Trey Lockerbie (03:02):
Do you think that stuck with you later on when you were becoming more and more interested about agriculture and getting… You’ve been into some ventures that are based around the idea of getting food out to people. Do you think that comes from these early beginnings?

Artem Milinchuk (03:18):
Yeah, absolutely. I think the fundamental nature of food and land as it is connected to food is something that I’m really drawn to, especially the longer I live because you get this different waves and fats coming in and going, and we always feel we are inventing something new and then this time it’s different, but sometimes it is different most of the times it isn’t. And so I think it’s just been really nice in my professional career with FarmTogether to build it on something that is so fundamental to who we are as humans, we need to eat food. We have this habit so yah, absolutely.

Trey Lockerbie (03:56):
Well, that sounds like humble beginnings. You’ve gone on to have this incredible career and got your MBA and went to go work at one of the most prestigious and famous pension funds in Canada. Was that experience one of those where you were honing your craft of investing and did you just pick up some tips and tricks along the way? Did it have a material impact on you as an investor early on?

Artem Milinchuk (04:18):
Absolutely. I would say Ontario Teachers’ is probably one of the best investment organizations out there. They’ve been around for many, many years. Their returns are absolutely stellar, especially given the size there over 200 billion approaching that number. And so the way they think and work is so systematic because investing can be so emotional, so volatile. So how do you consistently generate, often generate good risk adjusted returns for the pensions, the retired teachers of the points of Ontario of Canada. And it requires a lot of skill, a lot of work. And so I was very fortunate to be in that organization for a few years and to soak it in from many different, great investors and people. I was fortunate to commentors, friends, colleagues.

Trey Lockerbie (05:03):
You actually got your career started off as an investor, and then went to become an entrepreneur which is always interesting, right? Because I don’t know, I feel like a lot of investors look at entrepreneurship it’s easy or something maybe, I don’t know, because maybe not. But I feel like when you’re sitting on one side of the table, you’re well, why aren’t you doing all these things? And as an entrepreneur, you’re like, because I’m doing a hundred other things. So when you flipped the script a little bit and went into be more of your own venture, what were some realizations you had maybe early on or as you went along?

Artem Milinchuk (05:34):
Definitely entrepreneurship is one of the hardest things you can do put it this way. And I was also that investor where I was looking from outside and going, well, that’s so easy. No, why don’t you do this? Well, you should just go this, isn’t it obvious. And then you start doing it. So yeah, it was definitely a big shift but I was able, I think for me, what was really fortunate is that our business is an investment business so I was able to still use a lot of my skills to make that transition to entrepreneurship a little bit easier.

Trey Lockerbie (06:05):
One of your first entrepreneurial efforts it appears to me was from full harvest, which is a really interesting business actually because it’s connecting businesses with farms in this effort to use imperfect produce, which is becoming a little bit more well known these days, that whole concept, just things that don’t look good on a shelf, but are still useful and they would otherwise go to waste and I find that model so interesting both economically and socially, what were some of the challenges involved in a business like that, and maybe some learnings that you then took on to FarmTogether?

Artem Milinchuk (06:38):
Yeah, absolutely. So I joined full harvest as its first employee CFO and operations guy right hand man to the founder in 2016. And it was just her and then me and then a few other people. The challenges are, when you’re trying to fix such huge problems, it’s food waste which is a huge problem when we waste a third of our food. And if we wasted just a quarter less, we could actually feed all the hungry people. I just keep coming back to a major, a bigger philosophical point that we do live in the world of abundance and it is the systems and us as people that make things scarce. There’s more than enough on God given earth for everyone. So full harvest is near dear to me and the company is doing incredibly well. And just for the listeners, there are businesses really take the imperfect produce that farms always have, because guess what nature doesn’t produce celery hearts in plastic bags of three though, you have to make them shelf ready.

Artem Milinchuk (07:34):
And while you do that, a lot of food gets wasted and so full harvest would connect the farms directly to buyers that don’t necessarily care if the food is picture perfect, those companies, for example, that process them and found out it’s a massive business. It was a three-sided marketplace, logistics, buyers and sellers. And through that experience, well, one, I was just able to see much more the farmland side of things because before that I was looking more at the investor side. So I was able to meet a lot of great farmers, go see farms and also understand the challenges that go into building two three-sided marketplaces, because FarmTogether in a way is a marketplace between investors and land owners, farmers. So marketplace is notoriously hard. They are something that are very hard to stand up, but once you do, then they also equally hard to displace because once the marketplace gets going, the flight gets going.

Artem Milinchuk (08:23):
And so yeah, the opportunities in the food system’s absolutely massive because they’re not that sexy. Not a lot of people look at them and so my investor had is I want to look where no one’s looking because everyone is looking at Apple stock at crypto so that should have sailed the way that in food like Trey if you lack five people and be like, what do about food investing, farm investing? No one will be able to tell you and yet it is so vital to our lives. It’s health, it is nutrition, it is food security as we’re learning right now from the conflict in Russia, Ukraine. So there’s a lot that is connected with food and food harvest really opened up my eyes to everything else beyond just the investment thesis that I had around farmland.

