Farmland Investing During Economic Uncertainty

Farmland investments have historically performed well during times of economic turmoil. This talk, delivered in July 2022 by AcreTrader founder and CEO Carter Malloy, covers farmland’s historical performance in both recessionary and inflationary environments, how it’s holding up in today’s conditions, and its long term value drivers.

Transcript

Hi everyone. Thanks for joining us. I'm Carter Malloy. I'm joined by my colleague and good friend Ben Maddox here. I'll be leading us through the presentation today, and then Ben is going to join us here shortly for Q&A. Thank you. I'll turn off the video now and we'll hop into it.

All right, great. Presuming that you're able to see my screen, here are some important and fun legal disclaimers. All right, so this is Carter speaking. My background: I've spent a dozen years or so as a professional investor in public markets, so ultimately I was looking for sectors, geographies, and markets around the world where there was information asymmetry and attractive risk versus reward. In the background of my career, I grew up in a farming family, and I began buying and selling farmland near the small farming town that I was born in. And despite having local connections and farming in my blood, it was still really hard to invest. So we began working on building AcreTrader five years ago or so, and since, growing to a team of over 100 people. We're also fortunate to have raised $80 million in venture capital for our business operations, the vast majority of which we still hold in reserves. We'll show you some of the things—the exciting things—we're investing in here later today during this webinar.

Ben, my colleague, is also going to be joining us for a bit during Q&A. Ben and I have been working together for a number of years now. He is an absolute encyclopedia of information on farmland and farmland investing. He spent much of his career in and around farming and economic analysis and as a member of the American Society for Farm Managers and Rural Appraisers as well as the Arkansas Cattlemen’s Association.

So some of the larger themes we're going to go through today—basically a closer look at farmland's performance. Really this shows that it has consistently produced positive returns. It has produced positive returns in both recessionary and inflationary periods, and currently, farmland values appear to be on trend.

So first we'll talk about the relative performance of farmland and some basics, then we'll get into the more exciting stuff here. So first is a quick recap of farmland as an asset set up against other established assets. Farmland on the left here is a hard asset that has historically appreciated in value over time while simultaneously kicking off an attractive yield. Stocks are valued on their future cash flows and not typically on their underlying assets or book value, whereas bonds are really valued on the ability of that company or that government to pay its future debt. Commercial real estate is similar to land, but many of the assets actually depreciate over time. So there are constant expenses for renovation, remodel, and often rebuilds. And then of course there's cash. Today's returns on savings accounts are surprisingly low, and there's obviously inflation working well against you here.

So farmland as an asset class. Not only is it structurally fascinating, it's historically performed well with lower volatility. This graph shows various asset classes since 1990, the earliest date for in-depth analysis of farmland performance. The y-axis here— the up and down on the left side there— that's the average annual growth rate of these assets, so how well these assets did on average. The x-axis, left to right, is annual volatility or how much they swing up and down. You can see that farmland has been positioned very well historically on this chart both on an absolute and a relative basis.

To show that differently, we can look at that compounding over that same period of time, just looking at the same constituent assets in a different way. So let's dive in a little bit closer here. Let's look at equities. So the S&P 500, which is a broad measure of U.S. equities, has provided really attractive returns, so a little over 11% on average since 1990. It also includes years of significant losses and volatility though, including the current one. Whereas farmland has historically returned something similar with much lower volatility of annual returns.

Now with bonds, Triple-A bonds have been seen as a good alternative to T-bonds but providing increased yields, but at the expense of near risk-free return. When adjusting for risk, however, farmland historically has proven a strong return in comparison. And again, you can see that here— the dark bars being bond yield and the green being farmland.

Remember, importantly it's about compounding not timing. Over long periods of time, I should say. So gold losses have been as steep as 30% during certain years. Farmland on the other hand has again been a very consistent performer.

And lastly looking at it versus commercial real estate. Farmland can provide a partial shield from this uncertainty, as most cash rents are paid up front or in bi-yearly installments with exceptionally low vacancy rates. Commercial real estate requires nearly constant improvements to technology, design, efficiency in order to remain competitive, making older buildings less attractive over time, whereas farmland does not have this issue to the same extent, as soil quality and scarcity of land help support its value. All right, so let's talk a little bit about performance during recession and inflationary periods. And then finally in the final section, we'll get to the current setup and outlook.

