Grazing the Steaks

The imagery of cattle on 747, flying 2500 miles across the Pacific ocean took me by surprise –and wasn’t an idea I ever thought I would have to entertain until I began exploring the market potential for pongamia seed cake as a cattle protein supplement in Hawaii.

content cattle

Very content cattle (replacement heifers) on a intensive rotational grazing system at Ponoholo Ranch on the Big Island, with sweeping views of the coastline and Pacific Ocean

Through this pursuit, I discovered that approximately 75 percent of the cattle raised in Hawaii are shipped, by either plane or boat (via “cowtainers” or “floating feedyards”), for finishing and processing on the mainland. This practice began taking place after a large-scale processing plant closed down in 1990, causing the only large capacity feedlot to follow suit.  In another article, I explain that this practice not only decreases Hawaii’s market share of the industry from 30 percent to less than 10 percent, but also bears down on the islands’ food security and self-sufficiency — a looming issue for Hawaii. Nonetheless, it turns out, shipping cattle live to the mainland for finishing and processing is more economical for ranchers than purchasing feed to finish them here. A big issue is that the cost of feed (protein) is nearly double the price paid by ranchers on the mainland. Thus, with limited local feed options, in addition to veterinary care, branding, processing, and grading services, finishing and marketing the product on the mainland becomes more profitable.

cow calf operations

Cattle production chart depicts each phase of production and relative nutrients. Cow-Calf phase in yellow is what primarily takes place in Hawaii.

The scenario described is exactly why local feed solutions are currently in vogue in Hawaii.  In fact, a variety of industry stakeholders are interested in locally produced livestock feed, especially those derived from biofuel co-products, in effort to bolster Hawaii’s food-security and self-sufficiency, as well as the economic pay-off. With this considered, Pongamia is not only high-performing biofuel but also a potential solution to a eminent food security issue here in Hawaii.

Knowing all this, the seemingly manifest subject-matter of cattle supplementation in Hawaii quickly became a quandary through the market research process. First, Hawaii’s cattle inventory (including calves) is 135,000 head. With only one 950 head capacity feedlot in Maui, most of the weaned calves that are finished in Hawaii (a little over 8,000 head) are almost entirely forage-finished. These cattle are locally marketed as “grass-fed,” which doesn’t necessarily mean that can’t be given supplements but it is indeed a murky market to evaluate. However, most of Hawaii’s beef cattle industry consist of cow-calf operations, which takes place over a year before the finishing (feedlot) phase, as illustrated in the chart below. This is key as supplementation is the most critical during the cow-calf phase, given the mother cow’s high nutritional needs during pregnancy and lactation. With approximately 80,000 mother cows requiring 2-3 lbs of protein a day, this particular market could range from about 2,500 tons of pongamia potential, if only half of the mother cows received the supplement for 365 days, up to 8,000 tons of pongamia potential if all 80,000 mother cows receive the supplement for 365 days.

hawaii climateFor an even more critical look, a majority (about 80 percent) of the cow-calf operations are on the Big Island, where you’ll find one of the most productive (and jaw dropping picturesque) grazing lands in the U.S. Moreover, what you might find surprising, is that the Big Island is home to three of the top 25 largest cow-calf operations namely, Parker (#9) , Ponoholo (#21), and Kahua Ranch (#23). These three ranches (all neighbors – pictured below) make up a quarter of Hawaii’s protein supplement market. Parker ranch alone has approximately 10,000 mother cows over 130,000 acres, in 4-5 climate zones that can be observed from a pu’u (mound) from just up the ranch headquarters. These microclimates, along with the mountainous topography and multifarious winds are certainly factors these ranches take into consideration when choosing to supplement. Parker Ranch, for instance, finds it important to look at the season and time of year, as the nutrients in the forage is dependent on this.parker ranch Ponoholo, on the other hand, over 11,000 acres and three climate zones, prides itself on being a low-cost ranch, that is able to practice intensive rotational grazing which maximizes nutritional opportunities for the cattle, thereby reducing damage to the land through erosion and overgrazing. Given this, Ponoholo would likely forgo protein supplementation even in the event of drought, where they find it best to simply reduce their herd size. Right next to Ponoholo, Kahua Ranch would, however, consider using a protein supplement especially during drought to maintain cow-herd numbers. This illustrates the complexity and case-by-case nature of the cattle protein supplement market Hawaii. Nonetheless, even the ranches that rarely supplement their cattle, are still behind the idea using of pongamia seed cake as a protein supplement — especially in a drought situation, which one rancher explained could be the difference between life or death for a cattle herd.

