Alternate View: The Podcast Guide for Alternative Investments
Why add alternative investments to your portfolio? How do private equity or private debt risks compare to stocks? "Alternate View" answers your key questions about alternative investing. Host Matt Andrulot and experienced fund managers break down alts, covering real estate, infrastructure, hedge funds, and more private investing categories. Gain clarity on this often misunderstood asset class, learn how they differ from public markets, explore the functions and risks of alternative assets, and explore their power for diversification. This is your essential resource for understanding alts.
Alternate View: The Podcast Guide for Alternative Investments
Growing Wealth In Farmland Investing | with John Goodreds from Nuveen | Episode 006 | 09-17-25
🌱 Farmland: The Next Frontier for Investors 🌱
In this episode of the Alternate View, host and Managing Director of Verdence/RIA+, Matt Andrulot sits down with John Goodreds, Managing Director at Nuveen Real Assets, to dig into one of the most overlooked investment opportunities: farmland.
From inflation protection to long-term growth potential, farmland offers unique diversification benefits that can help investors weather market cycles while tapping into a truly essential asset class.
00:00 – Welcome & Introduction with Nuveen’s John Goodreds
01:00 – What Is Investable Farmland? Explained for Investors
03:05 – Farmland as an Inflation Hedge & Diversifier
06:10 – Nuveen’s Strategy for Farmland Investing
10:15 – Market Trends Driving Farmland Investment Growth
15:20 – ESG, Sustainability & Global Food Demand in Agriculture
18:45 – Long-Term Outlook for Farmland as a Real Asset
22:00 – Key Takeaways on Farmland Investment Opportunities
Whether you’re curious about alternative investments, real assets, or building a more resilient portfolio, this conversation will give you the insights you need to understand why farmland belongs on your radar.
🎧 Listen to all episodes at http://AlternateView.FM
For more information on Verdence/RIA+ and the turnkey solutions for RIAs, Family Offices, and institutions, go to https://ria.plus/.
#FarmlandInvesting #AlternativeInvestments #Nuveen #PortfolioDiversification #RealAssets #InvestingPodcast #WealthManagement #LongTermGrowth #FinancialFreedom #InvestSmarter
Well, welcome to the Alternate View. Today, I'm really excited we get to talk a little bit about farmland. I have a fantastic guest with me today. John Goodreds is here from Nuveen Real Assets. He's a managing director. He's going to have a conversation with me about farmland investing, but first I think we should turn it over to John and John, give us a little background about yourself and what you do at Nuveen.
John Goodreds:Well, good morning, it's a pleasure to be here. So, as you said, I work on a real asset platform, which I've been doing since 2010, although I had joined the parent company prior to that and came up through an investing role. And, interestingly, with respect to farmland, I grew up in upstate New York and I didn't grow up on a farm, but it was a farming community so, for example, I could see a cornfield from my bedroom window. So I've had an appreciation of the asset class for a while, but really only started investing in it in about 2010.
Matt Andrulot:Excellent. Well, I'm fascinated with the farmland investments. Really exciting to have a conversation with you today and kind of dig into it a little bit more. Hopefully our listeners and viewers will get something out of this and learn a little bit more about farmland. I know farmland is an interesting topic Everyone eats food on a regular basis but from an investment perspective, I think it's a little bit more unique. I don't think there's as many people investing, especially on the I don't want to say retail side, but individuals per se relative to institutions, who have big, big, big big investors in farmland for quite some time. But I think I want to start with a little bit with the basics. You know what is farmland and what is investable farmland. I think we should start there and I can kind of ask you some things around that.
John Goodreds:Yeah, it's a great starting question. I would say that investable farmland is really any land that has the right soil and water types to grow agricultural crops to which you can get clear title which is applicable. There are some countries where you might want to avoid investing, because that's not always the case, and it's also important to distinguish if you're buying farmland whose highest and best use is just farmland or if there is perhaps a real estate development angle to it. Many investment managers just want the pure farmland and nothing else.
Matt Andrulot:Yeah, that's interesting, right, the crops relative to the farmland as the real estate as well, and we'll probably get into that a little bit more. But let's talk a little bit about the different types of crop types associated to farmland. I think that's kind of important to kind of give everyone an understanding of kind of what we're talking about when we talk about farmland itself.