So first is a check on where we are today. This is showing the latest Atlanta Fed GDP Now estimate and the evolution of that estimate the last several weeks. In the first quarter GDP contracted about 1.6%, and if this most recent forecast holds, it will contract another 1.2% this quarter, which would put us in a technical recession.

Barring a couple of policy wonks that actually define that— it's a fun backstory, but technically historically usually two back-to-back quarters of contraction indicate a recession. We have seen many asset classes react accordingly alongside this data. The S&P down upwards of 20% year to date and the B of A U.S. Corporate Bond Total Return Index down 14% year to date. So it's been a rather challenging year, and there have not been many places to hide.

Fascinatingly, this is showing Google search volume for the topic of recession. It's interesting to see this interest spike in 2007 to 2009 for obvious reasons, followed by a little bit of a head fake in August of 2019 around tariffs and a volatile stock market. Then you see the big jump from Covid in the spring of 2020. But recent interest in this topic is above all previous spikes. So at the very least it's clear the U.S. consumer is becoming very concerned.

Indeed, consumer surveys are showing that concern is on par with past economic downturns. As you see there on the right, sentiment around current conditions has now reached a new decade low and on par with that of the ‘08 Great Financial Crisis. The index of consumer sentiment and index of current economic conditions are both down around 40% year-to-date—sorry, year over year. So the data is certainly not exciting.

Look, we're not here to say there is a recession coming or not. What we are interested in exploring is the data here. How has farmland performed during challenging times?

So here, you can see the NCREIF Farmland Index Total Return that includes both appreciation and land prices as far back as we have the data. And through the early 90s recession, the dot-com boom and bust, a global financial crisis,and most recently the Covid pandemic, farmland has shown to be a fascinating store of value.

The point of this slide really is to show that farmland is not a silver bullet, but it is very different and it acts very differently and it has again in recent economic troubling times in economic history.

So a different way to look at that. This is showing the annual year-over-year change. Farmland returns have been about 10.5% as far back as we have that data, and again has performed relatively well during those recessionary periods.

So today one of the larger key macro concerns that we see—let me rephrase, that everyone sees—revolving around us is the current inflationary environment. We're seeing inflation running at levels not seen in four decades and the May CPI figure, Consumer Price Index, being up 8.6% year over year. One unique aspect of farmland is the food (corn, soybeans, wheat, etc.), the fuel (ethanol and biodiesel), and fiber (being cotton) it produces are all major components or can be major components of inflation.

So this chart shows the annual year-over-year change in CPI compared to the USDA's data for land values in the 32 top-producing agricultural states, the ones that really grow the very, very large majority of food, fiber, and fuel here in the U.S. Note that this is just the change in farmland values and excludes any land income. The key takeaway here is that farmland values have shown a strong correlation to inflation dating back to 1969, or as far back as we can really effectively measure this.

Again, note here we are isolating farmland values. So we are excluding the income produced from the farm. As you can recall, you can make money two ways from investing in farmland—both from the land itself appreciating in value over time and also from the income produced on that farm. So what we're doing here is just looking at the land price component of that total return. That allows us to look back further in time and also to look at the value of the actual land versus the economic indicators that would presumably influence that.

All right, so, where are we today? So first is looking at where farmland values are now. So what this chart is showing you is a rolling 12-month percent change in land appreciation according to NCREIF data. What you see here is that land values, as of even through the first quarter of this year, have gone up by 5.7%. That compares to the long-term annualized land value appreciation of 4-5%. So said differently, we have seen an uptick in land value recently. But it appears to be within historical trends, and it appears to be supported by underlying fundamentals, which we will touch on shortly.

First, if we take a step back and we look at capital appreciation for farmland over a longer term horizon, it appears that the appreciation may still be below trend, and we may still be catching up. The important point here is that while farmland values and returns have been rising, they appear to be adjusting towards a trend. It does not appear that this market is acting as many other financial markets have over the last couple of years.