Nitasha Baker

RISE/EEx- TerViva Business Development Fellow

Too legit to quit

The process of commercializing a new permanent crop such as a tree takes time to ‘prove’ economic viability. It is therefore no surprise that investors have shied away from the space. In fact much of the investment in new crop development over the past hundred years has been on annual crops like corn and soy. Nevertheless, permanent crops have the potential for much higher yields per acre and sustainable cultivation through the use of lower inputs (unless you are clearing forests to plant — I’m looking at you oil palm!).

Yes indeed validating yields of mature tree crops takes many years, so how do we get investors to pony up risk capital to develop novel permanent crops? Let’s leave aside the notion that investors (venture types especially) delude themselves and their LPs in to thinking that exits should require only 3 to 5 years (please look at all of your investments and see how many actually hit that mark).  Most successful businesses in agriculture, biotech and even technology take a decade or more. Even though permanent crops are more challenging they can be very profitable and scalable if done using innovative business models.

The key to large scale adoption of a ‘new’ tree crop isn’t just good yields but can also come from developing valuable uses for the crop.  For example, a Bloomberg article this morning highlighted the recent interest in the cacay tree that is found in Andes Kahai-Nut-OilMountains in Venezuela, Ecuador, Peru and Colombia. This tree probably pre-dates humans and has been in use by people in the Amazon for centuries to treat skin irritations and burns, to make soaps and to feed livestock. A few years ago, a company called Kahai SAS showed that the oil from the tree has anti-aging properties and now folks are selling facial creams for $200 an ounce in beauty shops. Are there large scale plantations of cacay trees? None! I am sure it will take many years to hone in on consistent, high-yielding cultivars of the cacay tree but the highly valuable oil will make broader adoption of cacay plantations economically viable.  And to sweeten the deal, there are also a number of sustainability benefits for planting trees: CO2 capture, soil enhancement and curtailing deforestation (apparently cacay makes great firewood).  Kahai has already built a nursery and a processing plant to scale this crop.

As we discussed in previous posts, TerViva is commercializing a leguminous tree crop called pongamia that is native to India. Our vision is to create the world’s most scalable, cost-effective and environmentally friendly source of oil and protein. That grand vision is married to an innovative business model where we work with growers to convert their underused and distressed agriculture land into productive acreage by planting our proprietary pongamia cultivars. We offer more than just large and consistent yields per acre; we are also developing high valued uses of the oilseeds like anti-microbials, bio-pesticides and animal protein.  Permanent crops that can produce high valued, non-commoditized products make the bet for growers (and investors) more than just about yield.

Our bottom line is that if growers are convinced that a crop can be profitable (due to high yields and/or valuable products), they will grow it. Just look at the table below of 4 more established permanent crops and how many acres are planted every year.

Keep your eye on this space…

Sudhir is the CFO of TerViva, Inc

Dry Farming: A Sustainable Solution for California Farmers?

20142015 droughtAs California emerges from a “winter” with average temperatures 4.4°F warmer than the 20th century average and the lowest snowpack in 24 years drought is on the minds of many. While many of us will notice higher water bills, brown lawns, and asking for water when dining out the agriculture industry will continue to bear the brunt of the drought. In 2014 the agriculture industry suffered $2.2 billion in economic losses and 17,000 farmers lost their jobs. We can likely expect more of the same in 2015 as the drought continues, but what, if anything, can farmers do to minimize their losses?

soil-profileDry farming is a set of practices that aim to capitalize on using the water stored in the subsoil layer, rather than traditional irrigation, and was practiced long before modern irrigation existed. In areas with long dry seasons and seasonal rainfall, crops such as olives, grapes, figs, apricots, almonds and walnuts were historically farmed without irrigation. Dry farming was widely practiced in California up until the 1970’s, when drip irrigation became the industry standard. Today, dry farming is most notably used in the cultivation of wine grapes in California and abroad – in some regions of Europe it is illegal to irrigate because it is thought to dilute the quality of the wine.

