Value-Add Strategies for Farmland Investments
What is “Value-Add” Farmland Investing?
Most real estate investors are at least loosely familiar with the concept of “value add” investing which is, in short, a real estate strategy in which an operator purchases a property and then makes various improvements to increase the profitability of the asset. These improvements can run the gamut, from light renovations to wholesale redevelopment of a property. In the multifamily realm, this might look like replacing outdated kitchens, baths, and fixtures. Value-add investments can also be targeted toward operational improvements that result in stronger returns.
Value-add farmland investing is no different. The strategies deployed for farmland may look different, but the concept is the same. It usually entails making some combination of land, crop, resource and/or operational improvements that, in turn, generate stronger returns for investors. Rather than renovating kitchens like someone might with a value-add multifamily deal, a farmland operator might instead redevelop the land by planting higher-value crops. But again, the goal is the same: to increase the value of the property.
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Value-Add Strategies that Boost ROI of Farmland Investments
Value-add strategies should be thought of along a spectrum. On one end, an operator might make modest, low-cost property improvements like increasing the amount of tillable land, optimizing irrigation, or employing a different pruning regimen. At the other end of the spectrum, an operator might make costlier investments such as clearing old, lesser productive trees from the land – for example by removing those producing raisins and redeveloping a farm to grow higher margin crops like Cara Cara oranges or stone fruit, like plums.
While the value-add strategies for farmland can run the gamut, there are a few key tactics that farmland operators will generally consider.
Redeveloping Farmland with Higher-Value Crops
A significant portion of California Central Valley farmland is owned by long-term operators. In many instances, the farms have been in the same family for generations. Some of the crops being cultivated today are no longer as profitable as they were in years past, but the returns are sufficient for the current owners’ needs. These types of farms are acquisition targets for Bravante Farm Capital in much the same way a 20-30 year vintage apartment building owned by the same person might be a target for a value add multifamily company.
As farmland increasingly trades for a premium, it is more important than ever for the new operator to identify the highest-value crops for that farm based on climate, water availability, soil conditions, crop profitability, and consumer demand.
A savvy farmland operator will be able to identify the highest-value crops for any given block of land. Those operators also need to carefully monitor market trends. Just as office trends wax and wane—like the preference for open office space and communal work areas—so do preferences for specialty crops. While specialty crops can be highly profitable, here at Bravante, we focus on those that have predictable, long-term demand like lemons and mandarins, for example. This helps in maximizing long term profitability while reducing income volatility that can come from planting row crops that are more susceptible to commodity pricing variations driven by consumer demand.
Vertically-Integrating Farmland Operations
Another way farmland operators can add value is by vertically integrating farmland operations and this means by owning the packing facility too.
By way of background, vertical integration includes all the stages by which produce grown on the farm reaches the consumer’s table. Consider this flow chart below:
- Grow crops
- Harvest the crops
- Transport to packing facility
- Sort produce into different qualities
- Pack the produce
- Ship to retailers
Whether a farmer has owned his land for decades or, like Bravante Farm Capital, is a value-add player, both grow crops – stage #1 of the process.
Once the crops are ready for market, they are harvested at the farm, stage #2, and transported to a packing facility, stage #3. At the packing facility produce is sorted by size, sugar content, appearance, and other qualities, and packed accordingly so that pricing can be set according to overall standard of the produce – stage #4.
Once the produce has been sorted it is packed into boxes or bags and boxes, branded according to the end customer, typically the retailer, stage #5, and then shipped by truck or, for our overseas customers, by ship, in stage #6.
The packing function typically includes all five stages 2-6 in the diagram above, from harvesting to shipping.
Ownership of a packing facility is a major capital commitment that only larger scale, institutional caliber farms can afford to own outright. Here again we see parallels with the multifamily world. A sponsor owning and operating 3,000 apartment units, for example, can afford to have in-house architects, construction teams, and maintenance staff, but someone who owns only 10 units cannot.
