Interview with David Chan, COO and founding team member.
FarmTogether is an innovative new platform that allows individuals to invest in US farmland. We interviewed David Chan, COO and one of the founding team members to learn about the platform and discuss the farmland industry overall.
Prior to joining the FarmTogether founding team, David has spent his career in ag-focused investing and technology roles. He first became interested in the sector by asking himself two questions:
What industries are most impacted by climate change?
What industries hold the most promise for being part of the solution against climate change?
David narrowed that down to: Natural resources, energy and, of course: Agriculture.
He noticed that while there was a significant amount of innovation and investment going into energy, little was happening in agriculture. This made it an incredibly important sector and one that will experience significant change over the next couple decades: The perfect place to have a career.
David’s career has touched multiple aspects of agriculture and finance. He was an early employee at Gro Intelligence, a fast growing tech company that leverages artificial intelligence to improve agricultural data. Then, he went to Harvard Business School for his MBA where he became focused on ag-investing and had a variety of different roles in the agri-investment space. He came across Artem Milinchuk, the CEO & Founder of FarmTogether, at the CB Insights Fintech conference in New York and was blown away by the vision.
“I had long believed that farmland belongs in everyone's portfolio - not just those of university endowments. The vision of opening up the asset class and making it more accessible for the everyday investor really spoke to me.”
About a month after meeting Artem, he joined the team.
In this interview we discuss the FarmTogether platform specifically as well as some wider trends that are impacting agriculture.
FarmTogether is a rapidly growing platform with a number of new farmland deals. If anyone is interested in adding farmland to their portfolio, the team would love to connect. You can get in touch with the FarmTogether team through their website.
How does FarmTogether work?
FarmTogether allows individuals to invest and monitor their investments in US farmland. The investor experience is the following:
- Via a marketplace, individuals can browse a vetted selection of investment deals.
- Individuals select a specific farmland deal and become fractional owners via an LLC.
- From the platform, investors can track their investment and stay up to date on key information such as farming practices, cash rent, input costs, taxes and land price appreciation.
- Investors are entitled to receive cash distributions on a quarterly or annual basis. The frequency of these dividends depends on the operating agreement for that particular property.
- At the end of an offering's target hold period, the property will be sold and investors are entitled to their share of capital gains.
Why is it currently challenging for small investors to invest in US farmland?
The US farmland investment market is extremely fragmented because over 70% of properties are under five thousand acres. While five thousand acres may sound like a lot, it can be too small of a deal size for major institutional investors.
Around 10-15 years ago a few major institutions decided to allocate large amounts of capital to farmland. They accomplished this through insurance companies as insurance companies already had experience investing in farmland. We're talking about some of the largest university endowments in the world, such as Harvard and Yale. Due to the nature of how large those institutions are, they need their managers to put large amounts of capital to work. That often meant a minimum deal size of around 20 million dollars. Farms under that size often do not qualify simply because they are too small for these institutions.
This creates a wonderful investment opportunity:
Highly productive farms in great areas, with great owners and strong returns are too often overlooked as a result of this fragmented market.
Looking on the demand side, this fragmented market also means that the minimum investment to access farmland is very high. In order to open an account directly with a large institutional manager, a minimum capital requirement could be a hundred million dollars or even more.
When you're thinking about a 10% allocation of your portfolio to real assets that would imply that you have a 1-billion-dollar portfolio. I don't know how many folks are that wealthy or lucky.
The advent of crowdfunding allows FarmTogether to offer smaller deals - properties that are between 1-5 million dollars. Those deals can then be truncated into smaller pieces and offered to smaller investors for as little as $10,000.
Is there anything else interesting about how FarmTogether structures deals compared to institutions?
Under a closed-end fund model, managers receive management fees regardless of when capital has been deployed. With the FarmTogether model, FarmTogether only receives compensation once capital has been put to work. On top of that, the team leverages technology to become better investors in the sector.
There's so much available data that is relevant to farmland investing. Satellite data, evaporation data, precipitation patterns and more. Those environment variables, as well as demographic variables, allow us to put together the pieces to the puzzle for which property would be the best for our clients.
Another differentiator of FarmTogether from other funds or real estate brokers is the creative way the team can structure deals.