The practice relies on tilling practices that create a “sponge-like environment” in the topsoil. Water from the subsoil layer then rises into the topsoil and a roller is passed over the topsoil sealing in the water and preventing it from escaping through evaporation. Drought resistant varieties are then planted and use the water in the soil to sustain their growth throughout the dry season. The precise timing of the planting and tilling is essential for proper moisture retention.

The potential for dry farming is limited by climate and soil type. A sandy soil will never be suitable for dry farming because any water will quickly drain away. At least 12 inches of rain are needed for proper moisture in soils, excluding much of the Southern portion of the Central Valley. However, in areas that have the appropriate soils and climate, it could prove to be a useful tool for farmers looking to cut costs or make use of land that seemed unsuitable in the current drought.

The lack of irrigation requires less dense planting, because only so much water is available for each plant, and leads to significantly decreased yields, sometimes as little as one-tenth of that of irrigated fields. To some extent, the savings of not using irrigation counteracts the loss in revenue from reduced yields. Irrigation infrastructure can be very expensive to purchase and install, and the cost to pump groundwater will continue to rise as we deplete our reserves. One case study from a vineyard in Sonoma County, CA found that a minimum of 16,000 gallons/acre feet was saved compared to growers who lightly irrigate. Less irrigation can also results in less weeds, reducing the need for expensive herbicides and pest management.

Dry farmed Early Girl tomatoes at Live Earth
Farms in Watsonville, CA.

In addition to savings on irrigation, some dry-farmed fruits and vegetables have created a cult-like following for their improved flavor. The improved flavor comes from reduced water content and higher concentrations of sugar and flavor compounds. In recent years, dry-farmed tomatoes have been in high demand from chefs and wholesalers around the country and can provide high economic returns despite low yields.

The economics of dry farmed products are far from certain, however. Though fruit coming from dry farmed orchards and farms tends to be more flavorful and better storing, the commercial fruit industry has invested a substantial amount of time and money in developing standards for large fruit, dependent on the application of irrigation, fertilizers and chemicals. Dry farming is not going to be the answer for large-scale agri-businesses – the yields are too low and crops like strawberries, rice, or lettuce would not survive without irrigation. For smaller growers and unemployed farmhands, however, dry farming could provide some relief in the current agricultural landscape of drought-stricken California.

Water Innovation for the 21st Century

This week’s blog describes three examples of water innovations.  In the first case an entrepreneur fights city hall to provide a source of clean water for residents of Mexico City. In the second case, a state government entity agrees to pay a publicly traded commercial entity to store water on private land in Florida. In the third case, an engineer calls for a water revolution. 

Retrofitting homes for rain water catchment in Mexico City

Mexico City faces a severe water crisis. The Valley of Mexico aquifer is being overexploited to provide water to its 21 million residents.  As a result, the city is sinking about 1 meter every 10 years.  And yet, citizens of Mexico City still lack sufficient drinking water. Mexico City’s water pipes are old and cracked, springing thousands of leaks that the city government cannot keep repaired. It is estimated that 40% of the available water is lost through these leaks. Some 36% of households are without access to a constant daily flow from their faucets. This lack of drinking water is posing a major health risk, and Mexicans try to compensate by having the highest consumption per capita of bottled water in the world. Without investing billions of dollars in infrastructure to replace the entire system, the government will continue to fail to deliver safe drinking water to its citizens. In crisis mode, and in large part to reduce the probability of political unrest, city officials are delivering water by truck at great cost (PBS Newshour, PBS NOVA).

RainWater_Harvesting_Isla_Urbana_System_ComponentsEnrique Lomnitz, an engineer from MIT with an industrial design degree, has developed a low cost rain water harvesting system and established Isla Urbana to build such systems and educate local residents on harvesting and using rain water. His system, at a cost of $1000, when applied to a typical roof and under average annual rainfall, can provide enough water for two families per year. Mr. Lomnitz estimates that widespread installation of such systems could provide for 30% of Mexico City’s water needs. To date only 1500 rain harvest systems have been installed. The challenge that Mr. Lomnitz and Isla Urbana face in building widespread adoption for this innovative solution is political, governmental inertia, rather than technical. (PBS News Hour).