So what’s supporting the values in today's farmland economy and into the future? First is the simple story of supply and demand. On the supply side of the equation, we have a shrinking supply of farmable acres, both here in the U.S. and in many places abroad. A lot of those acres are being lost to urban development. Ultimately, this disappearance of productive farmland is one of the items that really sets farmland apart from other asset classes. This is a very finite amount of supply we have. So to see that on an actual chart, you can see that disappearance here more explicitly. Something like three acres of arable land go out of production every minute in the U.S.

So at a high level from a supply and demand dynamic, there are more and more mouths to feed, both animal and human, so a growing amount of demand with a decreasing amount of farmland available. Maybe said more clearly, as the amount of land decreases and the need for what that land produces goes up and increases, the macroeconomic equation appears quite favorable for farmland as an asset over long periods of time.

We've also got some recent data points here that support this idea. We are really losing productive farmland acres. So every June the USDA estimates and certifies planted acreage of all major crops in the U.S. The June 2022 Planted Acres Report revealed that we may be close to maxing out our plantable acres in the U.S. here. So this means that to plant more acres of one crop, we will usually, if not always, have to remove acres from another type of crop, and that's what you're seeing here is this rotation between our two primary crops here in the U.S., corn and soybeans.

So corn, soybean, and wheat prices are all near or exceeding all-time highs in 2022 and approaching their historic levels of 2011 and 2012. So what’s structurally driving those high prices? We’ll explore that topic here in the next few slides.

From a demand perspective, global supply chain issues are grabbing most of the headlines out there. These are certainly notable, but they tend to be more transitory with respect to farmland values. Some of the larger long-term factors in demand include growing biofuel demand, new purchases from China, a rising global middle class, and associated changing of the global diet. In looking at the biofuels component here, we're seeing very large increases in pledges from airlines and transportation companies to use these renewable fuels. This is projected to dramatically boost biodiesel demand. So the soybean crops will have to do something like double to keep pace with demand by 2030. Where will we get those soybeans?

China is also an interesting factor. It's always imported large amounts of beans, but in recent years has begun importing more and more corn from the U.S. as well. Then lastly, and very importantly, is a large structural driver, which is increasing incomes globally. They're driving higher calorie consumption plus increased protein consumption, where those animals need to be fed substantial amounts of farm product.

So when we talk about Chinese purchases and their impact on demand, most of the story has been around soybeans, and what we can see here is China's role as a major global importer of soybeans historically. They're currently importing around 40% of all global soybean production. Much of that is going towards animal feed and cooking oils. But now we're seeing China—again, this long-term importer of soybeans—recently becoming a meaningful importer of corn as well. Their domestic corn production has begun lagging domestic consumption there in recent years. So this is driven by several factors, but the important point is that China has not increased its domestic corn acreage really in the last seven years. So it’s looking more and more to the outside world— to imports—to meet that growing demand.

So economic development of the 20th and 21st centuries has obviously driven increasing incomes for hundreds of millions of individuals and families around the world. These increasing incomes historically led to higher caloric demand per person, in part driven by more consumption of animal proteins. Diets higher in animal proteins as well require larger amounts of grain, primarily corn and soybeans, per person. So this slow and steady margin up and to the right has been going on over 50 years and appears to be continuing with continued growth in overall population and the global middle class.

So what does all this strong demand and the supply outlook mean for farmers? So in recent years, it has meant increasing net farm income. The net farm income has been positive, increasing, and above average for the last several years, and in 2022, it's forecast to be 15% higher than the trailing 20-year average.

So moving from the income statement to the balance sheet, we can see that U.S. farmers have low levels of debt on an absolute and relative basis. The U.S. farmland sector has around 16% debt to assets,and call it mid-teens or lower than that, debt to equity. That assets ratio of 16% appears very low because, relative to other things—let's look at REITs as an example (public real estate investment trusts) have around 50%, or three times as much, leverage in them. So farmland and farmers are typically underlevered relative to the larger economy. This can be a meaningful relative advantage in either rising rate markets or economic downturns. Just given how little debt is swashing around in the system versus, again, commercial real estate, residential real estate where you often see this number closer to 80%.