John Goodreds:Yeah, it's an important distinction. The basic two categories would be annual crops, or sometimes called row crops, and these would be corn, wheat, rice, cotton, soybeans, things of that nature that you're planting and harvesting on an annual basis. And then there's another category called permanent crops, and I always a bit of an oversimplification, but think of things that grow on trees and vines, so these could be tree nuts, fruit, citrus table grapes, wine grapes, things of that nature.
Matt Andrulot:Yeah, and obviously those are two very different aspects of crops, right? And I think most people, just in general, when we say farmland like they think commodities, right, they think food, agriculture, those type of things. You know, as it relates to that, commodities have always had a distinction of being quite volatile from a market perspective and I think people associate themselves to that Like what's the, what would you say the difference between farmland investing, like we're discussing, relative to just like a pure commodities type of investment?
John Goodreds:Yeah, well, you hit a key word already, which is the volatility. There is a relationship, obviously, but farmland values and income streams tend to be substantially less volatile than commodities. It reflects really a longer term view on commodity demand and commodity prices. It's much less prone to things like speculation and use of leverage and things of that nature. In fact, I think a lot of investors start their farmland journey thinking about exposure to commodities versus perhaps public equities that have exposure to the farmland space versus owning the physical farmland.
Matt Andrulot:Yeah, I think that's a good distinction. I think you brought that up in terms of public versus private. I lean to the private side, obviously, as an alternate view person. Talk a little bit about the differences between that. I mean, you mentioned a little bit from an equity perspective and this is more of direct access to farms and the crops that they're necessarily producing. But can you go into a little bit more around that?
John Goodreds:Yeah, we always think about it as what role might farmland play in your portfolio? If you had a real need for liquidity, the public markets might be a good route for you. However, that brings other things like volatility and market sentiment that may not reflect the underlying value of farmland, so you may not get the same diversification benefit by investing in commodities or public equities that you could get by owning the physical farmland. Of course, farmland is less liquid, right, and that's a trade-off, although I think a lot of investors might be surprised. Farmland Of course farmland is less liquid, right, and that's a trade-off, although I think a lot of investors might be surprised. Farmland is perhaps more liquid than you might think. There is an active auction market out there and, generally speaking, you could probably sell your farmland in a, let's say, 90 to 180-day period with a professional sales process.
Matt Andrulot:Obviously, an individual who doesn't have any experience in farmland might be a tough situation or tough sell to be like go buy some farmland and harvest some crops and sell some crops. So obviously the liquidity and the know-how is quite important, I'm assuming. But as it relates to that, I mean, why would people want to invest in farmland? I'm sure there's some key attributes that help portfolios in general, but farmland is pretty interesting and it kind of is off the run, I would say, from an individual investor, as I mentioned before. But you find that a lot of institutional investors have been investing in farmland for quite a period of time, a long, lengthy period, and you can talk to that. Obviously you've been doing this for a while. But why are they investing in farmland? What are the benefits to them to invest in farmland?
John Goodreds:Well, you're right. Institutions have been investing in farmland for over 30 years and, generally speaking, there's two or three key attributes that they're looking for when they think about adding it to the portfolio, and that could be diversification. There's some great data that really shows the lack of correlation to public equities, to public fixed income and even to other types of alternative assets, including real estate. There's also an income component to owning farmland. We can get more into that. It depends a little bit on what your crop mix is in terms of what your income profile might look like. There's also high correlation to inflation and for that reason, a lot of people will think about farmland investing as a store of value, as a store of wealth. It's kind of like gold with a coupon. Sometimes people will say yeah right.
Matt Andrulot:So when things get kind of problematic in the economic environment, whether inflationary or even volatility, I feel like people revert back to assets like gold and farmland as a tangible asset that you know we all kind of need food, right Like that's something key to our livelihood, so obviously they can play a role there. I know you mentioned income to this, as well as the potential growth aspect of it. I mean, how does farmland generate a return for a potential investor? Is it all via income? Is there a growth component to that? Is there a difference between the two of those and how those are the way you can necessarily invest?