Trey Lockerbie (09:05):
Well, you’re thinking I would say Bill Gates and maybe even Warren Buffett are thinking right with buying up so much farmland, Gates by proxy through his foundation is largest single landowner I think in the country, which we should talk about a little bit.

Artem Milinchuk (09:18):
Yeah.

Trey Lockerbie (09:19):
But I’m curious this moat you mentioned, this defense ability let’s call it. It seems to play into the thesis here as well as the performance which I also want to cover. From what I’ve seen, and you can correct me with maybe more recent data, but farmland has been posting anal return of around 11.2% for a 25 year period that ended in March ’21. And that was compared to a 9.6% gain for the SP500 during the same time. So it’s also worth noting that the SP500s return is much more volatile. So I think is actually twice as much as farmland. So, you mix together the sharp ratio there, the yield and the defense ability and I’m like, well, this is classic Buffett, classic Gates, right? So is that the thesis here or are there other things that play into it?

Artem Milinchuk (10:07):
That’s absolutely part of the thesis farmland. I think most people don’t realize how good Iran has had in the last 20, 25 years. So the returns very solid. That’s true. They’re also less volatile in farmland, especially if you’re building a somewhat diversified portfolio. You can expect high single digits, maybe below double digits but you’re not investing for 10 X return, that’s not going to happen. But when we think about investing and when we think about how people go about meeting the goals, there’s other things that farmland provides as an investment product, because remember no one invests for the sake of investing. Everyone invests to meet a certain financial personal organizational goal. They have pay pensions, save for retirement, save for college, or they want more money, although that is the basic idea. And so with farmland, you also have something that is extremely [inaudible 00:11:00] in this days.

Artem Milinchuk (11:01):
It is a fantastic hedge against inflation, at least it has been historically. During periods of high inflation, farmland has performed very well, done better than gold equities. And that’s because by its very nature, farmland is something that is inherently very hard to create. In fact we’re losing farmland, we’ll talk a bit about that and it’s super basic. So when you think about inflation, it’s really, well, there’s now more paper to buy the same amount of goods. Well farmland’s not magically going to double triple and so it just has to move with inflation. Also hundreds of farmland products actually go into the CPI. That’s what we call food fuel fiber feed, right? It’s not just cereal. It’s a lot of other things that farms produce. So that’s a major factor. Seems like after inflation, we’re going into recession. Well guess what? Actually farmland has done quite well in periods of recession too.

Artem Milinchuk (11:46):
In 2007/8, it was up 20 plus percent when everything was down 50%. In the latest blipish crisis we had, the fastest crisis I’ve ever seen. Well, most people think everything COVID Q1 when everything was down majorly, farmland was also fairly flat and during the tech boom of 2000/2001, farmland was up when everything’s down. So that’s another big factor. And then the last one I want to mention for your listeners and just in general, there’s a big ESG component here. So when we talk about sustainability, regenerative agriculture, water scarcity as well as now more and more farmland actually becomes this optionality play with solar and wind, and there’s a lot of things that come into play where you go from being a farmland that wants to just extract the maximum possible field, which by the way, nothing is wrong with that, people have to eat, to someone that is more a steward of land where you have this additional responsibilities around carbon, around being good to the local ecosystem as well as the local communities. When we talk about land, the reason it’s so fascinating is because it’s so central just to our existence.

Trey Lockerbie (12:52):
Is that performance mixed with the volatility a result of illiquidity? And in this instance, is illiquidity more of a feature than a bug?

Artem Milinchuk (13:02):
Partially yes. So there are two publicly traded farmland stock, farmland partner in Blackstone. And indeed we see their stock be much more volatile versus the underlying asset and the farmland index, and even what we see in our work. So it’s a feature because it’s more liquid indeed, and it’s a buggy feature fuel because you have the stock not represented types, the underlying asset. And so you are able to enter into the underlying asset attractive price if the markets have been too panicky, but you also sometimes don’t have that ability or you can sell that stock when the price has run up too far. So just look, I think in general every asset will become more and more liquid because liquid is just us being able to trade in something. I see nothing wrong with that. I think more and more assets should be liquid.

Artem Milinchuk (13:54):
So as that happens, farmland will absolutely become more volatile. But Trey, if I can use this as a jumping point to talk about volatility as a proxy for risk, because when we talk volatility we think risk. And I think it’s funny because investing is very common sense when, you and I think about risk, I think how much money am I going to lose or did I get more than I put in? And then you get this Chicago PhDs and this brainy scientist that I know. I was one of them and they will have this insane models on computer and then say the same thing which is basically, am I going to lose money? So farmland’s I think white flat risky not because of volatility, there’s that, but because risk is a function of uncertainty. When you invest in something, to what extent is this uncertain?

