At The Money: Monetizing Dirt

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0:40on the edge of what we think we know. Wherever you get your podcasts. Bloomberg Audio Studios. Podcasts. Radio. News. Here's to the farmer that plants the fields in the spring that turn from green to that harvest honey. Pull one up for the banker downtown. You got him on his feet with handshake of money. Have you ever thought about what makes land valuable? It's much more than just a place to build a house or commercial building or place a farm. Real assets have become increasingly popular, accessed through alternatives like private equity funds. I'm Barry Ritholtz, and on today's edition of At The Money, I'm going to discuss alternative land rights investing.

1:33To help us unpack all of this and what it might mean for your portfolio, Let's bring in Brandon Zick. He's the chief investment officer at Saris Farmland Fund, managing about$2 billion in ag assets. Saris not only looks at farmland, but a slew of additional rights that can help monetize dirt, as Brandon likes to say. Saris was recently purchased by Wisdom Tree Investing. And full disclosure, I'm also an investor in Saris through my own personal investing. So Brandon, you've been investing in and around farmland for decades. You grew up on a farm. What makes this kind of land a compelling real asset?

2:17Well, thanks, Barry. I think when you look at farmland, one of the things that's so interesting is just what are the optionality buckets that come with land? So when we buy farms, generally, we're thinking of this is going to be a farm for the long term. but when you own the real estate when you own the dirt you have a lot of optionality starting with mineral rights that's something that on the family farm I grew up at northeastern Pennsylvania no one knew what Marcellus Shale was but over time there's been a tremendous amount of value created through those mineral rights well above the farmland value and when you think about other things that when you buy a farm in many cases there's there's timber on the property that could be harvested selectively over time.

3:00There are opportunities to lease out land for hunting and other sorts of recreation to generate revenue. And then you start thinking about other optionality that can come too. Well, before we go to other optionality, let's spend a little time with each of those. So when you say mineral rights and you're referring to Marcella Shale, which is natural gas made accessible by fracking, you're not giving up the farm because of the fracking technology, those natural gas companies and oil companies can access that from a single point in the corner of the farm without disrupting the farmland. And they could go literally miles down to access.

3:43How significant, how valuable are those natural gas leases? Yeah. So it depends on the area specifically. But yeah, the great thing is that you're not strip mining a property, to your point, you can access it from a corner of the property or even lease it without any surface intrusion on your property. They have to access it from a neighbor's property. Who would allow that? And in the Marcellus Shale region, you had land that probably would have transacted almost any acre for$1 ,500 to$2 ,000 an acre. And then it was generating$4 ,000 or$5 ,000 per acre in revenue per year. Wow. That's a lot. So that's completely changed.

4:20So even within our portfolio, you don't see any farms purchased in Pennsylvania because of the Marcellus and Utica shale. There's so much cash flowing around that land just isn't available at an attractive price from a farmland investment standpoint. Let me ask you a naive question about this. How do I, as a farmer, maintain my mineral rights if the adjacent farm is sucking the natural gas out of the ground? Doesn't my natural gas then flow into that vacuum? How do you manage around that? Yeah, so they try to put them together into units so that that doesn't happen. And there are rules around what you can and can't do, especially with these, as opposed to vertical wells that would be on one property.

5:02And depending on where it was on the property, you might actually be extracting from the neighbors without paying them. With these horizontal wells to go underneath, there are requirements that you have to be paid. You do see an interesting dynamic in Pennsylvania and New York where it's not allowed in New York State, but if you own a farm on the Pennsylvania side of the highway there, that you're definitely generating a lot of revenue. And there could be an argument that maybe some of that's coming from across the way. But that's where regulation probably doesn't really meet up with the reality.

5:33So let's talk about some other sorts of leases that farmland can generate revenue from. You mentioned hunting. What do you put up a gate and charge people on the way in? How do you charge fees for hunters and other recreational users if you own a couple hundred or a couple thousand acres of prime land? Yeah, so typically it's in the off season when the crops are off the field, but hunting in the northeast and the midwest is something that I'd grew up doing, but it's a way of life for a lot of people. And everyone wants to have a specific place that they can go to to hunt their own land, a private place to hunt.

