The Exchanges

Q When you look at the unit economics of a farm, what is it that makes it attractive?

A As a lender, you have to split the conversation between the cash flow economics of the enterprise from the asset. The real estate asset, whether we own the, the asset on our equity side or we're, we're lending and taking a first position mortgage. Agriculture real estate is so stable. It has one third of the volatility of commercial real estate. Over a long, long period. We generally are between 10 and 15% of real estate debt to real estate asset value in farmland. And so we don't have credit bubbles. Has a 97% correlation with inflation. So last year, agricultural real estate did really well, but even when we come off of inflationary time periods, it's, there's a smoothing. It's not a, it's not a crash, a major pop in terms of that value. So it's a really good asset. To lend on. That's your loss given default. That's what protects you. We saw a period in the eighties, back to farm aid days, and then back during the depression where we saw values drop, you know, in the 20, 25% range, but no huge crashes. On the income side, as we're lending, and we're a commercial lender, these are commercial loans. We have to look at repayment. It can vary. I always tell people, if you're going to be in the agricultural lending business, you have to realize that debt, Is a killer. Farmers just cannot have a lot of debt. Not only looking at LTVs, but the debt assets have to be within control be…

AI assessment note: “these are 15 to 40% margin businesses, so they're good businesses.”

Q Well, you can imagine in the early stages of timber becoming, call it, from a real asset to a financial asset, that there could be a lot of inefficiencies along the way. What's an example of what that looked like when you were in the business trying to make money in the early stages of it?

A Well, the timber company owns 50,000 acres of land between Chattanooga and Knoxville. You know, that's not one contiguous piece of property. That's A hundred separate pieces, some located close to Chattanooga, some, you know, a little bit more remote. Forest products company has made a decision. We need to close by quarter in and move this asset, and they put it up for bid for a 60 day, 90 day closing. And, you know, it goes for a timberland type of price, but within that package, you have some core timberland, but you have some other pieces that have higher and better use value. And so, You know, the market was inefficient, so you have a large company that has an asset on the books and an asset that they value based off of its core agriculture use and a lot of other uses to all of those parts. So that was some of what we were doing. Over time, we were exposed to a lot of different areas, geographies, a lot of different commodities, a lot of different types of uses of property. Over time, we built up a good core agricultural portfolio, core ag that we kept, some we sold off, and some we kept, and that higher and better use property allowed us to lower our basis in what we were holding.

AI assessment note: “within that package, you have some core timberland, but you have some other pieces”

Q What did you see in that broad opportunity set of working with financing for farmers?

A I think you have to look at the changes that took place after oh seven, oh eight. 15 years ago, 40% of the loans in agriculture, real estate were held by banks. We're down to about 30% now, and we continue to drop. You have to generalize. It's Community banks. About 50% of the market are the co-ops, the farm credit system, and that stayed solid. Um, that's stayed about the same number it has, but that co-op system from a service standpoint can be a bit stagnant. So there are between 60 and 70 of these co-ops scattered around the U.S. Those co-ops cannot lend outside of their geographic area. That creates a, a, a lending institution that is owned by the borrowers, That does not have incentive to grow anymore. It just is stagnant, and so if you think about a farmer, farmers there in rural America, majority of farmers don't have a college degree. They're smart people, very industrious, but they don't have finance and accounting background, so their lender in a lot of cases is their financial counselor, and so they're turning around to a co-op or a community bank with limited lending limits, and That's not enough of a solution. So it was pretty obvious to us early on that there could be something better that not only provided quick service, but provided some value in terms of the advice you give and a more sophisticated product offering. I would say that finance, what we've seen, t…

AI assessment note: “it was pretty obvious to us early on that there could be something better”

Q As you approach the space, I'd love to break down the investment process from where you started. So how did you start sourcing these opportunities?