Artem Milinchuk (14:40):
So volatility is really that uncertainty. And with land there’s been only two quarters when the index actually lost money. And when you think about it, you invest in a corn farm in Illinois. You fly over Illinois, it’s just farms, farms, farms. So there’s just of all thousands of them. You have really good sense of your price. It is unlikely that that farm will lose its inherent asset value because that means that people stop eating corn and soy and there’s suddenly fewer people and more land, and that’s just not a reasonable base case. So when we talk about farmland being less risky, it’s that the inherent value and ability to maintain that value long term is very, very clear. We’ve been farming for thousands of years, probably we’ll farm, I don’t know, until we’ll go to Mars or something or virtual, we’re going to keep farming. And so to me, when you’re investing in some crazy crypto coin, you have no idea what it’s going to be. In farmland you know exactly what it is, exactly what it’s going to be. So anyway that was a very… You got me very philosophical here.

Trey Lockerbie (15:41):
I love that. I appreciate that. Before we move on from Bill Gates and I mentioned he’s a largest farmland owner. He’s invested over $100 million. I think last time I checked, it was something like 200,000 acres, you’ll know better than I do, I’m sure. But give the audience a little bit of an idea of what the total addressable market though of farmland is in the US and how it compares to what Bill Gates owns and give them a sense of the market here.

Artem Milinchuk (16:05):
Well, first of all, I want to give a shout out to not only Bill Gates but to whoever outed him out because in the farmland investing space, it’s been a well known secret that Bill Gates is the largest farmland owner and then somehow it just became public and everyone knows this. It’s really been incredible in terms of generating interest at one fact. But Bill Gates I think owns something north of 200,000 acres, I believe 230, 40,000, which sounds a lot. And it is in the billions, not in the millions, but let’s let me just paint a picture how tiny it is. US has 900 million acres of farmland, so that 240,000 it’s 0.0 and then you just… It really is a rounding era. So the market is absolutely huge and that is broken down between what’s called pasture land. That’s where you graze your livestock, and crop land where you grow crops.

Trey Lockerbie (16:56):
Yeah. Let’s talk about that. What are the different types of farmland and which ones are the most optimal in terms of margin or ease of operation and a number of other factors, I’m sure that play into it.

Artem Milinchuk (17:07):
Yes. So those are the two major types, the pasture land and the crop land. Now within crop land, you have permanent crops, so this is crops that are permanent. So your trees, your apples, your citruses, and then you have what’s called raw crops or annual crops that you have to plant every year, so corn soybeans. It’s hard to say which one is better because it seems like, and which food is better? Well, they all play a different role. But broadly speaking in the raw crops you have lower risk, low return investment product that typically we target anywhere from six to seven, eight total return net fees, and that is something that is fairly stable, unlikely to lose money in the long term, unlikely to make a lot of money in the long term. We had investors compare raw crops to a mix of gold with a coupon or investment grade bonds, sometimes compare it to timber or real estate or inflation linked bonds because typically the rent and the land prices tend to move when inflation moves.

Trey Lockerbie (18:08):
I ask because I was researching here and it appears that APA culture, which I had never heard that term before, but it’s essentially beekeeping is one of the higher margin businesses, I think just because of the scarcity of it and the honey market which I haven’t looked into. And the margin thing is interesting to me because you see how Michael Burry went on to do a number of things after the GFC but one of them was investing I believe in water farms because California for example, there’s a lot of almond trees, almond farms, but you also hear that California doesn’t get a lot of water and almonds need a lot of water. So to me, I would just think subconsciously that’s a low margin business. Why get involved there? So what are some aspects around commodities and margin and where you should focus most of your energy when you’re an investor?

Artem Milinchuk (18:55):
Yes. And I think Michael Barry, obviously I haven’t seen his portfolio, but he should have done quite well with his portfolio since the great financial crisis. So the highest margin farms would be your TriNet farms and your fruit farms, namely apples, cherries and organic of course, but that is because again, you have more risk, more volatility. So let me use almonds maybe than apples as an example. So in almonds you have indeed more volatility in water. You have a fairly, like within the last few years, the markets can be quite volatile for the almonds themselves because it’s an expert product, California across most of the world’s almonds. And so because of that, you get higher returns, but it’s a very mechanized type of farm so you can do a lot with a few people and there’s continuously gained efficiencies in genetics in how you plant trees.

Artem Milinchuk (19:46):
So, you talk about some of the more recent almond varieties are self pollinating, meaning that you’re not as reliant on these. And with apples, you also have this interesting situation where you have different varieties coming out all the time. And if you can get on that variety and ride the train, then you actually can get some amazing margins. One of the farms we have, it’s projecting margins in some years is high as 40%. So it’s not going to be forever, but a few years where you get incredible returns. It’s not just the margins themselves in the point of time. We’re all lazy. We just want to invest and forget. So is it going deliver those margins consistently over many years? And yes, once you plan the trees and they get going and everything is set up, it is a money making machine. Some trees like pistachio they last for like, we don’t even know how long, 40, 50 years. So you have this plan to tree and then for generations, your portfolio, your kids will do well from having that investment.