Water storage and release on private land in Florida

In Florida, water districts are challenged by the unequal and intermittent flow of fresh water into lakes, estuaries, and ultimately the Everglades following heavy rainfall. This challenge impacts agriculture, the environment, the economy of Florida, and the quality of life for its residents.

Under a recent agreement between Florida’s oldest and largest water alico logomanagement district (the South Florida Water Management District), and a major agribusiness with the largest citrus production in the US (Alico, Inc.), more than 34 billion gallons of water will be stored on approximately 35,000 acres of ranch land. This agreement is a first under a Dispersed Water Management program and makes use of private properties to store water and manage its release to avoid overwhelming Lake Okeechobee and coastal estuaries during heavy rain seasons. Property owners gain financially in return for providing a critical water management option.

Water 4.0 for Californiawater 4.0 yale books

“We require a fundamental change in our relationship with water”, says David Sedlak, UC Berkeley professor of civil engineering, co-director of the Berkeley Water Center and author of the recent book Water 4.0: the Past, Present, and future of the World’s Most Vital Resource (Yale University Press, 2014). Over the centuries there was Water 1.0, when Rome built aqueducts and disposed of waste. Water 2.0 saw 19th century Europeans chlorinate and filter drinking water; followed by our present system, Water 3.0, that treats sewage as well. But according to Sedlak, now it’s time to update to Water 4.0.

“If the system remains hidden underground and people just turn on the faucet and don’t think about all the effort that goes into getting the water to them, we can’t have an intelligent discussion about water supply”, Sedlak says (PRI). However, according to Sedlak’s optimistic view, the very crises we face, such as the severe drought that California faces, may just result in sufficient collective will to accomplish a major shift in our relationship with water.  In a recent interview (NPR) Sedlak expressed his optimism that rapid advances in electronics, materials science, and biotechnology will help us solve current challenges.

The first principal of Water 4.0 involves continuing to adopt new technologies for indoor plumbing and elsewhere in the entire water system, technologies that allow greater water conservation. Technology solutions include switching to top-loading washing machines instead of front-loading washing machines and installing more efficient toilets. The modern flush toilet uses 1.5 gallons per flush, whereas vacuum toilets (think airplane toilets) can reduce that flush to 10% of that amount.

The second principal of Water 4.0 refocuses urban residents on local solutions that capture and recycle water. Capturing urban storm water run-off (USG), using seawater desalination plants, and sustaining urban aquifers are all ways to move water management to a local level. While building a reservoir in the middle of a city is nearly impossible, many cities already have urban aquifers underneath them that can store water (NPR). Other local solutions include recycling more water either by returning grey water (water from bathroom sinks, showers, tubs, and washing machines) for use in flushing toilets ( or by recycling sewage after it’s been treated and returning the clean water back into the water supply.

According to a 2014 report by the Pacific Institute and Natural Resources Defense Council (NRDC), if Californians adopt aggressive conservation, water reuse, and rainwater capture practices, the state could save up to 17.3 million cubic meters of water, more than the amount of water used in all of California’s cities in a single year.

Lessons from Australia’s response to millennial drought

Sedlak and others point to Australia’s response to their millennial drought that ended in 2009 as an experience from which Californians can draw important insights. A summary of Australian responses can be found in a presentation at the Public Policy Institute of California on January 12, 2015 by Jane Doolan, fellow of natural resources governance and member of Australia’s National Water Commission.

In brief, the Australian government responded to their country’s extreme drought conditions with policy initiatives that changed their water entitlement system, supported water markets, and provided water for the environment to head off catastrophic impacts to sensitive species and ecosystems. Economic, social, environmental outcomes were considered together. The new paradigm became ‘This is the future”, as opposed to “We need to get through this”.   Australia succeeded in changing its water system in a way that different stakeholders saw as fair and as spreading the pain all around equitably and thus the changes had broad public support.  Specifically they:

  • Improved the water grid at the highest level to enable the movement of water.
  • Adopted efficiency in all sectors:urban households, industry, and rural irrigation systems.
  • Improved infrastructure and adopted smart river management to enable water movement.
  • Gave tools to entitlement-holders to allow them to manage their own risk.
  • Made the water market able to operate under extreme circumstances.
  • Augmented supplies when required.
  • Shifted to an environmental paradigm that was practical, pragmatic, and easily understood.


