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EP 574: Buying $2m 600 Acre Pecan Farm, $450/acre/mo, Literally Shaking Money From Trees with Investor Luke Stronach
18 Feb 2017
Chapter 1: What does Luke Stronach do in the farmland investment space?
This is The Top, where I interview entrepreneurs who are number one or number two in their industry in terms of revenue or customer base. You'll learn how much revenue they're making, what their marketing funnel looks like, and how many customers they have. I'm now at $20,000 per top. Five and six million. He is hell-bent on global domination. We just broke our 100,000-unit sold mark.
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Chapter 2: How much money has Luke raised for his farmland fund?
Good morning, folks. Nathan Latka here. It's February 18th. Good morning to all of you guys at TuneIn Daily. I appreciate you guys. I really do. Thank you. Coming up tomorrow morning, you're going to learn from Lawrence, who runs Fruit Street. They've raised $6 million from 180 of their customers, not investors, but from their customers for their health technology startup.
Is this the new kind of venture capital, raising money from your customers? We'll see. Tune in. Good morning, guys. Nathan Latke here. Our guest today is Luke Stronach, and he spent the past year raising money for his farmland fund. He's got one single family office as an investor. He went to Tulane. He's currently 44, taught finance, and most of his background is in low-income housing.
He's really looking forward to coming on the show. He's a listener. Luke, are you ready to take us to the top? Absolutely ready, Nathan. You said you were listening before the show pretty regularly. What do you like most about the show?
I like how it's fast-paced. I just like the diversity of it. It's really interesting to hear what everybody out there is doing, what they're working on, and really kind of fun to watch how some of your guests have grown when you begin to see these products out there on the market.
It's a lot of fun. So you said you just raised a farmland fund. How much money have you raised?
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Chapter 3: What are the essential factors to consider when investing in farmland?
That I can't really get into. Give me a range.
Less than $10 million. Okay, less than $10 million. Great. And what do you spend the money on? Tell me about farmland investing.
So right now I'm spending a fair amount of time in Georgia. I'm in the process of moving to Atlanta. I'm about to close on my my my first farm. It's a it's a large pecan orchard in Georgia. I'm close to having a second pecan orchard under contract and I'm starting to do plans to develop a 1000 acre orchard in Georgia. So start starting out with nuts, starting out with pecans.
There's there's a lot of reasons for that.
And then at least starting out with the nuts and bolts. yeah yeah i couldn't resist luke i couldn't resist yeah you could have thrown something there about going nuts for nuts but i'm with you i'm absolutely with you okay i cannot wait for this interview this is gonna be so much fun talk to me about the economics of this pecan orchard you're about to buy in georgia what are you paying for it
Well, you're going to find that type of farmland. You have to draw a line in the sand with, is it irrigated? Is it not irrigated? What kind of water does it have? Most farmland investors beneath the surface, they're water investors. When you go out to the farm, you're looking at the earth, you're looking at the trees, but what you're really looking for is water.
And so this first orchard, it has below ground irrigation. It's wonderful. It has numerous wells. It has lots of water. So for that type of orchard, you're gonna pay. You're gonna pay eight, nine, $10,000 an acre. And it adds up.
How many acres is this one?
Hundreds, five, 600 acres.
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Chapter 4: What are the economics behind Luke's pecan orchard investment?
That was way too detailed to be true. I feel like if you could ask me about pecans, I'm going to give this answer.
No, I eat them every day. I buy them by the pound at Whole Foods.
I believe you. All right. So you're eating one one day. You go, oh, my God, there's a there's a revenue opportunity. I'm going to go buy this farmland. So this first one is 600 acres. It has below ground irrigation, numerous wells, lots of water. You're buying it for about two million dollars. Why is it worth it to spend that money on that farm? How do you make money from this?
Sure. So 40 percent of the farmland in North America is leased to farmers. This is a huge space. This is a $2.5 trillion vertical. So you go in, you buy the farmland, you lease it to the farmer, and he can either pay you a cash rent per acre, or you can participate.