6:10And if you don't own land, that comes through the rental market. And there is a robust rental market. When you drive through rural areas, you'll see posted signs on trees saying this is like, you're not allowed, no trespassing. Typically it's landowners or hunters who are paying for those rights, who are posting that. And yeah, we go through third parties that will require insurance. There's a lease being paid. And once someone's paying and paying for the insurance, they're enforcing the boundaries such that we don't have to, which is great. Let's talk about other leases, renewable energy. I know you guys are big with wind turbines.

6:46The president may not love those, but farmers sure as heck seem to like it. What are the economics of putting up a wind turbine on a farm? So wind has been around now for quite a while. You've seen 30 years worth of wind farm construction, and it's very incremental in nature to the farm, but it could add anywhere from 20 to 40 or 50 basis points of income, depending on the property, and it takes up a very small footprint. So you're still farming, you just have a couple of big turbines in the corner? That's exactly true. So I think when people started doing it, they thought, well, this is essentially free money as long as you're fine with looking at wind turbines, which some people like, some people don't.

7:26But it was incremental and it was meaningful enough to farmers because they were still farming those properties. The thought process around that has changed a little bit. They're much more difficult to permit now because not only do they take up a huge footprint, a large wind farm could take up a very large footprint. So anywhere from 20 to 30 ,000 acres, there's a lot of neighbors involved there. And there's also people who fight those wind farms on behalf of migratory birds. So I think they're much more difficult to permit now. What you tend to see on the solar side, which is significantly different, is much higher impact on the land.

8:04So they're taking up the majority of the footprint. So you're not continuing the farm. So the revenue has to be not just incremental, it has to replace the farm income and be transformational. So what you tend to see on the solar side is revenue that could be anywhere from three to five times the total return of farmland plus wind. So it's much more meaningful. And you can also do it on a much smaller footprint. So whereas you might need those 20 ,000 or 30 ,000 acres for wind, for solar, you can do it on 1 ,500 to 2 ,500 acres. So many fewer neighbors, maybe just one landowner. Really, really interesting.

8:38Another naive question, migratory birds and wind turbines, how hard would it be to embed, you're generating electricity to embed some form of light, even something in a range that's specific to birds that maybe doesn't disturb humans or planes, or even just put a little high frequency sound cue. You know, you're spinning these blades through the air. Should be easy to generate some sort of noise. And I know there are lots of frequencies that don't disturb humans. The dogs aren't going to like it. But is that really that difficult of a problem to solve? It seems like it hasn't been solved yet. So someone might be on it, but this could be an idea for you.

9:27That's my gift to the wind farming and landowning community. just put a couple of reflectors up on the edge of the blades and the birds will be able to be able to see it. So we've talked about solar, we've talked about wind. What about projects like biogas? Is that a significant source of potential revenue? As a landowner, maybe not as much, but we have farm tenants that own dairy farms that they have anaerobic digesters that are great for them. They can use some of the waste product from the cows and turn it into green energy and sell it back into the grid. So that's something we've seen a lot of in states like Wisconsin, Ohio, Michigan, New York State.

10:11And I think that'll continue to grow because it seems like the dairy industry is continuing to grow. More cows means more opportunity to do that. And this is a very heavy protein cycle of how people are consuming food, less sugar and carbs, a whole lot more protein, or at least that's what it seems like. You mentioned timber. I know that there's a very specific form of agricultural husbandry with harvesting, trees, planting. It's a very long-term process. You're thinking in cycles of 10, 15, 20 years. How significant is timber? So timber is a huge asset class, specifically you know, in parts of Canada, northern Michigan, and then in the southeast, it's huge in terms of hardwoods and pulpwoods.

11:02That's been an institutional asset class or investment class for a long time now. And you tend to see these really large owners owning hundreds and hundreds of thousands of acres, selling to those very large end users. So that is a little bit of a different beast. And it's a very well-developed investment structure where you tend to see maybe a little more nuance is around some of the very high value hardwoods, so black walnuts and things like that. But that's something that I don't think is really scalable the way that some of the large timber investments currently are. What about various conservation programs and things like carbon credits?

11:41How significant are those? Yeah. So, I mean, there was a lot of noise around carbon sequestration and credits associated with that maybe two or three years ago. And we took a hard look at it because we own so much real estate. And the idea of regenerative ag being great for the land and being able to benefit from that with a payment cycle was very interesting to us. What we found was the strings attached, and in many cases, farmers were already doing a lot of these practices. The people that we worked with, they were already using cover crops. The question is, can you get paid for that in a way that doesn't attach strings that jeopardize things later on?

