Various News Bits from the World of Ag 2.0

Hi Ag 2.0 Readers – I’m short on time this week so I’m providing links to some of the more interesting articles that I read in the last few days.

 

Props to Syngenta for Putting the Focus on Problems Like This

Props to Syngenta for Putting the Focus on Problems Like This

1.  “Soil Leadership Academy” formed by Syngenta and UN Convention to Combat Desertification (UNCCD) (http://bit.ly/1prluVy).

Some interesting facts from the press release and related links:

  • UNCCD estimates that globally, at least, 24 percent of usable land is already degraded.
  • On average, every year we lose 24 billion tons of fertile soil to degradation. As a result, more than 12 million hectares of productive land becomes barren due to desertification and drought processes.
  • Syngenta estimates that we lose a soccer field of farmland every second to soil degradation.
  • Through its Good Growth Plan (cool website:  http://bit.ly/1hDofek), Syngenta has committed to improve the fertility of 10 million hectares of farmland on the brink of degradation.

 

Farmed and Dangerous2.  Chipotle has launched a mini series on Hulu called “Farmed and Dangerous”:  See the 4 episodes at this link:  http://farmedanddangerous.com/#.  I’ll admit, I haven’t watched it all, but it’s already stirring up some controversy (http://bit.ly/1lJ4lS7).  One of the plot lines:  fictional industrial company “Animoil” comes up with an animal feed made out of petroleum, called “Petro Pellets”.  Laughable as this idea sounds (maybe?), it’s not laughable to link the attitudes of Big Ag to those of Big Oil.  Entrenched companies in both industries seem to often think of innovation as “how to sell more oil” and “how to sell more corn seed”.

 

Prez in Corn Field3.  President Obama openly gets behind ag biotech:  Obama recently wrote a letter to the family of Dr. Norman Borlaug (the “Father of the Green Revolution”) to mark the the dedication of his statue in the US Capitol (http://bit.ly/1l7ihEA).    Obama hasn’t been very public on this issue, leading some to think that he might be in the anti-GMO camp.  But in this letter, he clearly states: ““I share [Dr. Borlaug’s] belief that investment in enhanced biotechnology is an essential component of the solution to some of our planet’s most pressing agricultural problems”.  I agree with the President on this issue, and it’s good to see him put out his opinion on it.

Naveen is TerViva’s CEO and hopes that one day the President visits a field of pongamia in Florida, where we are helping to combat citrus greening disease with a form of crop diversification.

TerViva: Why We Do What We Do – Part II

Back in June, I wrote the first part of a blog post called:  “TerViva:  Why We Do What We Do”  (http://bit.ly/18WIC2j).  In that post, I identified three sub-topics: (1) why marginal land matters (2) why new crops are necessary for marginal land; (3) what is TerViva’s unique approach to new crops for marginal land.

I discussed topic 1 in the previous blog, and in this blog, I will tackle topics 2 and 3.

To recap on topic 1 – why marginal land matters…

Put simply, the amount of marginal agriculture land is growing every year.  According to a recent Oxford University study, future environmental hazards such as climate change, land degradation, and water scarcity could eliminate as much as $8 trillion in agriculture assets annually (http://bit.ly/11Z2NeQ).

Oxford has put some thought into the environmental risks for agriculture.

Oxford has put some thought into the environmental risks for agriculture.

We use agriculture to make food, feed, fiber, and fuel.  To meet future demand, we will need to farm lots of new acreage, increase production on existing acreage, and also find ways to use underproductive acreage.

On to topic 2 – so why new crops for marginal land…

New crops aren’t the only option for marginal land.  Indeed, companies such as Monsanto and Pioneer are using genetic modification techniques to improve the ability for existing crops such as corn, soybeans, rice, and wheat to grow better in harsher conditions.  Other companies, such as Drip Tech and New Leaf Symbiotics, are improving the viability of marginal land itself –through advancements in areas such as in soil fertility and irrigation.

We commend such efforts.  But there are places where, no matter the extent of GMO or land improvement, existing crops like corn, soybeans, rice, and wheat simply will not grow.  Where we work in Florida citrus country is a good example:  weeds, sandy soils, high water table, bedded rows, high humidity.  In other words, it’s land that’s excellent for citrus but not for most other crops.  And now, with citrus greening disease wiping our hundreds of thousands of acres, it’s increasing difficult for citrus, too

But this land can potentially be farmed with alternative, hardier crops that can still produce similar food, feed, fiber, and fuel.