A This is going to sound crazy. In 2007, we bought a theme park out of bankruptcy. Former Cypress Gardens here in Florida. It's now the home of Legoland Florida. That was the first time I was exposed to a major marketing operation. So that park we bought, we had a management team in there, but if you can imagine a large theme park in Florida, the marketing apparatus was pretty significant. And marketing in 2007 was radio and newspapers. By 2010, it was digital and direct mail. And so we brought that model in our infancy here with Ag America, Clover, Digital, and Direct Mail, and storytelling, right? We want our advertising to be almost like art. We want it to evoke an emotion, and so we started Direct Mail, we started Digital. That drove a lot of demand in 2011, 20 12. More demand than we had personnel to process loans, which is a good problem. It's been 1314 years since we started. That's led to us having brand recognition now. So we're not advertising to get loans. We're advertising just to keep the name out there. Majority of our loan flow now comes from referrals from our existing clients, which is the best advertising you can get.

AI assessment note: “we started Direct Mail, we started Digital. That drove a lot of demand”

Q If you're making a loan, you could imagine you're loaning to a specific asset. You just want the farmer to operate that asset, generate cash flow. You can model that out. Equity, you think of growth. What does it look like when a farmer goes from whatever their plot of land to expansion mode?

A That's farming today. So let's break that down. Last 10 years, we've lost several 100,000 farms in America. And there's two farm categories that are expanding and everything else is shrinking. Farms, 50 acres and smaller, that category is, is increasing, and farms, 2000 acres and more is increasing. 50 acres and smaller, that's, that's the hippie farm, that's the, that's the fun farm, that's all of your COVID people that decided to move outside of town and get a few cows or grow something and take it to the farmer's market, and we financed that, and it's fantastic, and I love, I love it that people are doing that, but everybody else in farming is being squeezed out, and it's because of The technology required because of, with sustainability, a lot of the, the techniques require longer payback, and so you have to have scale in order to survive, and we're seeing a, a lot of consolidation in that, this space, and so what does it look like? It, it's, it's not as much, hey, I'm a farmer, and I'm buying 80 acres next to me. It's, I'm a decent-sized farmer, and I'm doubling the size of my farm. In one transaction. And so, with a lot of farmers, that can be done. They've paid down their debt. They can, they can put up the current farm and finance that. But with a number of others, it's, you know, in order to have working capital, they need a partner. That's a big change in agriculture.…

AI assessment note: “It's, I'm a decent-sized farmer, and I'm doubling the size of my farm.”

Q Which two people have had the biggest impact on your professional life?

A My friend Rob Harper, who I started Land South with, we grew up together as business people, and so we pushed each other and learned together and solved a lot of things together. We fed off each other and learned from each other there, so that was, we were in school together, sort of the answer there. The other one, uh, would be George Jenkins. George was the founder of Public Supermarkets, and I'm, I grew up here in Lakeland where Publix was founded, and The corporate headquarters are located, and, um, I had the opportunity to know him, and if you've ever been in a Publix, culture is everything there. The employees, you know, make sure that company has outlived him, and continues to be at the top of the list in terms of standards in grocery stores, so those would be my two.

AI assessment note: “My friend Rob Harper... The other one, uh, would be George Jenkins.”

Q What did you see as the opportunity to develop a business at scale into this space?

A Technology has allowed the world to get closer. It's made the world smaller, and I think we saw that that would allow us to provide service to a wider group of people. I think farmer behavior is such that you don't have to be in Sunday school with the park, the farmer every weekend to do business with them. They're more willing to Do remote business. That's more the norm now. But if you're building an organization that's investing or lending into agriculture, you're going to be able to offer a better portfolio to your investors, and you're going to be able to ultimately offer a better rate to the farmer if you're more diverse. And so you need geographic and commodity diversification. And so I look at the landscape. All of the competitors are Small regional lenders, right? If you're a community bank or you're a, a co-op in that area, imagine what a weather event does to your, your book. And it's not that it blows up. It just makes it where it's more intensive in terms of playing defense, right? Having to meet with clients, make sure they're in a good spot and not able to, as an organization, attack the market and, and, and innovate. And so for us, I mean, since our inception, all of our concentration levels have continued to drop. Whether it's regions, whether it's commodities or whatever, and that's led to a healthier portfolio, and the metrics bear that out.

