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Investing in Regenerative Agriculture

Editor’s Note: This article was originally published by Regenerative Food Systems Investment

When Danforth, Illinois, farmer Harold Wilken’s father was dying, Wilken told his dad he was going “100 percent organic.”

“Why would you do that when we struggled for years to keep weeds down and it’s so much easier with herbicides?” his father asked. Wilken’s dad had been using herbicides since 1964, and his skin had become pigmented and would blister whenever he was in the sun.

“Why would you want to continue that way?” Wilken asked his father, in the context of what the chemicals had done to his health.

Harold Wilken himself was familiar with the effects of herbicides, having been drenched in them, having had cancer and survived.

“I didn’t like Roundup, and I figured out in my budgets for 2004 that Monsanto was going to make more per acre on licensing fees than I was going to make on my soybean crop,” he says. “Another factor was my 12-year-old son told me he thought he would like to farm when he grew up and I knew we couldn’t do it on a conventional farm. I thought to myself, ‘If Ross doesn’t have to handle herbicides, pesticides or insecticides, that would be more than worth going organic.’”

But in the 1990s, when Wilken first considered transitioning, the landowners he worked with weren’t hip to it — and neither were banks. Only in 2003 did the transition begin, on about 30 acres owned by Herman Brockman, who’d asked Wilken to convert production to organic methods.

Five years later, Wilken connected with David Miller, a cousin of Brockman’s and co-founder of Evanston, Illinois–based Iroquois Valley Farmland Real Estate Investment Trust (REIT), which invests in land on behalf of farmers who agree to transition it to organic or who agree to continue farming it organically. Miller had another seven acres, part of a family farm, that he wanted Wilken to work organically. Wilken became the first farmer in Iroquois Valley’s portfolio. From 700 conventionally farmed acres in 2003 to 2,900 acres all organic or in transition today, Wilken has since brought his son and nephew into the business and has opened a mill for corn and small grains, selling cornmeal and flour to Chicago-area bakers.

Farmers using conventional methods who want to transition into organic still find it hard to get financing from conventional commercial lenders. But burgeoning numbers of alternative sources, such as Iroquois Valley REIT, are popping up around the United States to step in when and where it makes sense — not only financially, but with the goal of supporting efforts to regenerate soil, conserve land, protect air and water, and boost health by eschewing chemicals and providing nutrient-dense food.

A research project sponsored with an innovation grant from USDA’s Natural Resources Conservation Service — and conducted by Croatan Institute, Delta Institute, and the Organic Agriculture Revitalization Strategy — found that there are 127 investment strategies, with assets of $321.1 billion under management, in the U.S. that integrate sustainable food and agriculture either wholesale or as criteria in their investment process. Of those, 70 strategies, with assets of $47.5 billion, include one or more criteria that relate to regenerative agriculture, according to the July 2019 report, Soil Wealth: Investing in Regenerative Agriculture across Asset Classes (soilwealth.org). Estimates in the report are conservative, meaning there are probably other investments not included in the growing field of regenerative-ag investing.

Of the different asset classes, farmland, cash and fixed income are the “ripest for rapid development in part because bank financing remains the leading form of financing farms and businesses in rural communities,” said Dr. David LeZaks, one of the report’s authors and a lead for Regenerative Food Systems at Delta Institute. Although innovation might happen in those asset classes in an isolated way, “government and philanthropic capital can play a catalytic role in the development of new mechanisms, instruments, and approaches within these asset classes that align the appropriately structured, patient, and biomimetic capital needed to grow the regenerative agriculture sector,” he said.

What’s needed, of course, is no less than a culture change around food, in terms of quality and cost. “In reality, cheap food is very expensive,” said LeZaks, who recently spoke about “soil wealth” and increasing opportunities for investment in regenerative agriculture at the Regenerative Food Systems Investment Forum in Oakland, California. Macro-balance sheets don’t account for soil and human-health degradation, and those costs show up as healthcare expenses, ag subsidies and lost biodiversity.

“We need new accounting standards, financial decision-making tools, policies, and awareness that more fully account for the true costs and benefits of our food systems,” LeZaks said.