On to topic 3 – TerViva’s approach…

A few years ago, we convinced ourselves of the need for new crops for marginal land.  We then began to evaluate many different “new” crops, from the well-known to the not-so-well-known:  sorghum, miscanthus, castor, jatropha, camelina, moringa, simaruba, yellowhorn, etc., etc.  At TerViva, we describe these crops as “semi-domesticated”  — they have had varying degrees of advancement by humans over generations, but not nearly to the extent of large-scale commercial crops like corn and soybeans.

Our search process led us to three conclusions, or better said, three pre-requisites for the success of new crops on marginal land:

(1) Hardiness:  the new crops have to be versatile, capable of withstanding the “new norms” of soil salinity, water availability, and pests.  Ideally, these crops will require fewer inputs than their predecessors in terms of fertilizers, pesticides, and irrigation.

Hardiness in action:  pongamia in the desert.

Hardiness in action: pongamia in the desert.

(2) “Drop-in”:  the new crops have to utilize a region’s existing agriculture skills, labor force, equipment, field setups, and processing infrastructure.  New crops are risky, and if growers cannot leverage existing capabilities, the rate of new crop adoption is likely to be low.

(3) Disruptive economics:  by definition, marginal land is not generating a good return.  High, sustained returns require both high income per acre and scalability.   $50 net income per acre doesn’t excite a lot of growers (I’m looking at you, camelina).  Similarly, It doesn’t help to have a $5,000 net income per acre for a crop with a market of only 5,000 acres.  For these niche crops, supply eventually exceeds demand, driving down revenue and returns.

Pongamia trees "dropping in" to Florida, just like citrus.

Pongamia trees “dropping in” to Florida, just like citrus.

Not many crops can check all three of these boxes.  But we have found one: pongamia.  It’s the crop of fervent devotion on this blog:  a legume species of tree that produces oil and seed cake of similar quality to soybeans, which is used heavily for the biodiesel and animal feed markets.

Pongamia is extremely adaptable:  droughts, waterlogging, sand, clay.  Where tree crops are cultivated, it drops right in to the existing agriculture system.  It can serve the huge markets for biofuels, biochemicals, and animal feed, at a return per acre of over $1,000 per year.

For these reasons, pongamia is rapidly gaining traction with large, leading landowners in Florida, Texas, and Hawaii.

Naveen Sikka is TerViva’s CEO.

Looking for Value in Farmland Investing

By Tom Schenk, Director of Business Development for TerViva

Back in 2006, when people were trading the stock and the real estate markets like rock stars, few people cared about a quietly obscure asset class called farmland.  However, the economic collapse that began in 2008 changed all of that. At the same time, grain prices soared to a new plateau at 2x the prices seen in the 80’s and 90’s due to increased demand from middle class consumers in emerging markets and ethanol production, as well as supply shortages created by crop failures from violent extremes in weather patterns globally. On the demand side, the industrialization of emerging market countries has brought millions of people into the middle class in those countries who demanded – and could afford – better diets of meats, vegetables, and grains.

At the beginning of the farmland investment boom in the US, every $1 of farmland value only carried about 5¢ of debt.  Ownership was in strong hands. It was this obscure statistic relating to the low levels of farmland debt that was one of the greatest factors that contributed to the fact that this asset class being a wonderful placeholder for wealth during the financial hurricane that slashed stock and residential and commercial real estate in half in a period of months.  Asset classes that were highly-leveraged were the same ones that deflated the hardest.  When collateral for loans decline in value, lenders demand more collateral.  If that other collateral is falling, it creates fire sales in a rush for liquidity and thus a vicious feedback loop ensues.

Today, debt-to-asset ratios in some of the major farming states are back to 30% and higher.  These are levels not seen since 1979 which, along with sharply rising interest rates and falling commodity prices, led to the great farm crisis of the 1980’s.  Today, alarms are being sounded that we are in a similar setup and an imminent crash could be ahead.

However, few things in the financial world are that linear in reasoning.  There are many moving parts involved in calculating the future stability of this asset class if we enter a period of rough financial weather.  For example, while debt levels in dollar terms may have increased 2x, land values (on paper) have gone up 3x to 4x times in many instances.  Another major variable in this calculus is that production costs for farmers have come very close to doubling in this period also.  Additionally, farmland has historically had a very high inverse correlation to the 10-year US Treasury rate.  The enormous impact on farmland values from the Federal Reserve’s financial engineering of interest rates cannot be overstated.  Where investors could find 7% – 9% cap rates back in 2006, today those rates have dropped to a range of 2% – 4¾% depending on the quality, yields, and location in the US.