Trey Lockerbie (20:41):
Now, 150 years ago, almost 70% of people were working on farms and by 2020, it’s gone down to 1.4%. So clearly a sign of technological advancements and higher standard of living, I imagine. But in contrast, the ownership of land, which still consists of individual owners has hardly changed. So I actually find some solace in that to be quite honest with you. I like the fact that individuals own farms. To me, it just I don’t know, I signify higher quality for whatever reason. A juxtapose to maybe Monsanto owning all the farmland in the US or some corporation. I find it interesting but what does that do to the supply side if there’s all these individuals? Is there less selling going on, which is then upping the value of this land?

Artem Milinchuk (21:28):
There’s actually more selling going on because a lot of the farm owners in US approaching 60, a lot of them in the 70s, 80s, and as they retired, kids don’t want to farm. So you get this consolidation and turnover of farms as you move land through generations. First of all, you just get more and more heirs and then you get into somebody who listens. We’ve seen succession, you get the same fighting for who gets to keep the farm and what to do with it between a lot of different people and it can be a mess and a lot of fun as well. So now there’s more turnover happening because of that transitioning in how we live the rural and urban divide and split. So the estimate is that about 70% or more of land in US will change hands in the next 20 years.

Trey Lockerbie (22:17):
Going back to California needing a lot of water and that being an issue with droughts and everything climate related, you’re in Portland, there’s a lot of farmland up there but it was the hottest year on record recently or hottest area of the US at one point in the recent past. How much do the climate related factors play into your investing thesis when you’re assessing a farmland?

Artem Milinchuk (22:37):
Yeah. You have to think about climate when assessing farmland and so you look at high level where we will model additional water needs and water operating because of hotter surface. We look at things like chill hours where almonds, they require certain number of cool weather but not too cool. That’s why California’s so unique, very specific climate. So that changes, you have to move up further up north. You have things like historical things happening. Colorado river I think for the first time had to curtail its water allocations down the river which I don’t believe ever happened. I mean Trey it’s such a huge question that hard to answer it, give it proper time here, but in short absolutely we pay attention to it and it’s a lot of fun, it’s very interesting and it’s very specific to different regions and crops and there’s opportunities and challenges there.

Trey Lockerbie (23:29):
You mentioned succession. There’s another show called Yellowstone which I’ve been saying is the succession just put in Montana, and the idea is there’s this farm being passed down by generations and they don’t want to give it up, but there’s all these people trying to make developments on it and take it away from them. So I imagine that’s a very real problem, and I read that over the last 20 years, more than 11 million acres of US farmland were also lost to development. So is there a certain rate of decline or I guess, rate of supply happening that’s also a factor here?

Artem Milinchuk (24:00):
Yeah. And I think it’s even accelerating if I’m not mistaken, because if you look in the last five years I think… But yeah, it’s urban development, it’s climate change, it’s kids not wanting to farm as much. All of those factors come into play. It’s also on the flip side, we do have increasing efficiency of plan we use, so we are getting better and better there and that plays a role.

Trey Lockerbie (24:23):
What about things like Kimbal Musk, Elon’s brother investing in square roots where they’re creating containers and growing crops and containers that could just stack up high in New York city for example. Is this a real risk in your opinion at this point? Is it too far into the future? Would it help in any way? Would it disrupt in any way? Any general thoughts on that?

Artem Milinchuk (24:44):
Yeah, I get this asked a lot and more broadly about vertical agriculture and I think it has its place for certain uses. For example, for leafy greens, for herbs, where it’s a high value product with a small footprint or where you need to be near a big city where the freshness of it and the transportation cost can take a toll versus being able to go somewhere right in Manhattan and get your lettuce growing on the empire state building, I don’t know. There’s definitely some benefit there, but it only plays a role in at margins because at the end of the day, I always like to come back to fundamental. So when you talk about farmland, you’re talking really about free water that falls from the sky.

Artem Milinchuk (25:22):
Because a lot of farms in US actually rain irrigated, free energy coming from the sun versus having to put the right light in place. Increasingly with regenerative agriculture it’s also the vibrancy of the soil and the additional benefits that you’re giving back to the ecosystem and just economies of scale being able to drive that tractor through huge field and make it much cheaper. So it’s just physically hard. We’re talking about Elon Musk and all the Musks and thinking about first principles. There’s just too much from basic physics that I don’t think will in the near term at least make that container growth or vertical farming a threat to the more land based farming.

Trey Lockerbie (26:04):
People like to shorthand think about that stuff where it’s like, oh, this is just going to take over. But when you go back to your point about there being 900 million acres of farmland, that’s quite a feat to disrupt. So going back to Buffett here, he’s frequently used farmland to illustrate a simple business and he even refers to the different business silos at Berkshire Hathaway as his orchards. Are farms really as simple as Buffett would suggest as a business or is it more complicated than we think?