John Goodreds:It's an important question and the answer is most farmland will have both an income and an appreciation aspect to it, and the income depends a little bit on the operating strategy that's chosen. So, for example, if you're directly operating the farm and then selling the commodities, that's your income stream. However, a lot of investors will acquire the farmland and lease it to tenant farmers. There's a very active market for the family farmer in the United States and other key markets around the world to not only own some land but also to lease land, because it's relatively inexpensive to lease farmland relative to the cost of acquiring it. So they can often spread their fixed costs think tractors and combines and all kinds of things labor force and farm more land than they can afford to own. So there's an active rental market, which is another way, and that way it's a little bit like real estate, because you're almost acting like a landlord and getting your income stream through a lease payment. So that's part of it, and then the farmland would be expected to appreciate over time.
Matt Andrulot:And that lease payment is fixed. Does it float? How does that work? Obviously, most people can think of rents as a rent payment and things like that. But from an investment perspective, what do those look like?
John Goodreds:It varies a little bit, but certainly commonly it would be fixed for one season, typically with a meaningful portion paid in advance of the growing season. That's the most common, but from time to time you'll see what they call crop share, where some of the lease payment could be based on the production of the land and paid after the growing season.
Matt Andrulot:So you can kind of participate in the crop necessarily, or the commodity I mean, it's not the commodities that we typically think of in a synthetic structural perspective, but the actual physical commodity itself in terms of price and yield that is coming out of that particular farm. Is that pretty accurate?
John Goodreds:That's true. That is coming out of that particular farm. Is that pretty accurate? That's true. The good news is you could potentially participate in the upside if yields were high or if prices were high, but you also introduce more volatility because you participate on the downside as well.
Matt Andrulot:So I guess portfolio construction, as it relates to farmland, is quite important right, well said. In terms of how you build a portfolio of farmland. I'm assuming that there's. Is there a good mix to that? Do you think?
John Goodreds:Well, I think so. It really depends on investor preferences. But I would say this if we started our conversation talking about annual crops versus permanent crops and if you look back at data over, let's say, the last 30 years, you'll see that they don't always move in sync together. So if your goal is to add an asset with limited volatility, then having a mix of both row crops and permanent crops would smooth returns, both appreciation and income.
Matt Andrulot:And then obviously having some associated with leasing just the land out to the farmers relative to participating in the crop. Would that be?
John Goodreds:pretty accurate it is, and it's interesting as the industry has developed. There are different managers out there that prefer the pure leasing model. So they'll acquire the farmland, maybe make operating improvements and then find good partners that will rent the land from them so they'll have really no exposure to commodities. Others might introduce a mix where part of the land would be leased out, so that's a lower risk but lower return strategy. But the other part of the portfolio you would have the risk and the exposure to the yields and the prices.
Matt Andrulot:It's really on what you're looking to accomplish with the strategy itself, whether being purely real estate with the lease component of it, or taking on some of the commodity exposure risk with. I guess you could do all of it right, like you could go one way or the other or come up with some combination of the two to meet a certain return objective, I guess in risk and volatility measure.
John Goodreds:Yeah, that's right. And the nice thing about farmland is because there is data that goes back 30 plus years, you can really start to do some quantitative portfolio analysis to say what's the optimal mix between annual or row crop and permanent crop, between leasing and operating, and what do I really want to accomplish for my portfolio for my portfolio.
Matt Andrulot:Yeah, I mean, I'm assuming that everyone's going to ask or I ask these questions all the time but what are the risks of farmland? You would think that there's people here. Water, I think. I want to talk about water. We'll start with water first, because I think that's a big thing, but there's another variety of that. How important is water? Water rights, access to water as it relates to farmland, as an investor should look for when investing in a piece of farmland.
John Goodreds:So water is absolutely critical. In fact, sometimes we'll make the point that farmland is actually a very efficient way to invest in water. Buying good land with really good water rights can be critical, and it does depend on the type of crops you're growing and where you're located. So, as an example, if you're just growing annual crops, you would certainly want good access to water, and whether that's surface water, perhaps you're relying on rainfall or you have an aquifer underneath. But if you're growing permanent crops so let's think of almonds in California, for example Water is even another level more important, because those trees need water all year round, or at least they need more water than an annual crop right.