So, and again from an operational and profitability perspective, we can also look at farm returns on a per acre for farmers. We get lots of questions from investors about the rising input costs— fertilizer, diesel, chemicals, and how they're impacting farm profitability. This slide shows the projected 2022 returns to farm operations on a per acre basis for corn and soybeans. What we find is that despite these high production costs, farmers are still expected to have attractive per acre margins for corn and soybeans, which make up around 60% of planting acres here in the U.S.

Then lastly is just showing that farmland’s prices have been supported over time by improvements in rental rates, and per the previous slides, there appear to be structural positives on-farm that can help improve rental rates and farm income ultimately that can have very positive impacts for land values.

Alrighty, so some of the takeaways here: one is again, a closer look at farmland's performance shows that it has consistently produced positive returns. It has produced positive returns in both recessionary and inflationary periods historically. And current farmland values appear to be on trend and indicative of a positive outlook.

So what's been missing in this market is easy access to participate in this market. It’s why you have probably not heard a lot of people like us talking about this until more recent years. This is what we're excited to bring to market is solutions. Ultimately we built AcreTrader precisely to respond to this crisis of access, to make buying and selling land common, transparent, and easy. Our process is simple: investors have fractional ownership of an LLC that owns the land. AcreTrader management handles all elements of administration, making that a truly passive investment.

So also, as many of you know, our team spent parts of their careers getting dirty on a farm. We are financial analysts and technologists here at AcreTrader. We're actually farmers first and foremost, and we can't stress how much this relevant experience matters when assessing various investment opportunities to open on the platform. So what you see on this page are lots of micro-variable examples that we consider on a per-farm basis. These are considerations like soil and field shape. So for example, irregular fields are harder to farm in that you turn a tractor more in an irregular field than in a square one. Another consideration we talk about a lot is water in certain areas. It may be favorable to install irrigation, but other farmers may be concerned about how to get water off of their field. Even things like historical rental rates for a certain farm are important, but rents in the area are important as well. This can vary by soil type, irrigation and drainage quality, for example, and many other variables as well.

So some of the unique elements of our diligence process are also the proprietary tools and data sets that we have spent millions of dollars building to help us evaluate land at scale. Our team now includes over 20 software engineers and data scientists dedicated to building our Acres platform. We're really excited about this. As I mentioned on the previous slide, I'm very, very proud of people I get to work with every day that are out getting dirty on farms and looking at farmland investment opportunities to bring the platform. We're also very, very excited to bring forth software and technology that, again, helps us really do this at scale, and it helps us to look at that many more properties every day.

So for a sneak peek of what this tool can do, I'm going to share a couple minute video of Rob on our farm investment team here doing the initial evaluation work on a parcel in Iowa.

“A farmer reached out to us with an off-market opportunity in Pocahontas County, Iowa offered at about $1.5 million or a touch under $10,000 per gross acre. Since this is farm ground, the first thing we need to do is recalculate costs on a per-tillable basis. So using the CLU layer, I can verify 130 tillable acres, adjusting my price assumption from just under $10,000 per gross acre to almost $11,500 per tillable acre.

To quickly pull comparable sales, I jump over to our sold land layer where I can scroll out, choose the size that I want to pull from to find my acreage, and sort by sale date to get a general understanding of rates in this area. Looking through the auctions specifically, I'm able to find several within a couple of months of the offer that we are considering, showing me a general price range in $10,000-12,000 a tillable acre and confirming that this parcel passes initial muster for price range.

From here, I move on to land diligence, beginning with soil, where we see an 83.3 CSR2. I can toggle between NCCPI as well as a state-specific CSR2 score. I see the dominant soils are heavier clay soils and notice that there's significant slope and moderate erosion in the southeast corner of the property. So I toggle immediately over to elevation.

Sure enough, this shows a high point in the southeast corner as well as a general northeasterly slope. Soil type and elevation raise potential flooding concerns, so I toggle on the flood layer, which confirms this risk, specifically in the northeast portion of the property.

To dig further, I turn on the NDVI or vegetation index layer, which is going to present the relationship between red and infrared light, a general vegetation index, and again confirms potential issues with the southeast section as well as an overall reduction in vegetation across the eastern section compared to the darker green on the western section.