Artem Milinchuk (26:34):
Yes and no. So on the one hand for us who FarmTogether, one of our investment products is a raw crop farm where we buy it, we rent it out to someone, they pay us a fixed fee. And by the way, it’s very common. So 40% of land in US is rented and mostly it is between individuals. And then we maybe get a function of a crop revenue share or a price appreciation share. So it’s very, very simple for us. We pay I think only a few payments a year. We get our check. We know the farmers, typically they’re multi-generations and so it’s that simple for us. Now for them, it’s probably quite complicated. And then when you go into permanent crops where you have trees and you have to take care of the trees and you have to water them right, you have to make sure that you have the right pest control protocol in place.

Artem Milinchuk (27:19):
I don’t know. I would say it’s as difficult as any other business. And a lot of other businesses weather doesn’t play a role where here it’ll be like, oh, I want to do something today. No, you have to actually go to the farm and switch on the sprinklers and cover the trees because we have unusually cold weather, things like that. So there’s more and more technology coming in that is making things easier to predict to manage. And so I think farms will definitely get simpler, but yeah, I don’t know if I would go as far as to say that it’s a simple.

Trey Lockerbie (27:48):
Well, similar to Buffett who typically likes to stick to the US when he’s investing, you often focus on US farmland, but some of the best produce comes from Europe and say Italy or volcanic regions, south America even. Why just stick to the US?

Artem Milinchuk (28:04):
Well, this is where we start thinking about farmland as an investment product. And so when we think about it that way we use the real estate labs quite a bit and the analogy of real estate. And by the way farmland, if you think of it as real estate is the third largest real estate market. So we have multifamily, sorry, single family housing in the US, which tens of trillions is just divorce, everything else in the world. You have multi-family housing about three trillion and then farmland also three trillion. So it’s a huge real estate market. So the reason for that is, and when you invest in real estate means you cannot move it, so you’re at the total mercy of the country, of its laws, of its infrastructure, its labor, and US is just absolutely a beast in that regard despite the issues we have with infrastructure, still a killer infrastructure with great ports and railroads. Coming back to Buffett, Buffett also likes railroads.

Artem Milinchuk (28:54):
And we have Mississippi really is just a wonder. The transportation is so cheap. The way it’s responsible for US is what it is today. You have extremely productive workforce and farmers that are very innovative. You have the rule of law, right? No one can take that farm away so that’s super important because yes, Latin America, you’re absolutely right, a lot of great countries there. Great farms. Do we feel as safe about the laws and regulations there long term? Because this is a long term investments. The only other country that I think, two countries that we are looking at in terms of that think gives similar level of safety is Canada and Australia, because we are talking about this is a safe investment, safer caller investment product. Nothing is safe, it’s an investment but farmland is on that low risk, low return spectrum and so we want to play it as such. We don’t want to make it Bitcoin. We want to make it the boring thing you invest and forget and US is the best for that.

Trey Lockerbie (29:47):
Speaking of Bitcoin, it reminds me of gold. I saw this chart today actually showing that commodities have outpaced gold in this high inflation environment by double. I just found that so surprising. That’s more about gold I think than anything else, but it shows you how farmland can keep up a lot I imagine with inflation just because of the increase in pricing of the commodities it’s producing. But sticking with Buffett there for a minute, he likes to buy and hold forever typically. What is the typical duration when you’re investing in farmland? Is it buy and hold or when you’re investing, let’s just say in a product offered by FarmTogether, are there end dates to those investments?

Artem Milinchuk (30:25):
Yes, we would like to hold forever as well and actually we do have a fund that is an open-ended fund where we want to hold the land forever, but most deals a 10 year hold, and that’s just a compromise between finding the right level for our investors. But yeah, farmland is absolutely a great investment. So in fact, my Alma mater Ontario Teachers’ Pension Plan has quite a sizable farming portfolio now because they have to think in decades, duration is 70 years plus where they think about the daytime horizon.

Trey Lockerbie (30:56):
That raises an interesting question about FarmTogether and the cohorts involved using the platform. It seems like it’s a great resource for everybody including pension funds, but when I’m a retail investor and I’m going on this platform to buy some farmland, am I going up against pension funds and the like who are outbidding, sweeping up these products and how can I compete there?

Artem Milinchuk (31:18):
So you only compete with pension funds when you buy real large properties and that is the beauty of farmland market of FarmTogether as well. So you mentioned that most land is owned by individuals. So indeed 98% of all land in the US by acres, by number of farms is owned by families. The market is very fragmented. Most farms are less than 10 million in value, less than a few hundred acres. So what it means is that for large buyers like pension funds, it is very hard to build anything that moves the needle for them. That’s why we haven’t seen actually a lot of those players in the space yet because they will figure it out because the asset class is just that good.

Artem Milinchuk (31:56):
So for now, what I like about this is that in a way we’re front running the institutional market that will is coming in already in the space and will come where I think the whole farmland market actually in the US will reprise to this diversified portfolio level where right now it’s detached to the broad capital markets, which I think will benefit actually the farmers and landowners because it’s really important coming back to risk volatility and certainty to price assets correctly that don’t want to get into economic theory but it really helps everyone when your assets are priced well, fairly, transparently.