It's called a participating lease or a revenue sharing agreement, where typically you get 20% to 30% of the profit, or you can take physical delivery of the crop and you can sell it yourself. So those are your Those are your two mechanisms. I always say there's yield in the field. And the way you get that yield is by charging that farmer rent.
And many times farmers welcome this because to expand their empire, they want to work leased farms. Like most businesses that expand, they don't go out and buy office space, they rent it. And so many farmers are cashflow farmers. They're very keen to that. And so many, many farmers with huge operations, some own it, but many lease it.
Okay, so yours is 600 acres. I want to make sure I got this right. There's two ways to make money. There's yield in the field. You can either take 20 to 30% of the profit, the output, but there's execution risk. You have to trust the farmer is going to actually grow these things and that there's going to be profit to actually take percentages of, right?
Right. So you see differences across different crops, Nathan. So as a good example, with people who might invest in corn land, most frequently you're going to see them charging a fixed amount per acre. OK, with other crops that are what we call permanent crops. So these are going to be things during the ground year long.
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Chapter 5: How do farmers typically pay for leased farmland?
They grow on trees. So these would be almonds. These would be cherries. These would be pecans. more frequently you're going to see that revenue sharing agreement. And the reason you want that as an investor is if the price of pecans or almonds goes up, you want to be able to participate in that.
But I don't want to participate when they go down.
Well, exactly. And you have to watch out for that. From the farmer's perspective, and he certainly has a perspective, if he has a lot of real confidence in himself, he's going to want to pay you a cash rent. He's not going to want to share very much with you.
Which averages what on this, on this McCann thing, what's an average rent per acre?
Well, you're really not going to find rent per acre with, with pecans. You're going to see revenue sharing agreements almost all of the time. But if you, if you want to break it down to a, to a good year, I mean, to a really good year, if you want to look at it that way, You could somehow break it out by acreage and sometimes see that $400, $450 an acre, if you want to look at it that way.
Right now in the Midwest, you see a lot of farmers that are paying rent of... And look, corn is not my swim lane. I'm completely out of it. It's not part of my thesis. So don't hold me to this to the dollar, but you'll see a lot of farmers... down in Louisiana with rice up in the Midwest with corn paying, you know, 200, 250 an acre rent.
Okay. Per acre rent. Interesting. So, so in your pro forma, cause you have a fiduciary responsibility to these folks that have invested in your fund, less than 10 million. What are you projecting? Your income will be on the $2 million investment. What's the return?
Right. So just basically in return, what you're what you're looking for, OK, is you're looking for some sort of a combination in the appreciation of the value of the land. OK. And then that annual yield, which you're getting off of the rent. OK. And so typically with your permanent crops, that's going to be higher.
So you can get that combined yield with permanence up to 16, 17, 18% when things are going really, really, really well. With your annual crops, with your things that have to be replanted every year, that's going to be corn, potatoes, onions. Your yields are going to be a little bit lower.
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Chapter 6: What is the impact of inflation on farmland investment?
You're saying a good yield might be you make $170,000 on your million-dollar investment each year.
that would be a fantastic return. And you have to understand some of that is unrealized. It's trapped, it's captured, which is a good thing in the value of the land. And many people look at farmland investing, Nathan, as a way to lock value into the land. You have people who are really after yield and you have some people who aren't. The main component is the land, going after the land.
It's certainly one of the big aspects of it from a portfolio theory standpoint, meaning... You have big forces out there in the world, very wealthy individuals, pension funds, insurance companies, and they're major farmland investors. And they all have different reasons for it. If somebody told me that their main interest in farmland investing was to just make tons of cash flow every year,
I would tell them that that is not the main purpose of it. Its main purpose is to reduce the volatility that you see in other investments, like the stock market, and as a real hedge against inflation.
Interesting.
Yeah, look at 2007 to 2009, okay? So the S&P 500, the 500 largest... publicly traded companies from 2007 to 2009, it lost 50% of its value. Okay. That's not taking an elbow in the ribs. That's getting punched in the face and pushed off a cliff. And during that time period, farmland did extremely well.