In the same way, a smaller scale farm such as those we are acquiring, has a competitive disadvantage because it is impractical for them to own their own packing facilities. They must depend on independent packers and are, therefore, subject to the whims of these companies. Maybe the packer does not show up to harvest at just the right time in a crop’s lifecycle, arriving too early or too late to capture the optimal quality of fruit from the trees. Maybe they only harvest half a crop one day and then decide they have enough other customers to handle the demand their own downstream customers want to buy.
And here, yet again, we see a parallel with the world of bricks and mortar real estate ownership and development. A small-scale real estate sponsor needing to build a new building, renovate an old one, or simply add upgrades to an existing facility is subject to the whims of his general contractor who, in turn, is subject to the whims of his sub-contractors. Maybe the general contractor has too many jobs and delays showing up on site for a few days. Perhaps the plumber is backed up (if you’ll forgive the pun) and is a no-show when scheduled causing a ripple effect in the entire project timeline.
A large-scale bricks and mortar developer will either have purchasing power leverage over their general contractor and sub-contractors or will own and operate those functions themselves – just as we own the packing facility at Bravante.
Rather than simply growing crops that are then packed, sold to, and distributed by independent packers, institutional scale, vertically integrated farms like Bravante have brought these functions in-house. This gives us economies of scale because we can harvest, pack, and ship all the farms we acquire using our one packing facility (with some minor exceptions), which reduces costs at the farm/ranch level and so increases profitability.
This also allows us to sell our produce under private brand names for a premium—one we can charge given the quality-control measures integrated into our packing operations. Furthermore, by owning the packing facility, we are control the harvesting process, stage #2 in our chart above. This allows us to decide the optimal time to harvest produce from our own farms to ensure the highest possible quality produce is delivered to our customers while minimizing waste at the farm, and so maximizing profits to our investors.
To be clear, owning the packing house is not the be-all and end-all of successful farming. The trifecta of owning good farms, with a good packing house, and good operations and sales is what drives maximum profit to the bottom line and returns to investors.
Adding Value Through AgTech Innovations
Technology is transforming every aspect of the commercial real estate industry. Farmland is no exception. The use of “AgTech” – hardware and software specifically designed to for agricultural purposes – can dramatically improve the profitability of farmland.
AgTech is often classified by its primary purpose. Those purposes can be grouped into one of three categories: Tech Assisted Farming, New Farming, and Revolutionary Farming.
AgTech used for tech assisted farming is perhaps the most relevant to traditional farmland operators. Examples of this AgTech include sophisticated water management systems, plant and soil analytics, IoT-enabled.
Brix Detection Machines
One specific example of an AgTech innovation that we use is called a brix machine. Brix is a unit of measure for sugar content in an aqueous solution – or, put into plain English, how sweet an individual piece of fruit is. A grape or an orange is said to have a certain brix count. Anything over a 12 is considered very high quality, for example. After the fruit is harvested and transported to our packing facility, we pass it through a brix machine which sorts every individual piece of fruit according to its sugar content.
Drones are increasingly used to increase the profitability of farmland operations. An operator who walks the farm has limited perspective. Drones provide an alternative perspective—specifically, one from the air. Equipped with infrared and other technologies, we can use drones to monitor things like the amount of water plants are getting or the air vs. ground temperatures. That said, we do not rely on this technology entirely. As with any real estate asset class, nothing beats being detailed and actively involved in the process at Bravante, George Bravante personally visits every farm daily, and sees every block on every farm at least once a month.
Thoughtful Farmland Water Strategies
In a place like California, where the availability of water can be limited, how and when water is used is critically important. Water is perhaps one of the most critical resources for farmland success.
Traditionally, farmers grow based on the calendar year. They start watering their crops on May 1st, add nutrients to the soils from June 1st, etc. These activities are not based on actual, real-time conditions. They are arbitrarily based on the calendar year and through force of habit of having done the same thing for many years.
Farmers have realized there is a better way. Here at Bravante, we were among the first operators to move away from calendar farming. Instead, for example with our Cara Cara oranges, we flood irrigate in June, July and August to saturate the ground which allows the fruit to grow bigger. Once the fruit has reached an optimal size, we starve the ground of water which stimulates rind (skin) development, optimizes the color, increases the sugar content, and enhances the overall quality of the rind which also makes the fruit easier to peel.