Trey Lockerbie (32:34):
Well, let’s talk a little bit about that theory where I’ve heard you say that you can build a “pleasantly boring” portfolio using farmland, but what are… Given that it’s low risk, low return as you put it, where does it fit in a portfolio typically? Is it in that all weather sense where you’ve got that five percent allocation to gold for the same reason? Are you thinking about that or is it taking up… Given that it is such a great asset class as you put it, is it something that should be considered almost like an allocation you would put towards stocks?

Artem Milinchuk (33:05):
So portfolio construction in general is an evolving science where before we used to have this control listeners, now 60/40 portfolio stocks and bonds. And then at some point we started adding real estate and we used to be like, oh, that’s so exotic and risky having real estate in your portfolio. And now it’s everything, right? The emergence of alternative investing, I was going mainstream. I like to tell this joke is that the difference between, if alternative medicine work, it just would be called medicine. So the alternative investments one day will generally be called investments. So I would say to answer your question where farmland belongs in New York, I cannot give investment advice. I’ll just muse a little bit on that. There’s elements of inflation link bonds in farmland. There are elements of real estate. There are elements of timber, elements of gold as well.

Artem Milinchuk (33:52):
And so the [inaudible 00:33:53] granddad of farmland investing did a research, potentially modeling farmland performance against historical stock point portfolio measuring that sharp ratio, that performance and that portfolio with farmland added did better than without farmland. And they I believe were using something five, 10% in the allocation. And we have this information on our website so people can take a look, but yeah, I cannot really give investment advice on how much you should put because it’s so dependent on individuals. But I hope what I said can help a listener think through their portfolio.

Trey Lockerbie (34:26):
Absolutely. That comparison to real estate is super interesting. And with real estate, especially lately, the issue is that the prices are rising so fast and it’s bringing those yields down. So in a high inflationary environment like that say for real estate, are we seeing the same thing with farmland? Are the yields coming down because the price of the land is going up so much?

Artem Milinchuk (34:50):
Yes.

Trey Lockerbie (34:51):
What’s the context of that? Are we at historic lows on yield versus farmland or how does it compare to the past?

Artem Milinchuk (34:58):
Right now we’re definitely I would say at the sort on the lower range of yields, a lot of what we see is two percent, one and a half and so that’s definitely on the lower side. The yields have been going down quite a bit so I think what we’ll see is either all asset classes will correct or stay there but for prolonged period of time. Look, it’s hard to predict the cycles. The thing to mention about farmland is that you have two counter forces, you have the inflation that’s pushing farm prices up, but then you have the interest rates going up, which any long duration asset is going to fall on farmland you can think of is a long duration bond. So it’s more sensitive to interest rates. So it’ll be interesting. It’s actually, we haven’t had this in 40 years. The economist in me, I have a master’s in economics more academic, is fascinated to see what’s going to happen with this inflation with interest rates. It’s a fascinating time.

Trey Lockerbie (35:53):
That was my next question exactly, is the interest rates rising is what’s that going to do? Is there an opportunity there? Once you own the farmland, what’s the future of this look like? Are there going to be derivatives based off of this thing of these products? Are there secondary markets coming? What’s the future of this look like?

Artem Milinchuk (36:10):
Yeah, absolutely. We like to say that farmland is 20 years behind real estate. And if you look at this cornucopia of real estate products and offerings, you’ll be like, I’m selling a quarter share of my shower online. Everything is so a fraction like, financial like. And so farmland is moving in that direction in the sense that you will have a secondary mark, you will have additional financial products. We are working on some stuff right there. It’s sad to see that farmers have so few options to finance their business and think about their business from transitioning to organic expanding succession planning. And there’s nothing really out there in terms of financial products that real estate has and so there’s just a lot still missing there.

Trey Lockerbie (36:54):
Going back to those individual owners and how few of them there are also is reminding me of the labor market. How many people are wanting to work on these farms? If you don’t have workers, it’s hard to have a farm, right? So is that a risk in your opinion? Are we seeing a decline in the interests of farmland work?

Artem Milinchuk (37:11):
Yeah, absolutely risk and that’s why we need I think better laws and more streamlined ways to bring in seasonal workers to US although it’s working pretty good as this, but that’s a big one. And then automation, mechanization of farms, that’s helping alleviate some of those issues. But also I think the farmers we work with, they enjoy the lifestyle. They actually make quite good money and they get to spend their time outdoors having fun. They’ll have dogs, they’ll fish, they hunt. Whenever we go see them, kind of like when we stop staring at the screen and get out there. So there’s a lot that farming can offer.

Trey Lockerbie (37:49):
When you talked about that, that was reminding me of the state by state nature of the US let’s say. So for example, when you’re looking at farmland, are any states more amenable, more welcoming to, are there more subsidies involved? Are there any particular benefits to one state over another when it comes to investing in farmland?