12:21What are cover crops? Cover crops would be so once your crop is harvested, you're planting a second crop there to prevent erosion, to maintain nutrients in the soil. So winter wheat, when people plant wheat generally, that is a cover crop that they're deciding in the spring, did it winter over well enough that they're going to harvest it? or are they going to just leave it there and then eventually kill it and plant another crop into it? But it helps prevent erosion, soil erosion, helps maintain nutrients and moisture in the soil. So cover cropping is a great form of regenerative ag or sustainable agriculture that's been around for a long time.

13:00And if they don't harvest it, and we talked earlier about some of the shows I watch like Clarkson's Farm and Harry's Farm, they just essentially run the combine through it shred it and then yeah they can till it under put it right in there and that becomes a resource for the next crop yeah exactly more nutrients in the soil so when we looked at those carbon credits we thought well the land is the only means of production for generating this credit the landowner and the farmer should probably get a bigger portion of the credit than the person who's transacting and in a typical wall street way, that's not how it works.

13:34So we have not been a big mover on the carbon sequestration side because we don't think it's a real benefit to landowners financially. Now, maybe from an agronomy standpoint, but if they're doing it anyway, you don't need to sign a contract. So as we think about that, you know, conservation in terms of payments, you need a special structure to really benefit from that. There are folks that sell conservation easements. That's not something we do, but there is a group around that. One of the things that we've taken a harder look at is wetlands banking, because when there's development going on, specifically in the Midwest, a lot of industrial development, departments of transportation, as they expand highways, there's always wetlands to mitigate.

14:17So there are a number of developed markets for creating a wetlands bank and then selling credits into that for development. And that's something we've been taking a hard look at in states like Michigan and Wisconsin. Really interesting. Let's talk about the use case for farmland that is the single biggest shocker to me, artificial intelligence. What's going on with these big data centers that seem to be popping up everywhere? Yeah, I mean, they seem to really be targeting areas with great power resources and capacity on the grid. On the electric side, natural gas lines or natural gas fired power plants close by fiber optic networks that are close by and then access to water for cooling whether it's groundwater or otherwise and it seems like in the midwest there's been a huge push into this so the old rust belt is done and there's new manufacturing coming in and data centers seem to be the highest value that's uh that's being built and it's being built at scale by a number of different players out there now and it just seems as though land that you might have said 10 years ago, well, that was not the best land because it has a transmission line running through it.

15:29Now that's like being right next to the exit on the interstate. It's a huge bonus for that land. And when you say big players, I'm thinking Microsoft, Google, Amazon, who are the big players in this space? Yeah, those are the groups as well as Meta that they have a, seems like a real thirst for these single user data centers. And they tend to target the places, those groups tend to target the places that are the most attractive and they're the most aggressive and trying to put them under contract. Even where we're based in South Bend, Indiana, there's two very large data center projects going on now, one by Amazon, one by Microsoft, that are transforming the area.

16:05And I don't think they'll be the last ones. So there are a variety of different land use options that can either generate revenue or drive appreciation. Did I forget any? Do we miss anything. Those are a lot of different things. Yeah, those are the big ones. And traditional manufacturing distribution centers, these are things that have been happening at least in the Midwest now for generations, and it just continues. So the more that the economy continues to grow, that's one area where maybe farmland is a little more levered to the economy for some of these non-farm uses because of that. And these tend to be multiples of anywhere from 5 to 10 to 20x farmland value.

16:44So it can be very meaningful in the market. So to wrap up, there are a number of things that make land valuable. Sure, it's a place to build a house or a commercial building or to farm to grow crops, but real assets have become increasingly valuable due to things like water rights, solar, wind, mineral rights, and now artificial intelligence data centers. It's a fascinating development and they ain't making any more land. So this is likely to keep staying popular in the future. I'm Barry Ritholtz. You've been listening to At The Money on Bloomberg Radio. Here's to the farmer.

17:31Thank you, boys.

17:41As our use of AI expands, how do we make sure it doesn't end up breaking the internet? I'm Hannah Fry, host of The Exponential Era, a series that explores the real-world impact of future network technology. And I sat down with two experts to discover how we can support the massive connectivity needs of AI. Find out what I learned at Bloomberg.com forward slash Nokia.

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