Matt Andrulot:Yeah, how do you mitigate some of those risks relative to water? I mean, some of that is controllable, I would say, and some isn't. I mean you're pulling water from a ground or you're relying on rain sources. As an investor, how do you try to mitigate those risks relative to water?
John Goodreds:Yeah, it's a very important question. So in areas where there's traditional water scarcity so let's just say California, and that's almost a misnomer there's actually more water available in California. It's just. I think you saw some headlines in recent years where perhaps the aquifers were overdrawn.
John Goodreds:But, to answer your question directly, many investors looking at California would want to have two water sources so they might have access to the aquifer underneath the land that they own, and there are regulations on how much water you can take out. And there are regulations on how much water you can take out. But you can generally, if you're doing your diligence correctly, really understand how much water is available to you from your aquifer and then you can supplement that with surface water. So this could be a nearby river or lake, for example. It could also be a series of state and federal canals that deliver water from Northern California down to the south. But you will want two water sources to guard against the water risk and then, combined with that, you would want a portfolio of farmland that spreads out the geographic risk. So you're spreading out the water risk.
Matt Andrulot:Exactly, and I'm assuming you jumped into that. I'll ask some other questions. But geographically I mean, obviously different areas produce different crop types better than other areas. You know, I believe you guys are more global in nature, so you know we're talking about not just here domestically, but overseas as well, in some other countries, benefits of geographical diversification relative to that as well as crop types. I mean I'm assuming that there's the more we can diversify, the better risk mitigation we can take on a particular portfolio across any asset class. So I'm assuming that farmland in particular is very much like that as well.
John Goodreds:I 100% agree. Yeah, diversification is very much your friend here. So just even within the US, there are different regions where annual crops, you know, you can easily point to six different geographic regions where the soil types, the water profiles, the temperatures, other risks such as, you know, hurricanes or tornadoes and hail which is a risk, or pests and diseases, or heat waves or freezes, those can all be agricultural risks that you can start to diversify with good geographic diversification. And then, beyond the United States, if you start looking at other developed countries, let's just take maybe Europe or Australia as two examples. Right, those are different weather patterns, different growing seasons because you know Australia, for example different hemisphere, different water risks, different access to different export markets and some insulation against trade and tariff wars, which is another risk in the ag sector. So again, the theme is exactly what you asked.
John Goodreds:It's diversification.
Matt Andrulot:Got it and obviously you mentioned a couple different things. With regards to the one you didn't mention was fire right? We've seen a lot of that, a lot of natural disasters taking place. With regards to that, what are some of the protections that are put in place relative to farmland as well as the crops? I'm going to ask it in the investment terms of what you can do as an investor from that. And then, how does that relate somewhat to the government as well? Obviously, crops are very important. We do have the Farm Act out there, so if you could talk a little bit about that and kind of some, I look at it as risk mitigation relative to that, but I believe that there's a couple different things that you can do from an investment perspective.
John Goodreds:Yeah, absolutely so. First, from portfolio construction, you want to think about the different regions where you're owning your farmland, because different regions will carry different degrees of fire risk. So, for example, you remember, back in 2020, there were a lot of fires in Northern California that impacted Napa and Sonoma counties. So wine grapes are a common agricultural commodity in many farmland portfolios. Just to be clear, this is sort of the boring part. This is the dirt and the vines growing the grapes. This is not the fancy wineries and brand names. In 2020, for example, you did have vineyards in Napa and Sonoma counties that had damage due to fires, but interestingly, it wasn't from the flames themselves, because typically there's a buffer zone between the edge of the farm and the start of the actual vines, and you can also turn on your irrigation to soak them and keep it at bay, but the risk can be through what they call smoke taint. Right, the grapes can absorb some of the smoke from the fires and that can degrade the value of the grape.
Matt Andrulot:Yeah, it's not as good wine, right, that's right. That's a supply-demand issue. It turns into, right, like the cost of our wine is going to be going up because there's not enough grapes producing future vintages, I guess, right.
John Goodreds:Well, so far. I mean, 2020 was a tough year and that did impact red wine grapes. Interestingly, the smoke is really absorbed in the skins and this is maybe just a quick aside story.
Matt Andrulot:I'd love to hear it.