Artem Milinchuk (38:07):
In short yes. But if you asked me to be more specific, you would have to spend an hour just on that. I will say that in California of course you have the, I would say, does feel that it’s less friendly to farming than it used to be. And I think sometimes for wrong reasons and misinformation, of course like Midwest state, Illinois is a great farming state. One that I want to give a shout out to is Oregon. So it’s a great state for hazelnuts, great water, great workforce, close to transportation and to the coast. So that’s a really great thing in Washington as well as climate change happens, you have the Columbia river which is just abundant water for anything you want to do. And really the weather is starting to become more and more amenable to more crops and longer growing seasons.

Trey Lockerbie (38:53):
So when I go onto the FarmTogether website and I’m looking around the platform and a deal is offered, what else would I be assessing there to note this is one of the better deals that’s coming on the platform versus something else, and what would be a bad deal other than just a very low yield?

Artem Milinchuk (39:08):
Well, we don’t put bad deals on our platform. So we really break it down into risk return spectrum. So we show that classification and we walk you through how we think about risk, where does it fall on the risk reward spectrum we have. And so it is really, while we do offer individual deals, that’s just the way it’s working right now. In the future we’ll have diversified portfolios. But the idea is that I know you would build a portfolio of many farms where you would have the low yield farms, high yield farms, you’ll have your apples, you’ll have the almonds, pistachio so that you have that broad exposure to farmland. But then you can also play around with, hey, maybe you want the highest risk stuff only. You don’t feel like you’re young. You’re risky. Seven percent return doesn’t sound too good to you even though it’s low risk. So we have all kinds of investors, but most investors invest in more than one farm.

Trey Lockerbie (40:00):
Are there any commodities to avoid? For example, I grew up in Indiana where it just seemed like the entire state was corn fields and that’s good because there’s a lot of supply, corn seems to go into almost everything or a lot of things, the sucrose, especially, but does that bring the price down just because there’s so much supply of it. And so many people are doing it. Would that be a commodity that you want to maybe shy away from and focus more on something like hazel nuts or that’s a little bit more optimal.

Artem Milinchuk (40:31):
Let’s see. So we don’t touch cannabis just because of regulations. We don’t touch dairy right now because there’s so many headwinds and its in a way not even land. And then within the crops… The certain bread is to apples that are going out of business but I can’t really tell you which ones those are top of my head. The thing is not really it’s you have this fundamental issue, growing population, improving diets where everyone wants to eat like we do in US, and that is a huge lift by the way. And then you have decrease in supply of farmland. So yeah, there might be specific varieties, maybe geographies that on the going down. Yeah, overall I can’t even think of something like, oh no, don’t touch that because it’s all food that we’ve been eating for thousands of years.

Trey Lockerbie (41:16):
Well, as you mentioned, you don’t put a bad deal on the platform. I’m curious how many deals you’re looking at and the ratio as to how many you’re vetting versus how many actually get put on the platform.

Artem Milinchuk (41:26):
Hundreds and hundreds versus one. We look at so many. We have an internal AI engine when AI is still a bit of aspirational term, but a fairly sophisticated tech system that allows us to continuously proactively as well as inbound analyze towards a lot of farms so we have a good sense of the market and do a rapid underwriting process that allows us to move much quicker or smarter on a particular opportunity. So yeah, it’s hundreds.

Trey Lockerbie (41:52):
You mentioned everything’s going to become financialized over time and real estate obviously you can find REITs for portfolios on real estate. I’m curious about farmland, are there any ETFs that are just bunches of farmland put together?

Artem Milinchuk (42:06):
There’s just two REITs, FPI and Gladstone land and FPI, that’s the only two I think.

Trey Lockerbie (42:14):
And what’s the benefit or trade off between just owning an ETF of a bunch of farmland or going into one of these deals? Is it just that diversification and less volatility or what are some other factors playing there?

Artem Milinchuk (42:29):
Well, there’s a number of factors. So one is you have no say on the properties in the portfolio. You need to really be very certain that the price that you buy in the stock as is not too high because we just talked about how they can run up too quickly. You have no say over leverage, and so we talk about farming being safe and stable where there’s one way where you could lose your money if you take on too much debt. And so what’s the leverage on those farms as well as just seeing how much the ability to add more farms to the asset base and being able to add good farms there. So I think because of that diversification and liquidity, we feel at least that we can offer potentially a more custom solution for you where you’re able to choose and pick different farms.

Artem Milinchuk (43:16):
There’s also some other things. This is where I have to give the obligatory. I’m not a tax attorney, consult your own tax attorney, but the farms because it’s a pass through vehicle and LLC that issues a K1, you’re able to offset losses in the early years that happened when you do development. You should be able to offset them against your passive income K1s. You get that additional benefit. It can be quite substantial if people pay you up to 50% marginal tax rate that you don’t get with the public stocks. And then look, we’re also not to be too self serving but we’d like to think we’re really good at our job and we keep getting better and we keep using more and more technology. We’re the young and hungry scrappy company. So you get that passion and drive from us as well. And look, we send also updates from every farm. It’s fun. You get some videos. So there’s that emotional aspect to it.