That said, the satellite image still shows a fairly clean property, so I finish with one of our most informative layers, the satellite history. In this instance, this gives me a much clearer picture of the potential problems on this property. Being able to scroll back through up to 20 years of historical images, I'm able to see problem areas showing crop loss including multiple years with standing water on this property throughout the past two decades.

*Ultimately, after reviewing historical yields and considering the necessary infrastructure improvements, along with information from the property tax, crop history, and county layers, our valuation came in below what was palatable to the seller, and we decided to pass on this opportunity.*”

All right, so we're really excited about these tools. But we didn't just build these tools to do diligence better or faster. We built them because we believe we can improve this industry for the better of investors and the farmers that we work with. So we're really excited to be rolling a lot of this out, and we'll hop over now to a section for Q&A. So I'm going to pop on the video and my friend and colleague Ben is going to join us here as well.

All right. We're just getting here as we can actually see these. If we lean into the screen, we're pulling up the questions, one moment. The first question, I'll take it here:

Q: Will you address the aging population of older farmers leaving the industry and the rise of non-farm ownership?

A:

So it's a great question. I think the average age of the U.S. farmer is around 58 years old today, and farmers are getting older. But I think hidden behind that statistic is the reality that there's a lot of younger farmers entering into the industry now, both multi-generational farmers and first-generation farmers. At AcreTrader, we help solve a critical problem that these new and beginning farmers have, and that is how do they access capital? That could be capital for purchasing land, it could be capital for developing a property, but fundamentally, we work with farmers to solve that problem of how do they finance and grow their operation? And so I'm happy to say that we worked with quite a few new and beginning farmers in the investments that you see on the AcreTrader platform.

I’ll further Ben's answer there to say that he and his team have spoken to literally thousands of farmers across the U.S. and Australia here over just the last year. So we are very, very excited to be actively helping and working with farmers to grow their small business.

Q: So the next question is somewhat related, I believe, which is who do you typically sell the farm to upon disposition?

A:

We will take that farm to market; we are looking to find the best returns for those investors. Our hoped-for, and and in some cases has been already in our history as a company, our hoped-for buyer is that farmer because many if not most of the opportunities that come to our site come to us from farmers that are looking to grow their operation and have us buy some land adjacent to them, as an example. We often look to that farmer as the ultimate hoped-for buyer. And what we are providing to them is a way to save up over five or ten year period even to buy that land versus the alternative, which is a new and/or often not-friendly landlord there, and/or going to the bank and levering up and getting lots of debt.

Q: There’s a question I'll take: how do you factor in the water issues in the West as you evaluate a property?

A:

So, common question. You know, when we sit down and think about water issues, it's really just as important, if not sometimes more important, than understanding the soil and the farm. And so as you saw in the video demonstration, we have soil maps for the farms, but we also have water maps for these properties. Now in the west you have different water rules in each state. So Washington is different than California is different than Oregon is different than Arizona. So you have to take all these states into their own context. We obviously sit down, go through all the legal rights and documentation related to the water rights and entitlements on each property and make sure we have that documented before we close on any potential investment you find on the AcreTrader platform. So needless to say it's a primary part of our due diligence process and you know, I think any process that overlooks that would be selling it short. So yes, it's a critical part of what we do.

Great, and to that point I can also say that our team, our data science team, has arranged and put together some absolutely incredible and unique ways to assess water and water availability in some of the more critical parts of the world like California—a place where we believe if you're buying great water, you can actually be set up incredibly well.

And if there are additional, maybe more specific, water questions, happy to take them now or after the webinar, so thank you. Sorry. We got a ton of questions here so we're going to try to get to you all, and appreciate the engagement here.

Q: So one is, in terms of demand out there, hydroponic and mushroom farming and that affecting demand.

A:

Those, you know, those we would call specialty farming, so think about vertical farming, growing basil inside of a storage container. Those are fascinating new parts of the farm economy, but call them incredibly, incredibly small and marginal. Again, we're big supporters of much of the revolution going on there and excited about it. But the most expensive things to grow in those types of farms tend to be water and sunlight, the things that when you farm at scale you get for free.

Q: There's a question here: what are the top three key features of a farm that make it attractive for your model?