John Goodreds:But what's interesting, when you're making the white wine, right, you're crushing the grape and you don't need the skin after the crush. So the white wine was basically unaffected. But the red wine right. When you crush a red grape, the juice is clear To get that nice red color that we think of, you take the skin and you soak it right, and it absorbs the tannins and the color. But if that skin is tainted with smoke, well then your crop is no good. So you have some further protection if you have white wine grapes and red wine grapes. What about insurance? Insurance is very important in the ag sector. You may know there's you referenced that there was a public-private partnership out there that's run by the USDA and a number of US insurance companies to provide US farmers with crop insurance. And this is, I think, if there's any issue out there that has bipartisan support, I think supporting US farmers might be at, or at least near, the top of the list, right.
Matt Andrulot:Yeah, yeah, I would agree. And what does that do for the farmers? How are they impacted? What's their risk associated to that? And I guess, in conjunction with that, that affects us as investors. So what do they get from that?
John Goodreds:Yeah, so, like any insurance policy, in exchange for a premium, there are coverages out there and this would cover a farmer for a wide variety of risks, and it could be late planting in the spring, or even conditions that were so adverse perhaps due to wet soil where you couldn't get in that you didn't plant your crop, or it could be you're just about at harvest and a hailstorm comes through and really degrades the crop. So it's meant to protect the farmer against a wide range of risk and to supplement or really replace, if needed, the income they would have had from the crop sales with insurance proceeds. So it's meant to be a safeguard for an essential sector in the US economy.
Matt Andrulot:So, from an investment perspective, that kind of gives us a floor to the impact of what could happen relative to let's call it, a weather event or some catastrophe that took place, I don't know earthquake, floods, droughts, whatever that could impact that. We as investors have some security relative to this insurance in partnership with the government. That kind of baselines us to some extent. Not that we're going to recoup all of our capital or principal relative to that, but it does provide some protection relative to it.
John Goodreds:It sounds like yeah absolutely relative to that, but it does provide some protection relative to it, it sounds like yeah, absolutely yeah.
Matt Andrulot:So a little bit more about just farmland in general. So obviously, farming has been in, you know, since the beginning of time, right? So we've had to produce food. Now we have institutional investors like Nuveen and TIA purchasing farmland from farmers. You know why would they want to sell farmlands to an institutional buyer?
John Goodreds:Well, it's a great question, and you can even broaden it to say why would they want to sell at all?
Matt Andrulot:True, yeah, I guess that's the first starter, like why are they looking to sell? I guess is the, you know what is it causing them to necessarily sell? And then take that to the next step of how it actually gets to.
John Goodreds:I know you mentioned auctions and is somewhere in the 58, 59-year-old range and I think what happens is there's a family conversation around the dinner table with the next generation saying look, in the next few years I'm thinking about retirement so this is the time to start planning.
John Goodreds:Do any of you want to move back to the family farm and take it over?
John Goodreds:And if the answer is yes, then now it's the second or third or fourth generation running that family farm.
John Goodreds:But farming isn't an easy business and if you have a family and you're established in an urban area or what have you, you may or may not want to move back to the family farm. So in those instances where the next generation doesn't want to take over the family farm, they start thinking about a sale price and you might want to sell to your neighbor. But if this is an asset that's been in your family for generations, you know this is your one time to sort of secure family wealth from the sale of that land. So you might want to cast a bit of a broader network in terms of your sale parties, and institutional investors can fill a very vital role in providing quick professional purchases and then also taking that farmland and leasing it back to other members in the farming community who might want to lease the land, because lease rates are actually very reasonable relative to, let's say, mortgage rates or the financial impact of coming up with the equity to buy the land.
Matt Andrulot:Yeah, and I guess that goes on to another question in terms of small versus large. I mean, can you be a small investor in farmland? Is it possible or does it help to provide scale as an institutional investor to maximize the ability to purchase and syndicate through a farming network to have people lease from you? Or is it easier to be small and nimble and kind of like pick off little pieces here and there?