The innovations described above are examples of how countries, states, cities, water management districts and individuals are going beyond incremental improvements to their water management to solve critical water problems.

Beyond the Buzz: High Impact Trends in Sustainable Agriculture

By Anne Slaughter Andrew, Co-founder and Chairman of TerViva

TerViva was formed and launched around a commitment to advancing sustainable agriculture – ahead of the trendy buzz that this concept invokes today. Yet this buzz, and the sobering fact that agriculture produces about one quarter of the global green house gas emissions, has given impetus to the hard work of developing measurable outcome data and of shifting cultural concepts around “the way it’s always been done on the farm” in order to advance sustainability – from large corporate farms to the rural agricultural communities of Latin America and Africa.


Sustainable agriculture aims to incorporate social, economic, and and environmental sustainability.

One impressive recent initiative is the Stewardship Index for Specialty Crops (“SISC”), which seeks to promote sustainable agriculture by providing common measurement tools and metrics for food producers and consumers. SISC’s goal is to provide a common language for communication about sustainability activities related to specialty crops  (fruits, vegetables and nuts).

The SISC agreed-upon metrics focus on a commonsense platform for sustainable agriculture: (1) Applied water use efficiency; (2) Energy use; (3) Nitrogen use; (4) Phosphorus use; and (5) Soil organic matter.  With today’s agriculture accounting for more than 70% of freshwater drawn from rivers, lakes and aquifers and the documented impact on water quality from agricultural runoff of nitrogen and phosphorus (not to mention the costly waste of limited resources like phosphorous), there is no debate that monitoring and adjusting farm practices around these metrics will advance sustainability to the benefit of the growers, producers, and consumers.


Agricultural runoff high in nitrogen and phosphorous can lead to eutrophication, harmful algal blooms, and other negative impacts on lakes, oceans, and rivers.

What has driven the interest by producers and consumers around this more transparent and measurable approach to sustainable agriculture? A major factor was the rising demand for “sustainability” in the marketplace where there was no consensus among producers and consumers of exactly what “sustainability” meant. The benefit of this “buzz-feed” is that it brought together a broad coalition of interests– from growers and producers like Del Monte Foods; trade associations like the National Potato Council; retailers like Walmart; and environmental organizations like the Natural Resources Defense Counsel — to develop a comprehensive system for measuring sustainable practices performed at the farm level.

Underlying the metrics of SISC, and making its approach possible, is the impact of big data and predictive analytics in agriculture. For agriculture to sustain its customers – including the growers and producers – it must be able to feed the world’s population, which by 2050 is expected to be 9.2 billion people. To meet this demand, it is expected that global food production must increase by 70%. With real-time data on critical information (e.g. the weather, soil quality and crop maturity) that can be processed, analyzed and downloaded back to the growers, farmers can maximize food production, operate more cost effectively and minimize the environmental impact.

Rural, small scale farmers feed more than 2 billion people every year.

Rural, small scale farmers feed more than 2 billion people every year.

These “precision agricultural technologies” today can be accessed and utilized by large farming operations and agricultural companies which have the financial resources to support a robust IT infrastructure to gather, monitor and analyze the data. However, this means that small scale farmers, who represent over 75% of the world’s farms and feed more than 2 billion people, are not positioned to take advantage of the advances in sophisticated data-driven agricultural technologies. This is particularly concerning because most of these small scale farmers are in underdeveloped areas where population growth, food scarcity and climate change will have such a disruptive impact.

 How can we bring these technology-based resources into the hands of the small-scale farmers? More importantly, how do we convince these small-scale farmers to adapt to more sustainable—and technology-based –agricultural practices when the farming traditions they follow are woven into the fabric of their communities and culture.

One organization with a track-record that has gained attention from major donors like MasterCard Foundation for their success in developing young leaders in sustainable agriculture is EARTH University in Costa Rica. EARTH University was founded 25 years ago with a mission to prepare young people capable of leading positive change in their communities to advance sustainable development and prosperity. Today, EARTH University has 420 students from 36 countries across Latin America and Africa, many of whom are the first in their villages to attend university. The students come together at EARTH U. with all of their diverse local traditions and customs, and with little exposure to modern agricultural science and technology. When these students graduate, the impact they are having in advancing sustainable agriculture at local and regional levels in developing countries is transformative.