Many of the smaller farms we are targeting for acquisition resist this approach; they are used to the ‘old’ way of irrigating, do not want to spend the small amount of money needed to create an effective irrigation system, and, ultimately, are just resistant to changing the way they have conducted business for decades.
However, this water allocation strategy – known as “deficit irrigation” – is proven to increase the size, color and quality of fruit. Two farms located directly across the street from each other can end up having entirely different crop yields if one uses deficit irrigation and the other does not.
This thoughtful water management approach results in stronger yields of more profitable crops and, as is our primary focus, increases returns to investors.
Use of Biologicals to Improve Crop Yield
Agricultural “biologicals” are a diverse group of products derived from naturally occurring microorganisms, plant extracts, beneficial insects and other organic matter. They can be used to stimulate plant growth (biostimulants), to protect plants (biopesticides) and to fertilize crops (biofertility).
The use of biologicals is still rather innovative. Many farmers have resisted their use, and understandably so: their effectiveness can be difficult to benchmark as every growing season can be so different. It can be hard to decipher whether the biologicals, which are expensive, had any impact on the crops or whether that was an especially strong growing season for other reasons (good weather, etc.). Most farmland operators will want to have hard data to prove the biologicals were effective before spending more money on their use.
In our experience, selective use of microbiological solutions can protect crops from pests and diseases which in turn, enhances plant productivity and fertility. In other words, farmers can generate higher yields using fewer inputs.
Finding Energy and Other Natural Resource Efficiencies
We have already touched on water management strategies, like deficit irrigation, that improve farmland profitability. Other energy and natural resource efficiencies can also be used to increase the value of a farm.
Variable Speed Pumps
It used to be that water pumps were one size. The power to that pump was 15 horsepower, for example. With variable speed pumps, an operator can use 2 horsepower instead of 15 horsepower if that’s all they need. Not only does this save water consumption, but it also saves energy which in turn saves money.
Energy-Efficient Packing Houses
Most people only consider the energy and other resources needed to cultivate farmland. The on-site buildings, like packing houses, also utilize tremendous energy. One way to increase the value of a farm is by focusing on the energy efficiency of these buildings which reduces the cost burden of the packing and distribution function allowing for more profits to be pushed down to the farm.
At packing houses, for example, old lighting can be replaced with more efficient LED lighting. Where possible, machines can be upgraded with more efficient motors and air compressors. Buildings can be highly insulated to lower energy costs (maintaining a dry, cool building is important for crop preservation), with refrigerated panels built-in in a way that optimizes energy use.
Some farms have extra land that, for whatever reason, may not be conducive to cultivation. In situations like these, that land may be better utilized as a solar field. PV arrays, either on the land or on buildings, are another way farmland operators can save energy and increase the value of the property.
Farmland Incentive Programs
Depending on the location of a farm, there may be incentives to upgrade the energy efficiency of the property and/or equipment. In California, for example, a farmland operator is wise to coordinate with the Air Quality Board. The Air Quality Board has various incentives available to operators willing to purchase more energy-efficient, non-polluting tractors and other farming equipment.
Most commercial real estate professionals will tell you that the apartment or office building they own is run like a business. The same is true for professional farmland operators. A savvy farmland operator will seek out underperforming farms and likewise, deploy value-add strategies that enhance returns for investors. This is exactly our approach at Bravante Farm Capital.
Farmland in the California Central Valley is particularly ripe for value-add redevelopment and consolidation as many of the long-time farmland owners are getting ready to retire. Those who only have a few years left are not particularly interested in reinventing the wheel; they are simply maintaining the status quo. For them, they are happy and that is sufficient. As farmland increasingly trades at a premium, operators will be wise to identify selective value-add strategies that transform outmoded businesses into more sophisticated, more profitable operations.
Are you interested in learning more about farmland investing? Contact us today. At Bravante Farm Capital, we aren’t just farmers, we’re in the business of farming.