Nevertheless, traditional farmland investing is considerably more vulnerable to adverse shocks than it was in 2006.  Creighton University’s Farmland-Price Index is a monthly survey of 200 rural communities in major grain growing states.  The most recent survey show that the rate of farmland price appreciation is has been decelerating since late 2012.  Clearly land prices are flattening out.  Unfortunately, commodity prices and land values can drop by the speed of light compared to any declines in production costs , and this can put a farm’s balance sheet in a bind almost overnight.  A strong case can be made that interest rates may have hit a long-term (30+ years) cyclical low.  If rates begin to rise, there is little question that farmland prices can come under immediate pressure.  There has always been a historically strong inverse correlation between 10-year Treasuries and farmland prices.

US farmland prices were on the steady rise last year (above), but according to the recent Fed Reserve studies in KC and St. Louis, prices are plateauing (http://bit.ly/1b5Wzxe)

US farmland prices were on the steady rise last year (above), but according to the recent Fed Reserve studies in KC and St. Louis, prices are plateauing (http://bit.ly/1b5Wzxe)

The purpose of this article is not to sound alarms about the imminent demise of farmland asset values. In this past decade, we have seen “bluechip” stocks and “AAA-rated” bonds  go to zero, as well as commercial real estate like shopping centerss can become vacant or obsolete.  But what was unique about farmland is that it has an imbedded put option; if you lose a crop, you still have the land and you can try again.  In this crazy world of abstract derivatives with notional values priced at hundreds of trillions of dollars worldwide, there will always be a demand for an real asset like farmland; it cash flows and the demand for its output is relatively inelastic.  People have to eat.

However, it should give investors pause before they pay $12,000 for that next Illinois acre.

Large scale/institutional farmland investors have always diversified geographically and with different crops, but in cyclical commodity downturns, the income streams of these “diverse” yet traditional agricultural properties will have as much non-correlation as a squadron of Blue Angels at a summer air show.  In other words, that cotton property in Mississippi will go in the same direction as corn land in Iowa or the potato farm in Idaho.

So what’s a farmland investor to do in what appears to be a relatively deflationary economic climate?? One idea is to borrow a page out of what traditional money portfolio managers have done for decades which is to apply the principals of Modern Portfolio Management – namely, diversify into property types with diverse return profiles in order to reduce overall portfolio risk.  Over the years, I have seen small cap and micro cap managers rescue overall portfolio returns by exploiting those overlook and under-researched companies where fundamental analysis ran circles around index managers by finding those opportunities that returned comparatively out-sized returns from some overlooked niche. In the 80’s, Microsoft was one such company.  The underlying attraction in small cap stock investing is that few, if any, analysts are researching these companies.

TerViva pongamia trees thriving in Texas

TerViva pongamia trees thriving in Texas

To that end, there is a quiet little company out of Oakland, CA called TerViva that has been establishing plantations of a hardy tree crop called pongamia. Pongamia trees are native to Australia and India.  They produce a nut crop that is virtually a first cousin of soybeans – but grows on a footprint where soybeans generally cannot.  An annual harvest of the nuts can produce over 400 gallons of oil and a couple of tons of residual “seedcake” that can be used as a high-protein animal feed or as a high-nitrogen fertilizer.  In a given year, a producer has the ability to direct that oil to biodiesel, bio-jet-fuel, bio-chemical (it is high in oleic acid and other valuable long-chain carbon compounds), or even biopesticides markets, depending on what is determined to be the highest best use downstream markets. Pretty cool.  The oil has been tested by Dynamic Fuels, REG, and Shell as a great feedstock worth about $3.50/gal.  I recently spoke to an organic grower who has successfully used pongamia oil as an adjuvant in his pesticide sprays for the last 7 years.  His supply comes from India.  He proudly informed me that he had recently got the price of his oil “down” to $17/gallon!

However, the most compelling aspect of this tree crop is that these trees can thrive in marginal soils such as south Texas or the challenging sandy fallow soils southern Florida where citrus trees used to grow before HLB disease marched through the state.  Instead of passively collecting x in revenue like typical farmland investors, you can proactively generate 5x-10x on these lower grade properties. And as a result, you will obviously get a sharp appreciation in the underlying land value in addition to the improved income stream that is arguably on par with the richest Iowa or Illinois farms.