He thinks of the report as “an open invitation to the community to think creatively about how the many forms of capital, whether financial or non-financial, can be used to invest in regenerative food systems that build soil health and community wealth.”

LeZaks expects that, even if the circumstances may not be “market ready” — as the investment atmosphere still tends to direct itself toward extraction — there are enough sources of “catalytic capital” to demonstrate proof-of-concept, mitigate risk and help move investments toward an economy that regenerates more and extracts less.

In fact, some in the regenerative-ag investing arena see the biggest barrier to increased investment there as conventional thinking about investments.

“I honestly think in the work we’re doing and what we’ve found, we need to stop prioritizing return, because, frankly, farming operations don’t make a big return,” said Esther Park of Cienega Capital. Cienega’s goal is to regenerate the agricultural soils of North America.

“We need to invest in people and livelihood on the land and rethink the parameters of investment,” she said. “There’s a perception of how hard and risky it is. It is. It doesn’t look like traditional investing. It does take work up front and it does produce lower returns. It can generate healthy returns on a loan portfolio — market-rate returns. That’s not our goal or what we’re trying to go for. It’s easier to rationalize loans. On equity in this space, it’s really hard.”

Alex Mackay, the director of business development and investor relations for Iroquois Valley REIT, said chasing the “next big thing” in agriculture, whether it’s hemp or grassfed beef, creates problems. Rather, the REIT looks for long-term, incremental growth. Iroquois Valley, which never buys land without a farmer and has no interest in competing with farmers who may buy land for themselves, does not tell farmers what they should grow. But it does consider how diversified farms are a way to manage risk. Since its founding in 2007, Iroquois Valley has steered more than $50 million in organic agriculture investments. As of 2017, it had more than 8,000 acres financed or leased across 47 farms, roughly half organic and half transitional.

Unlike Cienega, whose portfolio includes a variety of investments, from land and equipment to recapitalization of existing food businesses deeply connected with their local communities, Iroquois Valley focuses on land and tends to look for second- and third-generation farmers through word of mouth or via conferences like Maine Organic Farming and Gardening Association’s. Iroquois Valley is not the place for farmers to look for financing as a last resort and, in fact, Mackay says they encourage farmers to seek the least expensive source of capital available — and that may not be Iroquois Valley.

Farmers who lease land through Iroquois Valley have the option of buying the land after seven years. For those who obtain a mortgage, they offer a fixed term, interest-only for five years. Farmers can do another five years with principal beginning to amortize, and there’s no prepayment penalty. So if farmers find another source of capital, Iroquois Valley may serve as a bridge. Farmers pay roughly 4.5 to 5 percent.

On the investment side, impact investing within agriculture is new, although investing in farmland is not, as institutional investors look to it for preservation of capital. However, viewed over the long term — 30 years or more — farmland can make a good investment, said Mackay, because there will be more people, and those people eat; why not invest in agricultural lands whose farmers eschew chemicals, work to protect and enhance the health of soil and water, support biodiversity and grow nutritious food?

Iroquois Valley aims for 5 to 9 percent annualized returns, said Mackay. This past summer, the farmland REIT launched a direct public offering for investors with $100,000 in net worth — who could invest $10,000 — as opposed to the usual U.S. Securities and Exchange Commission stipulation that investors must have $1 million in net worth to invest in private equity stock because of the risk involved. Iroquois Valley worked with the SEC to open up to a broader base of investors. Already they’ve had a farmer sign on as an investor.

The success of Iroquois Valley and similar alternative sources of capital is a bright spot for Harold Wilken, who is disturbed by fraudulent “organic” grain imports and hair-splitting over what constitutes “regenerative” when any move away from chemical ag should be celebrated, he said. Although Wilken has inspired others to change, a lot of farmers and commercial lenders are resistant to shifting, he said.

“You’re not going to get every 65-year-old or 75-year-old farmer to change, but the people who are going to make the difference are the landowners, who will say to tenant-farmers, ‘This is what I want done. If you don’t, I’ll find somebody who will.’”

The 22 landowners Wilken and his family work with “believe in what we’re doing, and that’s why we’re farming for them.”

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