AgCast 211: How Investors Are Buying Farmland, Lessons from the Delta, Part 3

Audio Transcription:

Colson Tester: Our entire North Star as a company is buying farms at or below market. If you overpay the likelihood of hitting that launch or appreciation number is obviously diminished.

Speaker 11: Welcome back to the Purdue Commercial Ag Cast and our lessons from the Delta series. In the first two episodes, we explored how farming systems in the Mississippi Delta differ from what many Midwestern producers are used to, from irrigation dependent crop production, to the unique economics of rice and farmland values in the region.

If you haven’t gotten a chance to hear those, I’d encourage you to go back and have a listen. Today we’re shifting the conversation slightly to look at the investment side of farmland. Who’s buying farmland in the Delta? How those investments are structured and what investors are looking for when evaluating farmland as an asset.

While we were visiting Arkansas, we had a chance to talk with Colson Tester, an investment analyst with Acre Trader, a farmland investment platform headquartered in Fayetteville, Arkansas. Colson works on sourcing farmland investments, evaluating potential deals, and helping investors understand the opportunities and risks associated with farmland ownership.

This is episode three, our conversation with Colson Tester.

[00:01:17] Introducing Colson Tester and AcreTrader
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Todd Kuethe: Colson, why don’t you first just introduce yourself.

Colson Tester: So, Colson Tester, I am an investment analyst for Acre Trader, which is a farmland investment platform. We’re a farmland investment group that markets to retail investors. So rather than some of the larger funds and institutional players in the farmland asset management investment space, we market exclusively to retail investors. So anybody that’s accredited, is able to invest in farmland through our platform.

Accredited investors are defined from the SEC, this is Securities and Exchange Commission, as someone who has an annual income in excess of $200,000 or you have a million dollar net worth excluding the value of your primary residence.

Todd Kuethe: If things would’ve turned around differently for me, those be Beanie Babies I bought in the mid nineties, I would currently be accredited.

Chad Fiechter: Well, I think we can all safely say that had the Beanie Baby thing held up, we’d all be doing much better.

Todd Kuethe: Yeah. Yeah.

Chad Fiechter: Okay, so your job is investment analyst. Can you walk us through the tasks that you do on a regular basis?

Colson Tester: Yeah, the core of my job is sourcing farms for us to buy, to go on the platform for investment. So my primary job is to go find farms for sale that we think are investment grade and interesting regions that investors would be excited to invest in. And that varies across geographies, different crop types, different lease structures. So I’m trying to find stuff for us to invest in and then doing all the due diligence on those properties. So, talking to farm managers, talking to potential tenants or operators, getting information on tile yields, irrigation system. If we need to make improvements on a farm, what all needs to go into that. Budgets for what we think we can accomplish. And then, I put all that together in a package. Do a valuation on the farm, what we think it’s worth, and what we think we can buy it for. Then I present that to our investment committee who says, yes, this is an opportunity we’re interested in. No, it’s not.

So that’s kind of the core of my job. And then secondary stuff is I do a lot of, I write some articles for our website, work with people like Aaron on land values, publications and research, and then write a lot of the marketing stuff for farms.

[00:03:41] How farmland investment platforms structure deals
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Colson Tester: So because we’re a retail investment platform to structure that we use is pretty different from traditional funds. So we go under contract on a farm and our current kind of way we do things we. Set up an LLC, we make an offer on a farm through that LLC. Once the offer is accepted, we go under real estate contract. And then the farm goes up on our investment platform for investors to, uh, allocate capital to. And in between signing the contract for the property and the actual real estate closing date is the window for us to raise capital.

So a big part of my job as well is to make sure that farms, they go up on the platform, are attractive to investors. They have good pictures, they have good descriptions of the crop types. Uh, we give investors all the information they need to make an informed decision about whether or not they would like to invest in that farm.

Todd Kuethe: Well, and and do you also outline your intended improvements that you aren’t able to make yet? Like, so if you’re gonna, uh, grade a rice farm or put tile drainage on a corn and soybean farm, you, that’s part of that description as well.

Colson Tester: Yes. That on their, it’s also to

Todd Kuethe: plan for it.

Colson Tester: Exactly. And that’s, we have certain investor.

Who look for, they’re more interested in like a, you know, a, a rougher farm that we think we can add some real value to. And then we have other investors who look for really high quality, what we would call Class A farms that don’t need improvements. They just wanna invest in like blue chip assets. So we try to convey to investors, which, you know, what our strategy is on that specific farm.

[00:05:19] Investor preferences: organic, sustainability, and geography
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Todd Kuethe: Do you have investors that are caring about things like environmental impact or organic or sustainability, that sort of stuff. Have you seen more of a rise in that or is it more people just interested in just giving the return profile?

Colson Tester: I would say, I don’t know if we’ve seen like an increase in that, but we definitely have a subset of investors who are interested in specifically organic.