Is this too far-fetched of an idea?  Not for three major citrus growers in Florida (plus a fourth grower planting this month) who conducted extensive research on the tree and this concept before planting on their own properties.  So far, they are more than pleased with what they are observing. The trees are growing almost twice as fast as citrus and require a fraction of the inputs.  Moreover, for investors who want to grow this tree crop, these citrus companies will act as the operators for planting, maintenance and harvesting.

Sometimes is you cannot find any gems in the rough, you just have to make your own.

Tom is TerViva’s Director of US Business Development, and works every day with agriculture growers to explore opportunities with new crops.

Terviva: Why We Do What We Do — Part I

Whenever I introduce Terviva as a company at conferences or events, I always start off by saying, “Terviva develops new crops for marginal land”.

Very few people ask me why that’s important, or why anyone should care about new crops for marginal land.

And yet, for the people who work at Terviva, that “why” factor is at the heart of what we do.  It’s what motivates us and drives us to work intensively toward our goals.

So I’d like to share “why” we develop new crops for marginal land.  I’ll break our logic down into three parts, to be covered across two blog posts.

(1)  Why marginal land matters

(2)  Why new crops are necessary for marginal land

(3)  What is Terviva’s unique approach to this opportunity

First – why marginal land matters….

In agriculture, the big picture goal is to increase food production.  The often-cited UN statistic is that, over the next 40 years, global population will increase by 2 billion people, and the world will require 70% more food production.

To meet this challenge, we need to farm more acres, farm more per acre, and – even more basically – maintain the viability of existing land.

It is estimated that 1 to 2% of all agriculture land becomes indefinitely fallowed every year due to soil salinity issues.  Now, add in other factors, such as desertification, declining water availability, extreme weather conditions, new crop diseases, and volatile macroeconomics.  The result:  a significant amount of land that was once valuable for farming is now longer so.

Marginal agriculture land in Florida, with TerViva pongamia trees now planted on it

Marginal agriculture land in Florida, with Terviva pongamia trees now planted on it

There are numerous examples of this marginalization of agriculture land.  We specifically work in three affected areas:

Florida:  citrus greening disease has wiped out nearly 50% of citrus tree acres in the last decade (almost 500,000 acres).

Texas:  extended droughts have triggered irrigation water cutbacks and declining productivity in rice, corn, and cotton farming

Hawaii:  sugar and pineapple farming, once mainstays of Hawaiian agriculture, have almost completely ended, due to competition from lower cost geographies in Asia.

It’s unlikely that any of these three areas will recover to the point where their land will once again be farmed for their traditional high value crops.  But there may be alternative crops for these areas – ones that can meet the demand for food, feed, fiber, and fuel more efficiently than traditional crops such as corn, soy, and sugarcane.

Abandoned citrus field in Florida -- another victim of citrus greening disease

Abandoned citrus field in Florida — another victim of citrus greening disease

No matter what, the amount of marginal land in the world is going to continue to grow.  Solutions are needed to improve the usability of marginal land, and at Terviva, we think we have some great answers.

Next week, I will write Part II of my post, discussing the need for new crops on marginal land and Terviva’s approach to developing these crops.

Naveen Sikka is Terviva’s CEO.

Upgrading the World’s Most Important Crops

We are all accustomed to adopting new versions of familiar products like phones, computers, and cars. But what about taking on new versions of our most important food crops? Corn, wheat, and rice all have something in common that hasn’t changed since their domestication: an annual life cycle. This characteristic aided their domestication in the hands of Neolithic farmers by allowing quick improvements in yield due to the short time span between generations. Interestingly, these major grain crops have lesser known perennial relatives that did not lend themselves as well to domestication, but otherwise produce similar useable parts. Recently, humans have turned to perennial relatives of our annual staple crops in the hopes that they can help solve some of our most pressing agricultural issues.

Growers face common challenges including water shortage, erosion, high fertilizer costs, and lack of soil nutrition. These problems are caused and/or exacerbated by cultivation practices tailored to plants with annual life cycles. Annual root systems are relatively shallow and short lived. Therefore, a lot of the water and fertilizer applied to annual crops is lost in the form of runoff. By comparison, perennial plants have deeper root systems that remain in place for multiple years in a row (see image below). They help mitigate the above agricultural issues by holding soil in place, maximizing water use efficiency, and improving nutrient uptake. Many non-grain commercial crops are inherently perennial, require fewer agricultural inputs, and do well on marginal land. Examples include grapes, olives, pidgeon peas, and many common fruit and nut trees.