John Goodreds:So what's interesting is? I think the answer is a little bit of both. There are very good managers out there that are small and nimble and on a regional basis might be quite good, but what you give up in that model is that sort of global diversification or at least, if you want to just invest in the US, that coast-to-coast, north-to-south diversification which I think is so important. So smaller managers can be nimble, larger managers can create arguably a more diversified portfolio, I think, reduce investor risks because of that diversification and there's certainly, I think, markets for both. We've seen, if you go back, even, I would say, 15 years, where we had just a handful really of managers in the farmland space, and today there are quite a few.
Matt Andrulot:Yeah, you think it's a benefit to be an owner and an operator, or just an operator, right? Like understanding the difference between you know you could just be a real estate guy buying farmland as a real estate component for lease purposes, but when you know how to operate the farm as well, you know the impacts that could necessarily take place there and add value to your farmers and to the folks that are leasing.
John Goodreds:Yeah, and different managers would give you a different answer on this. Of course, some feel that a pure leasing model is the best. That a pure leasing model is the best. Our analysis of the data suggests that having a mix of both yields the optimal risk-adjusted return.
Matt Andrulot:Well, if you want some upside and to keep pace with necessarily inflation, you would think that the commodity would provide that to you at some point over time.
John Goodreds:Yeah, agreed.
Matt Andrulot:It's like everything and I don't know everyone believes this, but supply and demand is a very key component to everything. You know the demand for things relative to the supply that's being produced out of those which goes into my kind of. My next question is I've read a lot of different things with regards to the availability of plannable crop lands shrinking pretty significantly. You know, obviously you would think that that has an impact on price to some extent, and then we have a demographic component that continues to get larger, so the need for food is going to increase Absolutely. We can talk about the variety of different crops and you know, and quality and things like that in a minute. But I just want to get your take on kind of what that as it relates to investing in farmland itself, like that supply-demand component relative to land versus demographic and supply that needs to be produced.
John Goodreds:Yeah, it's a great question because there are some real macro tailwinds behind the farming sector. So we talked one the demographics of the average age of the US farmer and, by the way, that's not dissimilar to the same challenge faced in other developed countries around the world Australia, japan, europe. Right, the average age of the farmer is getting older, so we think within the next decade there is likely to be a fair amount of farmland for sale and, by the way, institutional investors, at least in the US, still own a relatively small percent of US farmland. I've seen different studies, but let's say in the 2% to 3% range. But a couple of thoughts just on macro trends.
John Goodreds:So today there's about 8 billion people in the world and most projections have that going by 2050 to you know, nine, nine and a half, maybe even a little bit more. So if you think about it, that's another billion to a billion and a half people. Number one they have to live somewhere and there's all these associated services that they need, like roads and bridges and warehouses and things, and all of that takes land, often productive farmland being taken out of production. So there's a little bit less. But you also have now more mouths to feed, so the demand for food has increased. I've seen studies by the UN that, again using 2050 as sort of a benchmark out there, suggest food demand could increase by 50% or more by then. And then third, globally, as you have more people being lifted out of poverty, they want different types of foods, often proteins, including animal proteins, and that requires more grains as animal feed to produce the protein. So you've got all these strains increasing the demand for food and probably limiting the supply of farmland. Those are all pretty powerful tailwinds.
Matt Andrulot:Yeah, and obviously we have the demand from organic to you know, you're starting to see those type of pushes and people moving towards more of a vegan diet or something more plant-based to some extent, Obviously hopefully driving demand for, as an investor, driving demand for for those products that these farms are necessarily producing absolutely.
John Goodreds:In fact we really saw, if you go back, let's say, 10, 12 years, huge spike up in demand for plant proteins. So not just you know proteins, but plant proteins. And california has some unique microclimate advantages where they're very good at growing certain types of tree nuts, almonds and pistachios as two examples. And we saw the demand from emerging markets India, brazil, other areas in Asia really skyrocketing for more plant-based proteins. So you know experts, it's amazing how big both the almond and the pistachio sector in California has become over the last 12 years Very heavy export business.
Matt Andrulot:So progressing this down the line, how do we solve this? Is there a technology component relative to farming? I mean, I feel like we see solar and things like that coming onto farmlands to help supplement as well. You can plant stuff underneath it or it can move and do this and that, or wind or whatever other sustainable ways to generate power and things like that as we kind of move forward as a shrinking plannable surface, like what's being done, or at least what you guys see from a technology perspective, to try to improve what we're delivering.