Trey Lockerbie (44:04):
That’s fantastic. Going to the tax portion, I imagine there’s not a lot of depreciation with the farm versus something like even a piece of real estate. Is that a factor at all? Is the soil degrading over time or just different factors around DEP appreciation?

Artem Milinchuk (44:18):
So soil can degrade absolutely, but land does not depreciate, and IRS even says there’s no land depreciation. So if the IRS says it then we’re good. Of course land can decrease in value and soil can get depleted in the agronomical facts. But what I mean by depreciation is the following. When you plant trees. So trees do have a certain depreciation schedule, you also, when you put up trellis, you drill it well. So there’s a bunch of improvements that happen on the lands. So it’s a fairly favorable treatment of those CapEx expenses where a lot of them can get depreciated almost 100% year one. So you can get a very nice offset for your income when you invest into a farm that. So for people being very smart and sophisticated about the tax planning and strategies that can be a very meaningful, additional bump that public stock just will not provide to you.

Trey Lockerbie (45:08):
So when I’m investing on FarmTogether, is there a minimum maximum going to investments and is FarmTogether investing alongside with its own vehicle? What does that look like?

Artem Milinchuk (45:20):
Yeah. So the minimum is typically 15,000. FarmTogether does not invest, but the principles, so the key execs do put our money in every deal. Look, it’s not a lot per deal but it’s a lot to us because we still like to think of us as well, we are a early stage company meaning that we are not paying ourselves much. We want to make sure that we deliver the value to investors first to our shareholders as well. Oh yeah, we put money to every deal. So I’ve been enjoying it right now because I get this little coupons from farms I invested in and it’s nice to have passive income I tell you.

Trey Lockerbie (45:53):
Are farms typically high dividend paying assets?

Artem Milinchuk (45:57):
Yes. They pay every year.

Trey Lockerbie (46:00):
That’s fantastic. And then are you guys fueling these investments with any leverage behind it? What does that typically look like?

Artem Milinchuk (46:06):
We do for some farms, especially development and other farms really improve returns at that additional potential tax component and help us invest in larger farms that we couldn’t otherwise. We are using less debt right now just because where the interest rates are, it’s still being accretive on a lot of farms. So yeah, probably you won’t see that for a while.

Trey Lockerbie (46:27):
I think you’re alluding to a secondary market coming down the road there, but I’m curious about that because say for example, I go into this investment. With the secondary market, would I be at any risk of a worse return? It’s a secondary market but my point I guess is the volatility there being so low is, we talked about earlier about the illiquidity being a feature. So things start trading around a lot discounts and nav come to mind, things like that. Are you at risk for a worse performance actually, if you get too busy with it?

Artem Milinchuk (46:55):
You could, yeah. And we definitely want to introduce the question of timing. So we’ll be very careful with it and intentional and we’ll be looking at what other markets exist that have that, but there’s a lot of demand for it. And you could lose a bit of that buggy feature as we said of farmland being a liquid. It’s almost a psychological thing where cannot sell. So a lot of losses happen with people they sell at the bottom, they buy the top from all the formal or from fear or greed. So that illiquidity portion I think can be nice. Not that it’s my area I know well, but in casinos you can put yourself on a no gamble list.

Artem Milinchuk (47:33):
And so it’s a little bit like this where like this market for example, so many of my friends that just get so nervous and they go, should I sell? And then it just becomes you’re working for your investment, not your investment is working for you. And here, yes, maybe it might be a little down record. There’s nothing you can do. It’s locked in for another eight, 10 years and over a long period, things will be okay. We believe so I hear your concerns on the secondary market.

Trey Lockerbie (47:58):
Very interesting. Well Artem, this is super fascinating. Before I let you go I definitely want to make sure you have a handoff to our audience where they can learn more about FarmTogether.

Artem Milinchuk (48:08):
Appreciate the time. Waiting for everyone at farmtogether.com. Was really good to be here Trey.

Trey Lockerbie (48:15):
Fantastic. Well, I encourage everyone to check this out. I think this is such an amazing asset class and you’re doing such a service here to democratize it a bit more and I really enjoyed it. I’ve been very impressed with the platform so far. So thank you so much for coming on the show and best of luck and I’m excited to see where this goes.

Artem Milinchuk (48:31):
Thank you, Trey.

Trey Lockerbie (48:33):
All right, everybody. That’s all we had for you this week. If you’re loving the show, don’t forget to follow us on your favorite podcast app. And if you’d be so kind, please leave us a review, it really helps the show. If you want to reach out directly, you can find me on Twitter at Trey Lockerbie and don’t forget to check out all of the amazing resources we’ve built for you at theinvestorspodcast.com. You can also simply Google TIP Finance and it should pop right up. And with that, we’ll see you again next time.

Intro (48:56):
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