A student at Earth University tends to an organic lettuce project.

A student at Earth University tends to an organic lettuce project.

How can EARTH U. create such a transformative impact on sustainable agriculture? It starts with the fact that 4 out of 5 EARTH graduates return to their country of origin—and bring with them a commitment to have a positive impact. More than 50% of EARTH graduates are actively engaged in advancing modern sustainable agriculture practices, from soil management and water conservation to alternative forms of energy for farming operations. At the same time, more than 75% of EARTH graduates are actively engaged in influencing positive social change, from improving working conditions to addressing gender and ethnic equality within their agricultural-based economies and communities. These students have learned how to be agents of change within the social and cultural context in which they live. No doubt the students of EARTH can best tell this story and you can hear from them here.

In agriculture, change comes at a pace that synchs with the growing seasons. Luckily, we are trending towards a more sustainable approach to agriculture—from the high-tech impact of big data and measurable metrics for growers and consumers to the high-value impact of young and committed leaders engaged in advancing sustainability in their communities across the developing world. Will this trend continue and support the global policies and practices necessary to feed the global population and sustain our environment? What do you predict?

Turning Air into Rocks?!

Mea Culpa, that was more click bait from this author; but as with my previous post, would you have clicked on a blog post with a title like “physicochemical conversion of heterogeneous gaseous mixture into stable crystalline formation”? Nuff said.

There are several components I consider crucial for a strong start to the day, two of which are a strong cup of coffee and a perusal of the newspaper so as to remain an informed citizen.

I’m naturally inclined toward curiosity in stories related to renewable energy and mitigation of the effects of climate change. As such, a recent post in the New York Times seized my consciousness.

The article, written by Henry Fountain and published by the Times on February 10, 2015, bears a headline that allows little ambiguity as to the direction of the narrative: “Panel Urges More Research on Geoengineering as a Tool Against Climate Change”.

This New York Times piece, and many others like it, are familiar to many, and the gist of these articles can be summarized as follows:

  • Climate change is happening
  • The eventual effects of climate change are going to be devastating
  • Current efforts are not going to be sufficient to address the effects of climate change
  • We need to take drastic action to avoid the worst possible outcomes
  • This drastic action may have negative unintended consequences, but the known negative consequences of climate change are far worse

Caveat: this article quotes US government officials who advocate for more research, I am not implying anything other than government advocacy for research into geoengineering.

Rather than foist my own opinion of this journalism on you, I bring this article to your attention for a much more important reason, summarized by this quote from the article advocating for the study of geoengineering.

In two widely anticipated reports, the [National Academy of Sciences] panel — which was supported by NASA and other federal agencies, including what the reports described as the “U.S. intelligence community” — noted that drastically reducing emissions of carbon dioxide and other greenhouse gases was by far the best way to mitigate the effects of a warming planet. But the panel, in making the case for more research into geoengineering, said, “It may be prudent to examine additional options for limiting the risks from climate change.

In case that wasn’t clear: groups within the federal government of the United States of America view our current societal trajectory as so calamitous that we should begin studying the potential effects of changing the climate of the entire planet, so as to lessen the catastrophic effects of climate change. This research could be quite necessary in case the work of folks attempting to address this conundrum through high tech, and high ambition plans such as turning atmospheric CO2 into rocks for sequestration doesn’t pan out.

I view the panel’s finding as significant because I plan on living many more decades on this particular planet. I also plan on having children who will hopefully, at the very least, have the option of living on earth for many decades to come.

I am greatly comforted by the knowledge that there are bright, well-intentioned people working to find very high-tech solutions to the problems that are the underlying cause of climate change.

I will also be completely candid with you: I have vacillated, but have not yet developed a strong opinion pro or con regarding geoengineering. If you feel strongly about this issue, please comment on this blog post.

I have the luxury of being able to punt on my opinion of geoengineering, because my day-to-day work chips away at an underlying cause of climate change (dependency on petroleum-based products) while being minimally risky: I plant trees for a living. While inspired and intelligent individuals the world over work through their own chosen potential solutions to climate change, I will continue planting orchards of pongamia trees with TerViva. These orchards will do more than address climate change, they also provide jobs, and return former agricultural land to productivity through new farming crops and techniques.