A:

So I will say there's a little bit of regional variation to this. But if I had to pick sort of a universal overarching set of three factors, I'd probably start with number one, what's the strength of the farming community in this area? So are there lots of farmers to work with and are they experienced? Are they sort of, you know, big enough to work with us as we grow? The second thing that I would touch on is what does the local land market look like? So you want to look at both current and past land sales and land liquidity. You want to make sure that there's an option for exiting a property in the future. And then finally you want to consider the natural resource base of any investment. So again, it could be the water as we talked about, could be the soil, it could be the rainfall, the weather patterns. So I'd start with the strength of the farming community, the sort of strength of that land market and it's ultimate liquidity, and then finally the natural resource base.

Q: Great, and so I think I missed one here earlier, apologies. What is the growth or shrinkage of farmland worldwide?

A:

As a whole, it is, on a per capita situation, it faces similar challenges to what we see here in the U.S. We focused on the U.S. because one, it's where we invest and farming tends to be somewhat localized. And then too it's where we have good data. And lastly is the productivity of a farm in the United States is often dramatically higher, so losing an acre here in the U.S. could be the equivalent of bringing online several acres in another country.

Q: Let’s see, there's a question. How large a percentage cost is the rental rate to the farmer?

A:

So answering that question is difficult because you would have to know the sort of unique attributes of every lease between a private landowner and a private farmer. But I would say if I was going to use sort of a rule of thumb, particularly here in the Delta states (we're in Arkansas), it would be about 20-30% of gross income that ultimately comes in is paid out as land rent. So you can use that as a rough rule of thumb, but it is going to change from region to region.

Q: There's another question about making statistics available for past investments to date.

A:

We do, and we've had several farms full cycle at this point on the site. And those—I may be speaking a little bit out of turn, but in general, they were looking for high, single digit IRRs, kind of 8%-ish or so. And in those exits that we've seen—how many so far, Ben, three or four—three so far, maybe more to come there, but we've seen mid-teens to 30% IRRs call it. So we've seen very favorable outcomes. Again, the past is no guarantee of the future, and that should be stated very loudly, but we've been very excited there.

Q: There's a couple questions around a common theme here. Obviously, people are interested in climate change and how farmland investing deals with and mitigates climate change.

A:

So I guess how we’ll ultimately think about climate change when we're considering any farmland investment is what can we do to mitigate those potential negative effects? So negative effects would be drought, negative effects would be too much rainfall all at once, and then there are additional smaller consequences, like perhaps pest pressure, disease pressure. Fundamentally when you look at a farm you can set up that farm to mitigate some of those extreme weather events. And what we primarily mean is not enough or too much rainfall. So in the South, we're looking at adding irrigation to properties. And so that that can be done either through flood irrigation, center pivot irrigation, furrow irrigation. And in the Midwest, you're primarily looking at draining farms with too much rainfall. So that's done by actually putting tile drainage—it's almost like a large French drain system underneath the property. And so those are just two examples, but ultimately, you know, farmland like any investment is not immune to climate change, but what you can do is mitigate some of the downside effects through these on-farm improvements, which really benefit both the landowner and the farmer who's leasing or operating that property.

Q: Right. Are you planning on any more international investment opportunities or is the main focus domestic right now?

A:

Our primary focus has been and remains domestic. We have on occasion hosted investment opportunities outside of the U.S. in Australia, and we may want to do more of that in the future. Although again, it always comes down to on a per offering basis.

Q: Let’s see, there's a question here, it's a good one, so sort of a political and regulatory risk question. So any plan to increase level of analysis pursuant to fiscal state policy, state government regulations and legislatures?

A:

So the answer to that is yes. So each state has a different property tax system. So obviously that's one of the first things we consider because we have per acre property tax rates that range from $70 an acre in some states to $2 an acre in other states. And so that significantly eats into the net return. We also look at different conservation programs. So some states will actually give you a property tax rebate or abatement if you participate in keeping the land in farmland, which we've done in the past. And then we're also looking at just various water laws in each state. So again, whether it's groundwater, surface water, or riparian water, each state is going to legislate that differently and regulate that differently, and so obviously we're going to dig into that before we purchase a property in any state.

Q: Great. Is farming being hit by the Great Recession issues or fear?

