In the United States there is a big disparity between the demand for organic food and the supply of organic farmland on which to grow it. Since 1990 demand for organic food in the US has grown at around 16.5% per annum, and organic produce now represents more than 4.5% of the marketplace. However only 0.7% of US farmland in certified as organic and that figure is only growing at 8.5% per annum.
One company that is well placed to capitalize on this mismatch of supply and demand is Farmland LP, a US private equity fund which acquires conventional farmland and converts it to organic farmland. Once the land has been certified as organic the company takes advantage of the 50 to 200% premium which is paid for organic produce.
Farmland LP manages over 2,000 acres of farmland, however it has plans to expand to over 6,000 acres.
When buying farmland the company takes a long-term view and uses twenty different criteria, which include examining climate models. As a result the land they currently own in Oregon and northern California has been unaffected by the recent US drought.
Farmland LP specializes in sustainable agriculture best practices, which typically involves reintroducing livestock such as sheep or cattle to the land. This not only generates more revenue per acre, it also helps fertilize the land and within 3 to 7 years the land is restored to its original, biologically fertile state.
The company’s business model is not just good from an environmental standpoint, it also makes sense financially. Academic studies have shown that if your time-horizon is five years or longer, then it is more profitable to convert to organic agriculture.
Around 40% of all US farmland is rented to farmers, and this is how Farmland LP generates it revenue. The company also has profit sharing agreements with some producers.
Farmland LP investors benefit from the long-term sustainable cash flow generated by productive farmland and the value added when the land gains organic certification. Historically farmland has not only provided a better return than the S&P 500, it has also proven to be less volatile.
In a recent interview with Chris Martenson, Craig Wichner, Managing Partner for Farmland LP, made the point that “gold is a great store of value but it doesn’t deliver any cash flow. Oil is a wonderful source of cash flow but it depletes over time”. Mr Wichner and his partner Jason Bradford, view an investment in farmland as being the best of both worlds, since it has “the durability of gold plus the cash flow” of an investment like oil.
For those with a long-term perspective, who are looking for a tangible asset that generates cash flow, Farmland LP is certainly worthy of consideration.
In 2010 social responsible ratings organization B Corp, awarded the company its highest rating.