I sincerely hope we never need the geoengineers to execute their plans, but am glad that intelligent people are thinking through the implications. For the time being I take comfort knowing that TerViva is contributing in it’s own, silvicultural fashion, as indicated by our newest, recently planted acreage in Hawaii that is pictured below.

IMG_8864 - Version 2

Some Thoughts on Farmland Investing on the Downside of a Commodity Cycle

By Tom Schenk, TerViva’s Director of Business Development

A good case can be made that over the last 10 years, most of the “easy” money has been made in farmland investing. Corn, soybeans, wheat, and many other commodities more than doubled in price over their prior decades, and then maintained those levels – until this past year. Surges in worldwide demand and weather-related shortages primarily fueled this explosive rise in prices.

Farm income rose sharply as interest rates plummeted and suddenly a once-sleepy asset class called farmland (and agriculture in general) became the darling of hot investor money. As investors swarmed to this asset class, farmland prices were bid up even faster than lease rates were rising.

Farmland that once fetched an 8% cap rate declined to 3% and in some cases even lower. Total annualized returns (lease income + land appreciation) ballooned to 15% and many expected those returns to stay close to those levels far into the future – until this year. Additionally, tillable acres worldwide grew sharply as technology improved farming methods and varietal yields.

So in 2014, faced with a worldwide surplus of grains, we are reminded once again of the fundamental laws of supply and demand.

Farmland values are related to lease rates. Lease rates are related to farm incomes. Farm incomes are related to crop prices, input costs, and tax rates. And none of the latter has been kind to profitability.   Growth in profitability drives appreciation expectations for this asset class.image009

As a result – and in the near term – investors are dreaming if they are expecting traditional row crop farmland returns beyond their current lease rate. Row crop farmland has entered an “adjustment” period where crop supply/demand ratios slowly re-align, where land prices re-align with rental rates, and where rental rates re-align with farm income. This is nothing new in agriculture world, but certainly may be for investors new to this asset class.

But rather than concluding on a gloomy note, I’d like to leave readers with two thoughts.

  1. Finding/creating alpha from this asset class will take some thinking outside of the box. In other words, instead of passively owning traditional farmland and riding the commodity cycles up and down, explore ways to proactively drive your own returns.

Advances in precision farming have the ability to make the land, inputs, machinery and the farmer more productive. However, converting to precision farming is expensive and especially at current crop prices, can take many years to just break even.

Agriculture will always need supporting businesses, handling, and processing infrastructure assets. Opportunities should be explored here, as well.

And finally, another approach for traditional farmland investment portfolios may be to add an “alternative” crop that can be grown on under-productive or low-value land. Though it is a shameless plug, the oilseed tree crop called pongamia is one such crop that, to date, is showing extraordinary promise to achieve just such a goal on abandoned citrus land in Florida as well as abandoned pineapple and sugar land in Hawaii.

  1. The final thought here is a macro observation about investing in general in today’s crazy world. I attended one of the top business schools, and worked in Wall Street firms for 36 years specializing in commodities and money management and I am completely dumbfounded at where we find ourselves today. I was taught that a healthy economy saves and thus creates capital to invest in the production of goods and services and good things result for the society as a whole.

The “Quantitative Easing” experiment that the central banks have embarked on has little precedent and even fewer image007beneficial results for employment or the economy as a whole. Years of artificially suppressed interest rates have resulted in mis-allocating capital and mis-pricing risk across all asset classes. Japan has probably the longest experience in following this politically expedient money-printing experiment and is a good place to look to for a preview of what we can expect in Western economies. There is a mind-blowing quantity of: debt, leveraged debt, trillions of derivatives and swaps written on this debt. Let’s be clear: nothing tangible is created other than esoteric derivative paper instruments or making the spread off borrowing from the Fed and investing in Treasuries!
Just like Will Rogers quipped years ago, that he is more interested in the return of his money than the return on his money, so too should investors be today. Farmland is truly a real asset – and it cash flows. (Not even gold can make that claim.) People will always have to eat. Farmland is always taking the energy from the sun and the rich earth and creating food. Even at today’s low returns, there are few better places to store one’s wealth until this economy returns back to some fundamental economic reality. If you own farmland, sleep well.