AI assessment note: “we saw that that would allow us to provide service to a wider group”

Q Kind of curious what happens When a loan isn't working out, especially in the smaller one, because on the one hand, right, it's your commercial, it's a lending officer. On the other hand, there's just supporting what needs to be done for the whole ecosystem. How do you work through those types of challenges?

A You work with them. I mean, think about it. If you are a farmer and most of these farmers, it's multi-generational. So if the farmer's been in your family for three or four generations and you have equity in that asset, You're not going to lose it. They're going to do everything they can. They stress over it a lot more than, than we do. And so I think the important thing is for us as a lender to have empathy and to help be, be proactive in coming up with solutions. And so unlike a lot of lenders in this space, we talk to each of our clients every three months, you know, it's good business. It's, it's good to have that relationship, but it's also important for us to know that there's a problem before the There's a payment issue, and so that allows us to be proactive. You know, the farmer, hey, I took my cows through, and they didn't get the right price, and I, I think I'm going to run them back through in two months, but I might be a little late. We can work with that. That's not a big deal. If it's a situation, though, where, for whatever reason, the debt's gotten to be too big, and there's challenges, you've got to give them some time to sell off the back, the back-eighty. And it's remarkable. A lot of these farmers, especially, you know, the older generation, when they made money, they'd buy more farmland, and when they were losing money, they'd sell some farmland, or they'd …

AI assessment note: “You work with them... have empathy and to help be, be proactive in coming up with solutions.”

Q When you're striking a deal, what's important when you're thinking about the deal terms?

A On a credit deal, you wanna make sure that the loan terms are such that the farmer has flexibility. Last thing we wanna do is make a loan that straight jackets a farmer. That doesn't mean you don't put covenants in the loan or whatever, but you wanna make sure that the payment frequency, you wanna make sure that the interest rate, you even, you know, you shock it and all of that, you wanna make sure that that farmer is going to be able to You know, survive a weather event or drop in prices, and that the stress from that is not going to put them in a situation where they're worse off, and so it's a balance, right, and this business we're in in terms of loaning to farmers is not short-term bridge loans if you're looking to loan off your reputation and also to do the right thing by the farmer. It's just hard to do, so that's one thing. Now, on the equity side of We do not invest direct in a farm like others out there and just lease it out. We bring in hundreds of qualified leads a month, and a lot of the business that comes through this door are farmers that maybe they do have a higher debt to assets, and because this business doesn't lend itself to a lot of high yield debt, the answer you jump straight from is it's a loan with some equity, and so we become their partner. And so when we're doing that, is it a good operator? What's their track record? Do we see this farmer as being…

AI assessment note: “make sure that the loan terms are such that the farmer has flexibility”

Q And how did it go from that initial track purchase to becoming what Ag America has become today?

A Well, I practiced law for about six months. I knew that wasn't going to work. I started out with my longtime partner and one of my best friends. We started a company called Land South in the mid nineties. Up until the early nineties, the forest products companies owned their material. They owned real estate to grow timber. For them to take to the mill and produce lumber or paper or whatever it was, the financial markets getting more sophisticated. And I think someone in the early nineties realized, why do we need these low appreciating assets that are really asset cash intensive? Why do we need these on the balance sheet? That's when TMOs were born, timber investment management organizations. It's a lot of pension money now that is managed in passive timberland, but back then that wasn't the case. And so During the nineties and early 2000, there were thirty million acres that changed hands in the southeast US. And so we were part of that. You know, you start up a company and you've got timberland changing hands. There was a lot of urbanization going on. So there were certainly farm properties that had a higher, higher and better uses. And that pulled us into it is the ability to make higher returns than what would have been available back in the eighties. That we were able to sort of hit it at the perfect time, and you know, it led to other verticals as well.