A:

I think concern abounds throughout every corner of the economy about where we are headed next. We are lucky that again farmers tend to run their business in a very conservative manner. We shared that earlier with their debt-to-assets or debt-to-equity ratios being surprisingly small, so said differently, farmers aren't running around with a whole lot of leverage or debt on their operations. So we believe that they are relatively well positioned and, again, usually approach their business in a fairly conservative mindset anyway. And so I think everyone is considering and concerned about recessionary fears, but as we've shown in a lot of the slides here, farmland has tended to be pretty consistent throughout those historical periods of volatility.

Q: There's a question here. How do we know which properties are better to purchase than others?

A:

So it's a fair question. I'm here to unfortunately tell you, number one, we can't give investment advice. But number two, we have a really fantastic Investor Relations Team. They're happy to answer any specific questions you have about a farm you see on the AcreTrader site. Ultimately it comes down to what you're seeking to achieve in your investment goals, right? So different properties provide different types of opportunities, whether it be a higher cash yield component or higher capital appreciation component. So if you have specific questions, while we can't give investment advice, we have a ton of people on the Investor Relations Team; they'd be happy to speak with you. The phone number on the screen is the best way to get ahold of it.

Q: So there's another question on thoughts around the World Economic Forum wanting to reduce worldwide farmland.

A:

I had not seen this one personally yet. We generally are fans of people being able to eat and fans of farming. So I'm surprised by that notion and would not consider it highly realistic given the demands and needs and frankly the need to grow more to help offset inflation.

And I would add to that: obviously we talked about some of the dispositions and full cycle investments already. They've all stayed in farmland, right? So that's one of our big both professional and personal objectives is to continue both the tradition of farming and the business of farming.

Q: So another question here is: government figures show inflation above 8%, though many economists feel like it could be more something like 20%, and how much elasticity do farms have for increasing prices and yields considering that consumers will feel inflation, too?

A:

So again, the way that we measure inflation on-farm is, well one is they have costs that go up so fuel is eating into margins this year. We showed earlier in the slides that farmers are still expected to have strong margins and strong on-farm profitability. But nonetheless, the larger elasticity—farmers usually aren't the ones, they would not be the ones out setting the price for corn, as an example. There's a large fluid or liquid market there to help establish what is the pricing and the futures pricing for corn or soybeans or whatever that commodity may be. And so we really do have good real-time data showing just what expectations are and what current prices are for the commodities coming off the farm, and suffice to say the inflation here on those commodity prices is often well, well above that 20% number.

Q: And from the same person, just to knock it out as well: Is there any possibility of revenue from mineral rights?

A:

Maybe in some situations. So there are mineral rights. There's the ability to generate alternative energy with wind and solar. There are hunting rights often that you can lease on a farm.

There's also the possibility to participate in more direct commodity exposure through things like what's called a flex lease or flexible lease. So you'll have a lot of rents that are just a straight cash rental agreement, but a flexible lease actually sort of gives you an index approach to the total lease amount at the end of the year. That would be based off some reference price for corn, soybeans, peanuts, cotton, whatever it might be.

Thank you. On almost all farms that we've bought, if not all, I just don't know offhand, we have retained the mineral rights. I think it seems to be very unlikely that that turns into anything material, but we would like to view that as a free option and not something that we or the investors are paying for.

Q: There's a question here kind of about how it works. So what is the mechanism of investing on AcreTrader? Does it work like a REIT?

A:

So the answer is no, it doesn't function quite like a REIT. So this is a direct investment in a discrete piece of farmland property. So when you go to the AcreTrader website, go to the Investments tab, you see specific properties that you are able to invest in. So you'll see all the due diligence and research materials. You'll see some maps, again, more the mapping program you saw today during the webinar, as well as some documentation around the entity that will hold that property. So again, it’s a direct investment in a piece of real property, and you can see all the details of each of those farms on the Investments tab. Great. You want to talk about this one here and perhaps flex leases a little?

**Q:**Sure. So the question is how much margin do farmers have to absorb commodity price declines during a multi-year land lease?