John Goodreds:So I'll pick up on my earlier comment that farmland is an efficient way to invest in water. It's also an efficient way to invest in technology Because, if you think about it, when you step back and say, well, what drives the value of farmland? Well, like any other asset, it's ultimately well how much free cash flow is coming back to the owner of this asset right, and if technology can help either reduce costs or improve yields, or both, and it's improving the cash flow back to the farmland owner and it's improving the cash flow back to the farmland owner, that's an uplift in valuation. And just a few common examples of where we're seeing technology go you're seeing it in seeds. You know better seed technology, for example. Maybe it's more drought or heat resistant, or maybe it's more resistant to certain types of pests or diseases, so that's very important to certain types of pests or diseases, so that's very important.
John Goodreds:We're seeing things like fertilizers, like technology being applied to fertilizers and also pesticides. Also, on data management, it's amazing to see how this has been integrated into farm equipment. You have tractors and combines that are essentially linked to satellites and they can tell exactly where they are on the farm. They can tell which areas might need water or fertilizer or maybe that have weed growth and they can target that more effectively. It's environmentally more friendly because you're using less fuel in these tractors, and it's better time management, which means your expense load starts to go down. So we're seeing a huge amount of technological development coming into the farmland sector, which I think is another tailwind for farmland investors.
Matt Andrulot:Is that a necessity, you think, at this point in time, just given the fact that land is diminishing?
John Goodreds:I think absolutely. The world has some real challenges in front of it to not only feed the existing population but to provide for another billion plus mouths over the coming decades.
Matt Andrulot:So absolutely so. How does that translate into like an investment in farmland right From a valuation perspective? And I mean, do we expect what do we expect from that right? Like so, if we have shrinking farmland, a higher demand in crop needs and food production, like from a global perspective, does that help us as investors in farmland? Will that make farmland more valuable?
John Goodreds:It should. Yeah, it's a very powerful macro tailwind, as we discussed earlier, that should provide an uplift to the valuation. We think about farmland investing in sort of 10-year periods because there's a lot of forces in any given, let's say, two or three-year period that could affect the value of farmland. But when you think about a longer hold period and, interestingly, the data shows that returns in farmland are better over longer hold periods, so we think if you're looking at sort of a 10-year hold period, yeah, technology, water, they should all be powerful tailwinds behind valuation.
Matt Andrulot:So I know I'm a glass half full type of guy, but I have to ask, like, what are the risks relative to farmland, especially on the private side? Obviously, let's get rid of the illiquidity component of things. We understand that we can't sell it tomorrow. I mean there is some liquidity too, as you mentioned earlier on, mentioned earlier on. But what are some of the risks, like the general risks that you necessarily see with regards to farmland investing and how it relates to crops? If you know, we'll think that you know we're investing in somewhat both right, the lease component of it, as well as taking on some commodity risk relative to the crops. Where do you see, like, some of the major risks that come into play there?
John Goodreds:Yeah, well, let's you know, maybe one place to start, and this is sort of a broad jumping off point. But we can just talk about a little bit of what climate change impact has been on the farmland sector. And again, it depends a little bit on where you're farming. Right, if you're near the coasts in, let's say, the southern United States, you're more exposed to hurricane risk than inland, but that's not always true. I mean, think of what happened in North Carolina recently, how hard hit they were from a hurricane that just made its way further inland.
John Goodreds:Which circles back to one of our earlier points around the benefit of diversification. So that's critical. I mean we think about different regions in the US growing different types of crops, growing both annual crops, where if you lost an annual crop, that would be unfortunate but probably you have crop insurance and you can replant the next year. If you have permanent crops and let's say you had a huge hurricane come through and it destroyed vines or trees, well they might have to be ripped out, replaced. You'll have a three, five, seven-year growing cycle until they start producing at a commercially viable scale. So that's a bigger risk. So, again, sort of spreading your bets with a diversified portfolio is probably the best mitigation.
Matt Andrulot:Yeah, and do they? I mean we talk about farmland, it's a real estate asset. I mean, are they subject to the same things like interest rates and cap rate as regular real estate relative? I guess you know we have different asset classes within real estate and I consider farmland being one of those asset classes. Just went way down the line and more in that real asset type of side of things. But are they affected just as much as traditional real estate relative to the purchasing of that and where interest rates are? And I guess, secondarily to that leverage right, You're borrowing money, you potentially could be borrowing money to purchase this particular property. Is it the same sort of situation or are there different kind of nuances relative to farmland?