4_Seasons_Roots

Despite the aforementioned crops, the world still lacks commercially viable perennial alternatives to the world’s most important grain crops. The catch with perennial grain species is that in order to produce extensive root systems and store energy for next year, they must divert energy away from seed production, thus lowering yields. It shows that the saying, “there is no such thing as a free lunch” holds true in the plant world. Currently, in order to get the ecological services of an extensive root system, you have to compromise on yield. Most growers on good agricultural land are not yet forced to make that compromise, but those on marginal land might take it into consideration. Breeders are working on backcrossing domesticated grains with their wild perennial relatives to close the yield gap between perennial and annual varieties. Breeding and commercializing these varieties has proven to be technically challenging and underfunded, but there are some notable signs of progress.

The Land Institute, founded in 1976 by Wes Jackson in Salina, Kansas is a leader in the research and implementation of perennial agriculture for cereal crops. The institute faces the challenge of creating varieties with adequate yields while also maintaining perennial characteristics. Some breeders say they are still 15 or 20 years away from developing varieties that are suitable for main stream agriculture, but signs of progress are imminent. Dr. Hu Fengyi of the Yunnan Academy of Agricultural Sciences has bred a variety of perennial rice that has produced yields for the last three years of roughly equal quantity to annual rice in the region. Nevertheless, projects on this time scale do not lend themselves well to the three year federal grant cycle, and their mission does not exactly jive with the business model of large agricultural companies, so there will likely be some financial hurdles to overcome.

glover-roots-lg

Regardless of the challenges, one has reason to be optimistic that recent advances in bioinformatics and marker assisted breeding techniques combined with mounting pressure from environmental hardships such as soil degradation and water shortages could tip the balance in favor of perennials sooner than people might think. Commercial viability of a crop is not decided in a vacuum, and depends on more than just the crop itself. It is a function of many economic, environmental, social, and biological factors that change from year to year. Additionally, there is an opportunity to get smarter about matching specific varieties to specific land use situations. Proto-varieties of perennial grains will probably not be able to compete on prime agricultural land in the near future, but prime ag land seems to be a static (perhaps diminishing) resource. In an approaching era of agricultural innovation, marginal land could prove to be a vast and profitable new niche for agricultural companies. The development and implementation of hardier crops such as perennial grains are likely to see huge payoffs.

“This Land is Your (Marginal) Land….This Land is My (Marginal) Land….”

We recently came across a study by the University of Illinois at Urbana-Champaign (“UIUC”) that estimates the total global amount of marginal agriculture land (“MAL”).  The study can be found here: http://pubs.acs.org/doi/abs/10.1021/es103338e

MAL is a concept that encompasses abandoned farmland, degraded land, wasteland, and idle land, and also takes into consideration various economic, policy, and legal factors.  Other studies have estimated MAL in the past. This UIUC study uses a fuzzy logic approach – which (as I understand it) basically means: (a) taking quantifiable input data like that from USDA NRCS and the Harmonized World Soil Database, then (b) qualitatively defining it against factors to describe land quality, and then (c) re-describing the land on a quantifiable scale.

The results are interesting.  Two things caught our attention:

(1) Half of the world’s MAL is in South America and Africa.

(2) The study creates scenarios for growing biomass crops on MAL for the production of biofuel.  One scenario map is as follows.  Looking at the US, we noticed that two areas we know to have MAL – Florida and Coastal Texas – are not included.

UIUC's calculation of MAL suitable for biofuel production

UIUC’s calculation of MAL suitable for biofuel production

TerViva works with a tree species, called pongamia, that’s usable for biofuel, biochemicals, and animal feed.  A bit of lingo:  we describe this spectrum of outputs as “biobased products”, and the crops that are used to produce biobased products as “agroindustrial crops”.

There are many crops that fit into this “agroindustrial” category – from oil producing crops like pongamia and castor, to biomass crops like poplar and switchgrass, to crops with niche purposes like guar (increasing popular in oil and gas fracking fluids – see http://bit.ly/Y0LeGJ).

Guar growing in India, bound for oil fields in the US

Guar growing in India, bound for oil fields in the US

The UIUC study – in part funded by British Petroleum’s Energy BioSciences Institute – only considers the potential of biomass crops on marginal land, and perhaps as a result, produces scenarios that ignore the potential use of MAL for other categories of agroindustrial crops and other biobased products beside biofuel.

Of course, there’s nothing wrong with the UIUC study in this regard.  But it does ignore places like Florida, Texas, Arizona, California, and Hawaii, where MAL is on the rise due to new problems (e.g., droughts, pests, diseases) – and there are unique crops like pongamia that are capable of providing solutions.