And there are a lot of people who, who have noticed this and there are a lot of investment firms and money managers. And what they want is they don't want to be a part of that volatility because And they're very afraid of inflation. And historically, farmland has done very well with inflation in the 1970s.
It's a great inflation. Is it a more powerful inflation hedge than a treasury inflation protected bond, like a tip or something like that?
So this is where you're going to get a million different opinions. My opinion is that if I just had to pick one thing as a fund manager, and right now I'm only doing one thing, it's farmland. Because even though you're getting that protection, the returns can be very, very attractive.
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Chapter 7: How does technology influence modern farming practices?
Then you transfer like the lease over.
This is why the farmland space is not as big as commercial property and other sectors is it's hard. This is a hard space. You can't operate in it sitting in an office, pushing buttons and, You know, spending your afternoons playing golf. You have to be able to go out in the middle of nowhere like I have. Stay in the stay in the do drop in.
Go have dinner at Cracker Barrel with the farmer who's going to tell, you know, about a million times. I mean, this is bumfuck nowhere. Let's be honest. You are out in some of the most beautiful places you have ever seen. But if you're if you think that you're going to stumble onto an international airport or a, you know, a Starbucks.
Yeah, there's no Michelin restaurant out in the middle of, you know, a 4000 acre carrot farm. But this is some of the most beautiful land you've ever seen in your entire life. And you're dealing with individuals who are some of the most intelligent people you've ever been around. You'll run into farmers.
And hardworking. The best. They're the best.
Oh, yeah. You'll run into a farmer who will tell you very quickly that he was tired of being a chemical engineer. And now he's a farmer. And you realize that's why this guy is so smart. But to answer your question... It's a persistence game. You have to determine what you want. You know, what I care about are vineyards. I care, you know, wine and table grapes. I care about berry farms and nuts.
And so you go there and you stay in the Dew Drop Motel and you start meeting people and you start getting used to hearing no. But once you have established some trust, then you start working on those relationships, just like I have in Georgia.
Luke, where are you right now? Where are you sitting right now? What's what city?
I'm in Montgomery, Alabama.
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Chapter 8: What advice does Luke have for aspiring farmland investors?
If I follow up and pick a date?
Oh, absolutely. And you'll, you will love the pecan stuff. Look, this is, this is serious business. Okay. A lot of the George pecan crop was exported to Asia this year. I mean, this is serious stuff. There's an argument going on around the world about where protein is going to come from. So there's big portfolio theory standpoint stuff going on here, Nathan, but from being on the farms, look,
Well, we'll hook you up with the little device. It's called a shaker. You drive it up to the tree. It wraps around the tree. It shakes the life out of it.
Hell yes. I will shake the life out of that tree. Just like I do guests on this show. It'll be so much fun.
Hey, you know, the thing is, Nathan, money really does grow on trees. You just have to shake it off. Right now, pecan prices are about $3 a pound. So when you go up and you shake that tree, every pound, that's $3, Nathan. Even though the harvest just now ended, we'll work something out for you.
I love money. You're speaking my language. You love it.
one of the things i'm just in a unique position where i have no responsibilities to anyone i can be anywhere and i meet these city these good looking city slickers with their suits and their red ties you know i beat the hell out of every one of them every time just because i go do real world shit and they might be investing in pecan stocks but i've actually like i'll be able to say i've actually been on the farm and i've seen it and i'll just understand things that they won't understand and that's how i'll beat them
You know, there's some extremely, extremely sophisticated people in the farmland support. This is a two and a half trillion dollar vertical. I mean, this is very big stuff. And the other thing is that, you know, a big part of being a farmland investor is is water and understanding senior water rights and water. Farmland investing is the gateway to water investing.
And so for me, when I have conversations with people, I'm talking about farmland, but I'm also talking about water. So when you and I meet up and we go out, you'll begin to see that there's a big difference in farms between senior water rights, the number of wells, and there's... there are things on the horizon in, in terms of investing and it's a huge tie in. So this, this is big stuff.
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