John Goodreds:It's a good question and there are important differences. So certainly, farmland does have cap rates. They tend to be less volatile than the real estate sector, just reflecting the fundamental nature of what farmland is growing. But we've seen areas where, to your point, we've seen cap rate compression and we've said, gee, the land in that region looks a little expensive. There are other regions and this is another benefit of size. If you specialize in one region and you think prices have gotten too expensive, you can say I'm going to hold off investing in this region, I'm going to focus on other regions. And we've experienced that. There have been core buying areas in the US where we felt the asset quality is very high, but so is the price. In fact it's a little too high right now. We're going to focus on other areas.
Matt Andrulot:And that's cyclical, would you say, up and down right. Or is it more secular, like longer term kind of, as it relates to price, or is it really driven by demand for the crop in that particular region?
John Goodreds:Yeah, I think probably the demand for the crop in that region is one of the bigger drivers.
John Goodreds:You know, a few years ago when corn and soybean prices were quite high, farmland values followed along and cap rates got compressed. We sat out in certain corn and soybean regions just sort of watching and saying I think there's going to be a better entry point if you have a long-term perspective on the asset class. But there are other regions and I would just let's say the Pacific Northwest or the Mississippi Delta or the Southeast where we felt the buying opportunities were a little bit more attractive. At the time Cap rates hadn't compressed to the same degree.
Matt Andrulot:Got it.
John Goodreds:And just one. I didn't answer your leverage question, but so there certainly is leverage available for farmland investors. The challenge starts to become if you look at the income component of your farmland and how does that rate, that expectation, compare to your mortgage rate, right, and if mortgage rates are, let's just say, 5% plus, but you have a portfolio where maybe your income component is 3%, 4%, 5%, it starts to get sort of tight. So there's different views on the use of leverage. Many managers don't use any leverage in their farmland portfolios.
Matt Andrulot:So you say it's fairly small for people to utilize leverage within farmland relative to, I would say, more commonplace and traditional real estate assets, whether it's commercial or residential.
John Goodreds:Yeah, I think that's probably true and again, different farmland managers have different views on it. But as a general comment, that yes that's right.
Matt Andrulot:Yeah, it's probably less levered for the most part. Yeah, just because of that. Yes, all right. So I guess, wrapping up as as we have folks listening and had no idea what farmland investing was, you know as you kind of like wrap it up as what would you say from you know the benefits associated to investing in farmland, why would an investor want to kind of take a look at that asset class, especially on the private side? I would say, like, as we talked about, a lot of different varying components, both positives and the risks associated to it. You know, at the end of the day, I think it's a very unique asset class. It's hard to access from an investor perspective but when you do, it has some really good long-term kind of objectives to that and really can meet as a piece of a portfolio. Maybe not the whole thing, but you know.
John Goodreds:Just for you to summarize kind of like what your thoughts are around that, yeah, and I'm happy to answer that question, and this comes from talking to a lot of investors over time and through different market cycles.
John Goodreds:I mean, not surprisingly after 2002, when correlations went to one and most fixed income portfolios performed, we'll say, below zero, just like equity portfolios, not surprisingly the spike in interest in farmland really, really went up. So we think about farmland as maybe this is a bit of an oversimplification, but it's more the protect the wealth investment than the create the wealth investment, because it's had low volatility, low correlation to traditional asset classes, higher correlation to inflation. So it's a good store of value. Farmland, depending on the portfolio you construct, will have an income yield to it and let's think typically sort of low to mid single digits, sometimes a little higher depending on your strategy, but then it's also got that long-term appreciation to it. A lot of times we'll ask an investor if you're thinking about farmland, where might you be taking your allocation from? And the most common answer we get is from fixed income. It's often viewed as a fixed income diversifier.
Matt Andrulot:Yeah, that's fantastic. Well, I want to thank you for taking the time today to talk about farmland. Super helpful, really appreciate it.
John Goodreds:My pleasure. Thanks for having me.
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