A:

So I'll start by saying that right now we had that slide earlier about sort of revenue per acre after all expenses and revenues are accounted for. So right now, as long as commodity prices stay locked in tandem with input prices which, again, historically they have, so that's the good news—as long as they work in tandem, farmers are still able to make a positive contribution margin on each acre that they farm. But I think getting to the heart of the question, how do farmers absorb commodity price declines on a multi-year lease, that's kind of why we get back towards that concept of a flexible lease. So on a flexible lease, again, you can either have just a straight cash rent or you can have a flexible lease rent. In a flexible lease rent, you're typically going to have a smaller amount of guaranteed cash with more upside participation for both the farmer and the landowner. And so in that case if there is a bad commodity year, it's sort of like a shared risk and the farmer pays a little bit less than that base rent, that cash rent. But again in a year like this year or the last year, 2021, there would be quite a bit of upside for the farmer and the landowner in a flex lease scenario. So a farmer's sort of able to weather some of those multi-year ups and downs in commodity prices with something like a flex lease.

Q: Can you provide us some context about land price trends in different regions of the country?

A:

So we're seeing differing trends in different places. I think it's a fair question. So in the Midwest, it has gotten pretty hot. We're still able to find some attractive opportunities there. But as a whole you'll notice that you've seen probably less Iowa and Illinois in recent months. It's just because it has become harder to purchase there at places that we find exciting. The Delta region as well has been moving up, though again as we discussed in earlier slides today, nothing that we see is crazy or out of trend. California, you're really seeing a dispersion in returns where water challenged farms are starting to see or are actually seeing material declines, and inversely in California, you're seeing some farms where there's really great water and long term access to that water where we’re seeing improvements. We are very much fans of kind of staying away from those farms where the values are coming down. You may have the last great puff of the cigar before the water runs out. That's just not something we're excited about investing in or playing a part in frankly. Versus we do feel strongly that if you have great water in California, you can actually be very well positioned to grow many of the highly, highly important crops that they grow there.

Yeah, there are regions—well, I was just gonna say, I mean, I think across the board the story is at least from a, call it a three to four year perspective, land prices are up. It doesn't matter if you're in California, Arkansas, or Georgia. But going back to that, sort of getting back on the trend line, one of the interesting statistics is if you look at a recent report from the Kansas City FFed, they showed, you know, who is buying farms today in this current market, and roughly 80% of farm transactions are being conducted by operators, by farmers. And so there's still buying in in this current market. So I think, you know, while that doesn't necessarily signal anything one way or the other about land values, I think it does sort of point towards that idea that we're still moving towards that trended land appreciation figure.

Yeah, and lastly too is to say for land prices in the different regions is that our team continues to look incredibly hard. The team Ben works with has grown tremendously this year; their capability sets have grown, their technology has grown. So we're looking at lots and lots of property around the U.S. and are still able to find things like the farm on the website right now in Georgia, where we're really excited about that.

Q: I'm going to just get this in very quickly and we'll get through a couple more minutes here. Estimated ownership duration: what does this mean?

A:

So usually we look at things on a 5-10 year time frame, sometimes 10-15 even, and so it's a fairly wide timeframe there. And the reasoning is that we would like the investors and the investment vehicle, ultimately that LLC, to have the optionality of an earlier or later exit depending on conditions. So as an example, we had a farm that was sold recently where that farmer came to us and said, “Hey, I wasn't able to afford this farm years ago. I would really like to buy it now. I'm happy to pay above market rate here because I feel strongly in knowing this farm long-term.” So for us we're able to in that case generate a very attractive IRR for the investors and a very attractive outcome for that farmer.

Can we see more videos of Ben Maddox on YouTube? Absolutely.

Q: I’d vote against that. Let's see, I'll take one more question—we’re three minutes over—there's a little bit of interest on the leasing. So what percent of your leases are in these flex leases I've mentioned?

A:

The percent off the top of my head, it's got to be somewhere around 10-20%. But I would say if you're looking at an individual investment on the AcreTrader platform, it will pretty clearly state in the description, this is a cash lease, is it a flex lease, and there are some investments that have sort of more direct operational exposure. All those things are disclosed and noted in the description of the offering.

Great. We are over time. We have a ton of questions left here. We really appreciate everyone's participation today, and our Investor Relations team will be attempting to reach out to you today or tomorrow for those questions that we were unable to get to. Again, thank you for your time. Thank you.

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