We’ve done, off the top of my head, I would say five to seven organic farms previously. Um, and we have a specific set of investors that say, Hey, I only invest in organic. Uh, we have other investors who like to have exposure to organic and non-organic. Um, and then we have some that are just more interested in broadly speaking, sustainability. Like they, like, uh, projects where we’re gonna improve the irrigation system become more efficient. Or we’re working with an operator who’s really, uh, likes to do cover crops or certain types of conservation tillage. Um, so like, yeah, investors, we have a pretty wide swath of investors who look for different things.

Todd Kuethe: Or investors that are interested in a particular geographic area for like emotional reasons or personal reason. Are there people that are like, I’ve always wanted a piece of Iowa, ’cause that’s where my great grandpa’s from. And so there’s, this allows me to buy a fraction of an Iowa farm or something?

Colson Tester: Yeah, there’s a ton of that.

If you just go to our website, ac trader.com and click the invest tab, everything that’s open at the time is there. If any given point, if you go to the website, there may or might, may or may not be a farm available. We like to hold ourselves to a pretty strict underwriting standard and sometimes there’s not, we just don’t have a farm under contract at that time that isn’t fully funded.

So we do have some down periods. Uh, we’d like to minimize that, but there’s periods of time where we don’t have a farm up. And then once we, once we put a farm up, sometimes they go incredibly quick. A couple weeks ago we funded a farm at seven minutes. Uh, other times it takes a month for us to fund a farm. Sure. It just depends on the size, the location, investor interest at the time.

Chad Fiechter: So far we’ve talked about how farmland gets sourced and evaluated for investment. Next Colson took us to see one of the first farms Acre Trader ever purchased here in the Delta.

[00:07:31] Visiting one of AcreTrader’s first farms in the Delta
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Colson Tester: So we just pulled into Acre Trader 111, which is the first farm that we ever did as a platform. So this was back in late 2018, maybe 2019. Uh, so we’ve had this farm for six or seven years and it’s a really small farm, so it’s the first one we ever did. It’s 40 acres, plus or minus couple, um, really high quality soils.

Todd Kuethe: Egrets.

Chad Fiechter: Tell us about, um, you, there’s clearly you’re not farming this, so who’s, who’s farming it? How do you, how do you deal with tenants on something like this farm?

Colson Tester: Yeah, so typically. Where we’re in the delta, a lot of leases are under a crop share structure. We do not do crop shares just because of, uh, the complexity of doing that with a very large investor base is a little bit more difficult. So we’re ex operate almost exclusively on cash rents or flex rents. So a farm like this and the Delta would be just on a strict cash rent structure, uh, with a local operator.

And I would say probably half to 75% of our farms we’re either working with the current tenant on the acquisition or we’re, you know, as a part of the purchase, we’re also keeping the current tenant on. So lots of times these farms are changing hands, but nothing changes in terms of the operator kind of how they operate the farm.

Todd Kuethe: Can you talk a little bit about how they sort of alluded to here? Um, like if someone is, for example, renting a farm that they’re operating and then the landlord that they have is passed away. Um, and then the kids just wanna offload it or something. That’s where you guys potentially come in and take a look at it as something you’d wanna maybe invest in, um, in like a buy and lease back, or maybe even land that they own that they’re wanting to keep operating, but access to a little bit of capital or something.

So can you talk a little bit about that sort of like purchasing or buying lease back or that process?

Colson Tester: Yeah, so I’d say that’s our ideal deal is one in which it’s either a sale lease back where an operator’s selling a piece of ground they own, uh, a. In order to recapitalize our operation, go buy a different track, do a 10 31 exchange, or it’s a tenant who calls us and says, Hey, landlord wants to sell landlord’s kids want to sell. I haven’t operate this farm. I really like it. I would like to keep operating it, but I don’t have the capital to buy it. Will you step in and buy it and lease it back to me on a long term lease that allows me to continue to operate it?

Um, so that’s, that’s sort of our ideal, uh, way to acquire farms. We’ve spent a lot of time over the last seven, eight years building out a, a network of tenants to where we have enough, uh, contacts and name recognition that people know that we’re who they should call when have an opportunity like that.

Chad Fiechter: Seeing the farm helps illustrate how Acre Trader structures these investments. But what does the investment actually look like from the investor side? We asked Colson about hold periods and expected returns.

Colson Tester: When you think about supply, farmland for sale and supply for us to buy, like available farms, it’s pretty lumpy because the most logical time to sell a farm is when it’s not. In the off season. So we see a pretty high volume of deals come in between, say mid late September and March, April. And then like this time of year, in the middle of June, July, August, it can get pretty slow. Investors are willing to invest typically year round, whereas our supply is, doesn’t always match that investor demand.

We typically buy farms in the one to $3 million range. That’s sort of our sweet spot in terms of investor demand and being able to fund quickly because of the, because of that window between signing a contract and real estate close is fairly tight. Oftentimes we have to be very confident that we can fund a deal quickly, so that limits some of the size that we can buy at. But there’s a lot, we think there’s a lot of opportunity to buy really good farms, uh, and work with operators, honestly, on bigger deals in the three to $7 million space.

