:59):
To put a wrapper on that previous conversation, you mentioned the necessity of so much 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 beef junky in the afternoon 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 it’s something to certainly pay attention to. And I love those stats you were naming earlier.

Carter Malloy (36:35):
To hop into, is there enough of a market here and why aren’t we talking about farmland much? I think you’ve hit the nail on the head. It’s hard. For most people, it’s impossible. If you want to buy a piece of farmland, you got to go out to a county you’ve probably never heard of, meet with a broke you certainly never met, pop 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. It takes a few minutes to do it all electronically inside of our application to go invest in farmland.

Carter Malloy (37:14):
And you can put in $20,000 rather than $2 million. And then it’s passive after that. We take care of the investment, the management payments, facilitation of leasing, insurance, 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 passive. So first, 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. 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.

Carter Malloy (37:48):
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, but to contextualize that 30 billion, we’re talking about over $3 trillion asset class. So it’s still like 1%, those private equity funds. And then you have large individual holders, like you’d mentioned Bill Gates and certainly 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 within farming communities or by individual investors or people that have inherited that farmland.

Carter Malloy (38:29):
There is real active liquidity in the market, and that’s growing. So 50 to $100 billion trades hands over year. So as a company or as an industry of farmland investing, it does not seem that there is any discernible impact from the buying action within the industry, and take a really, really long time for that to matter, in our opinion.

Stig Brodersen (38:50):
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’s actually a very low volume. Warren Buffett would probably be proud because he would be like, “Yeah, you’re trading real businesses, so it should be low.” Coming from the stock market, it’s like, “Oh my God, that slow day.” Again, we have to compare this $3 trillion asset class. So of course, it’s not a one-to-one basis, but if we say the US global market cap for stocks over four trillion, it’s 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 AcreTrader.

Stig Brodersen (39:36):
Previously, we’ve talked multiple times with our friends at CrowdStreet, which is a commercial real estate platform, and we also twice call with Masterworks, which is an investing platform that allows investors to buy into fractional shares upward. 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 call to 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 net individuals and major companies of course too, in that industries.

Stig Brodersen (40:12):
But one of the things that I’ve learned from listening to the interview that my cohost Trey Lockerbie did with Masterworks is that the CEO said, “We are the biggest player in Upwork.” And I was like, “What? Well, I’ve never heard that?” Because they pooled 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 AcreTrader? So I’ve heard that you had close to $100 million from the management, please correct me if I’m wrong, in that ballpark. And I can’t help but think if AcreTrader 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.

Stig Brodersen (40:56):
So, keeping that in mind, and I know it’s going to be like a long-winded question, but also read on your website that you only invest in 1% of the land that you review, 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?

Carter Malloy (41:24):
Firm no today. I think if we were buying a few billion dollars of land a year, then that may be a consideration. 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 story, although I would imagine with that type of volume, we would likely be in other countries and other types of farmland rather than the strict guidelines we have today.

Stig Brodersen (42:07):
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 farmland through someone like you compared to actually being the landowner in Saskatchewan where 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 classes given everything we’ve talked about, and not just for our listeners, but also for me personally.

Stig Brodersen (42:42):
And a lot of those, the investing platforms that we talk about here in the show, but also because we argue as 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 AcreTrader? Because I would imagine that might be a legal thing, probably more than you guys can post, but also even you still have affluent US citizens who might be interested but might not qualify for being “credit investor.” So why is it so hard?

Carter Malloy (43:18):
A number of reasons, one is compliance. That’s the biggest one, and it’s something that we take incredibly seriously today. Today, we allow accredited US investors only on the website, and that is someone here in the US basically that is accredited. Accredited means you make two or $300,000 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 seven as a professional industry 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.

Carter Malloy (43:55):
We today do not for the simple reason of compliance, in that you have to be… That’s a whole another podcast talking about compliance, but something we are just ultra-risk averse on because we don’t want to put any investor’s capital in unnecessary risk, and we view that as an unnecessary risk for a lot of people involved. Now, we will be opening up to individual countries as we go forward. We do like speaking to those international investors, we can accommodate them if they’re making large investments, they want to acquire a whole farm as an example, 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,” then we can work with folks outside of the country.

Carter Malloy (44:32):
We love the conversation, we’d be happy to have it. And again, bring it to more international people, especially Denmark Stig, 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.

Stig Brodersen (44:49):
Right. But you’re putting in a lot of pressure on me, but it sounds like you need to buy the actual farm because I can’t just as accredited Danish master invest. That’s interesting because being in Denmark, I’m sure that all listeners would feel the same way like surrounded by farmland, but we don’t have the same critical mass as you in the US, we’re the size of Maryland. So we don’t have like a platform for Danish farmland where you can go in and invest for $200,000. It would be like, you have to come with your briefcase of money and be like, “Yeah, I’m going to buy the farm. By the way, I don’t have no clue how to do that.”

Stig Brodersen (45:24):
So for those reasons, and also because of language, a lot of people are looking to watch the US and they’re 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’ve shed some light on that. I’m sure there’s something that, or I know that’s something some of our listeners have been asking about.

Carter Malloy (45:43):
You said the word earlier, democratization. The idea is to open it up for everyone to have access. And so our goals are not just to be accredited US investors only by any means. And also, when you said I 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’s just not how we operate.

Stig Brodersen (46:07):
With that said, Carter, lay it on us because as we were rounding off the show here, we definitely would like to give you the opportunity to tell the audience where they can learn more about you, but perhaps as important or even more important, about AcreTrader?

Carter Malloy (46:20):
First, go to acretrader.com, there’s a wealth of information there. 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. Our farm team alone in the first quarter, to give you an example, had over 1,000 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.

Carter Malloy (47:08):
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 and advisors we have on board with us here, it’s just a great company. And we invite you to come get to know us, come to our website, spend some time, give us a call anytime, chat, email, however you prefer to communicate, we love speaking to people about this. This is what we do, farmland.

Stig Brodersen (47:40):
Wonderful. Carter, thank you so much for taking time out of your busy schedule to speak with me here today.

Carter Malloy (47:46):
Thank you, Stig.

Stig Brodersen (47:47):
All right, guys. Make sure to follow the We Study Billionaires Podcast on Spotify, Apple Podcasts, or wherever you listen to this. We’ll be back next week.

Outro (47:56):
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