AI assessment note: “We started a company called Land South in the mid nineties.”

Q When you are talking to a farmer about lending to them, what's the pitch you give when you see their eyes light up and you know, okay, we're going to get this deal?

A One of the big things that I've learned over the years is that it takes a lot of listening with the farmer. We're not dictating a product. We need to listen to them on their goals because there is a farmer life cycle. There's the farmer that's established, that's farming, that isn't necessarily growing. You know, there's a product for that. There's the farmer that's growing, expanding, and has big dreams and all of that, and then there's the farmer that's at the end, and we have about half of our farmers now are retirement age. It's a big issue. For them, it's not just, what am I going to do the next however many years, but what's the legacy of this? My kids aren't coming back. My grandkids, it's helping them think about the future of that farm, and so it's great. When you strike a deal and you sign on the dotted line, but I think what I'm getting at is this is a big relationship business, and when you get them to agree to the deal, they're agreeing to be in relationship with you. We'll get that loan done, but we're going to be changing that loan in two, three years, right? They're going to be buying something else, or they're going to be otherwise needing something else out of us, and so that's what you're agreeing to. It's a relationship, and To get back to the beginning of this conversation, which is why did I get into this? I think that's probably the biggest reason is I've…

AI assessment note: “We're not dictating a product. We need to listen to them on their goals”

Q So there's this combination of shrinking supply. You also mentioned that a bunch of the farmers you work with are retirement age. You've got a demographic issue. What does that imply about As you look out at things like food sourcing in the country over the next five or 10 years?

A The UN says that we need to produce 50% more food worldwide over the next 30 years with population growing. I mean, you think about the other areas that produce a lot of food, uh, you've got the Ukraine, you have South America that's having drought. Australia has drought issues, and as we, we enter into an era of a warmer planet, American farmland, especially east of the Rockies, is about as good as it gets. We have multiple directions that, that winds bring, you know, moisture to the area, which is more drought resistant in terms of climate change, and we have more navigable waterways than the world, rest of the world combined, and so we have the ability to move it around. So I think America as a source of food Uh, we need it, right, for ourselves, but I think in terms of world food scarcity, we should play a large role in that, and I think that that's something we need to be thinking about. It's urbanization. There's a lot of pressure, you know, with solar, solar farms now. We've been seeing a lot of that. Solar farms have been, been going up on high quality farmlands. There's a lot of things going on out there that are reducing the amount of farmland we have, and You know, I think that's something that hopefully is paid more attention to, you know, as we move forward.

AI assessment note: “I think America as a source of food Uh, we need it, right, for ourselves”

Q How have you gone about trying to build up homegrown talent then?

A People that are smart, motivated from the financial and business sector, and make them passionate about the farmer. We have people that have grown up in rural America and grown up around ag and understand it, and our business development team is full of people that are agriculture to the core, but ultimately, we want to be a sophisticated finance company, and in order to do that, we have to have sophisticated financial professionals. We've got two clients. We have the farmer, That produces our food supply in rural America and they need us. And we have sophisticated investors. So it's a pretty neat area and mission to have. It's just working to, to find, locate those people that, that fit those two things.

AI assessment note: “It's just working to, to find, locate those people that, that fit those two things.”

Q So in the early years, were you less successful as you were like building up the data?

A You're just doing whatever you can. You know, the thing though, that in coming from the investment side, intuitively, I knew that if I kept My weighted average loan to value in that range, I was going to be okay. I mean, you can't predict when a weather event's going to happen. I wasn't a mind reader at that point, pick out, is this guy a great grower? I knew if we had, they had equity in it and we had that loss that take care of it would be okay. As you build scale, you've got to identify it just for efficiency, right? You don't want to have a bunch of special asset deals. You're just having to manage.

AI assessment note: “intuitively, I knew that if I kept My weighted average loan to value”