For example, if a farmer is considering estate planning, a situation could arise where a farmer has three children, one would like to continue with the farm, the other two who wish to liquidate. Often, the one child cannot afford to buy out the other two siblings. FarmTogether can structure a deal where a minority residual interest is left with the next generation that wants to continue farming, and FarmTogether syndicates the ownership stakes of the two siblings that are looking to liquidate their positions.
Our model allows us to be much more agile and flexible than traditional institutions.
How does FarmTogether do deal sourcing?
First of all, the team has extensive industry experience and a very strong network. Collectively the team has been involved with deploying over a billion dollars of capital into US farmland and has managed over ten-thousand-acres of farmland. Thanks to these strong networks, FarmTogether is able to build very strong partnership networks. FarmTogether also actively partners with brokers to find off-market opportunities.
How does estate planning impact farmland owners?
Estate planning is a tough and sensitive subject. Unfortunately many people are not very proactive about it because it's a difficult subject to consider.
FarmTogether loves to be that first point of contact in estate planning regardless of whether or not it leads to a sale. The team aims to communicate with the farmland owner the number of different options that are available to them beyond an outright sale. This is why flexibility is key to FarmTogether's investment model. The solution can vary depending on what is right for the specific farmer:
For one owner that could be an outright sale,
for another it could be selling a minority,
for another it could be finding a long-term lease option and continuing to own it in-full.
We think there is a responsibility from managers, like us, to understand the different ownership structures and help educate farmland owners.
Why is farmland an attractive investment opportunity?
Farmland, similar to bonds, is a very stable income-producing asset type. Like residential or commercial real estate, farmland is a real asset. Investors benefit as there is income generated from the land every year as well as land appreciation. Farmland also offers significant portfolio diversification benefits. For the 47-year period from 1970 to 2016, annual farmland returns averaged 10.27%. (Source: Nuveen TIAA, Private Real Assets)
Below you can take a look at how farmland investment has historically compared to other assets.
FarmTogether believes investment in farmland may be appropriate for investors who are searching for stable returns with relatively low volatility. Well-managed land can keep producing and delivering returns over many decades.
What do you view as the key trend impacting farmland today?
In the US, the number one trend is the generational transfer of ownership.
The average age of a US Farmer is about 60 years old, and farmers are beginning to think about estate planning. However, the next generation often has little interest in farming. This can be divided within a family where some siblings would like to continue owning the farm while others seek liquidation.
There are a variety of other trends which can impact farmland as well. This can be climate change, growing consumer demand for organic products or changing trade relationships between nations. All of these can shake up the US ag-market.
One area FarmTogether is really excited about is regenerative farming and the impact it can have on climate change. Through regenerative farming, a farm can actually sequester carbon from the atmosphere. It is an incredible concept and the closest to a carbon-sucking machine that we’ve come across.
What has been the most challenging part of your role at FarmTogether?
First of all, I’m glad to say we are live and accepting investments. Out first deal closed in September which was an Almond property in California.
With this in mind, our number one priority is our clients and making sure our clients' investment experience is a friendly one. Education is a serious responsibility. Before anyone invests, we want to make sure have been able to review our white paper, and we like to have conversations with each prospective client to make sure they understand how the asset class works. We don't think that it's an incredibly difficult asset class to understand but since it hasn’t been accessible, many investors don't know much about it.
Due to this, long-term planning can sometimes go onto the back-shelf. As COO, I think a lot about building tools that will allow scale. Making our administration process easy and flexible. Making our accounting process easy and accessible. Finding time to dedicate to longer term initiatives like that when there's so much happening in the short-term has been the most difficult balancing act.
You mentioned that you have recently become a semi-finalist in the Terraton Challenge. Can you share a little bit about that challenge and what it means to be a semi-finalists for your team?
The Terraton Challenge is a call to action for innovators who are developing solutions that will help remove one trillion tons or a terraton of carbon dioxide from the atmosphere. FarmTogether was named one of five semi-finalists in the reward track. The reward track is for companies who are developing ways to reward growers for carbon sequestration in soil.
By enabling farmland investment, we are putting market mechanisms in place that can help farmers convert their farms to utilize regenerative farming. These incentives are important as regenerative farming is new and can be complex, resulting in short-term declines in productivity.
We are honored to be part of the Teraton Challenge, as it was an incredibly competitive process with 266 companies across 44 countries having applied. We feel very fortunate to be a semi-finalist, and we believe the challenge can connect us to the right community of innovators to help us bring regenerative investment offerings onto our platform.