Todd Kuethe: So is it harder to market like a small farm, like in terms. Anchorage or tracks. Right. It’d be much easier you saying to like deal with like a larger scale parcel would drive more interest?

Colson Tester: Yeah, and it’s, uh, so like we have, because of the, we’re offering securities. We’re taking a, a piece of real estate and turning it into a security. There’s fixed costs we have for every single offering. And on smaller deals, that’s a larger percentage of the capital raise is fixed costs for putting the offering together. And as you scale that up, it becomes a better deal for investors because the fee structure’s lower, like the, the fee load on the front end, like the fixed costs are lower. Um, and for us it’s just easier to manage rather than have a bunch of 40 and 80 acre farms, it’s a whole lot easier for our management team to work with a, a tenant and a farm manager and do all the reporting to investors and lease management on, you know, a quarter section or half section, or frankly, a, if you could buy a full section, all that’s easier on our end at that scale rather than doing it over and over and over again on smaller tracks.

Chad Fiechter: What, what’s typically the hold period or the ideal since it’s fairly new.

Colson Tester: Our typical number we give to investors is five to 10 years. That’s our default target hold period. To date, we have 15 exit. So we’ve sold 15 properties that we acquired. Those are typically have been before the target hold period. And some of that is due to you get a really interested buyer who just approaches us. We haven’t marketed these farms typically. They just, we just get told that like, Hey, the neighbor’s really interested in that farm. He has some capital. He’s looking to make a purchase. Or we have a 10 31 buyer looking for a farm at a very specific location. Yours fits, he’s willing to pay a premium to get this location.

Chad Fiechter: Sure.

Colson Tester: Um, but the vast majority of our portfolio, at this point, 130 farms probably, uh, we’ve held for multiple years and are just midway through the life cycle of the investment.

Chad Fiechter: And like when you, those early exits though, like you kind of hit the return targets, like that’s why it made ’em attractive, is that that premium that the person’s gonna play like you

Colson Tester: Yeah. On those early exits, we basically only consider those when the return profile to investors is higher than what the market rate would be or what we target off the start of the underwrite. So maybe we’re targeting an internal rate of return of seven point a half or 8% typically, and we get an offer that gives us a 12% IRR. Sure. That’s, that’s a compelling case for us to make an early exit.

Chad Fiechter: Yep. How about the investors, let’s say something changes and they need cash quick. Is there a way for them to get out fairly easily?

Colson Tester: No, is the short answer and the kinda longer explanation is because it’s a, a security in a private market, there’s not a, an open marketplace for the investments after they’re made. Sure. So an investor is always able to sell their interest there. They can sell their share of the investment, uh, to another accredited investor, but we are not licensed to make, to facilitate that transaction.

Chad Fiechter: Okay. So, so I could, I could be in trouble and if Todd was accredited and I was accredited, I could sell mine to Todd. I could transfer my portion.

Colson Tester: Yeah, you can make a private transaction.

Todd Kuethe: But I just wanna let you know, Chad, you’ll be doing that at a distressed discount. ‘Cause I’m doing you a favor here. Yeah. Uh, and really kind of doing both of us a favor.

Colson Tester: So Todd’s kind of joking there, but that’s, that’s something that is a very real consideration. Like if you needed to sell a private security because you were in a bind, you’re probably gonna take some sort of discount to whatever the market value would be.

[00:15:50] Colson’s background
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Todd Kuethe: Colson, can you tell us a little bit about your background, what kind of training experiences you had, uh, prior to Acre Trader? Or potentially if that’s different than what you’re looking for now in similar roles, in the industry, what kind of training experience would you suggest?

Colson Tester: Yeah, so my background is I grew up in North central Arkansas, very rural, but not in a row crop background. So, most of the agriculture around where I grew up is cow -calf production. And my, my parents had a cow calf farm, still do. I was always interested in agriculture. I went to the University of Arkansas, did a bachelor’s degree in ag business, and then stayed and did my master’s in agricultural economics. And my research focus then was on cow -calf production strategies and herd management.

After my master’s, I went and worked in South Texas for an ag engineering company doing construction inspection. So worked more with like stream bank stabilization, dirt work, watershed lakes, watershed dams, things like that. And then came back to the University of Arkansas to be an instructor in agricultural economics. So in the same department that I graduated from. While I was there, I started a PhD in Environmental Dynamics. Did that job for two and a half years, and then through Aaron got connected to Acre Trader. An opportunity came up there to join them as an investment associate on specifically row crop, the row crop team and row crop underwriting. So I then took that opportunity and it kind of made that transition.

When I took that job, I did not know anything about land values and investment underwriting. To me, the skill I brought in is talking to, knowing something about agriculture and talking to farmers. And then I’ve learned, uh, land valuation and investment underwriting from the more senior people on my team.

Aaron Shew: So you, but you had one thing our team would’ve never hired Colson without that financial modeling and quantitative background.

[00:18:06] Modeling farmland appreciation and returns
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Chad Fiechter: I got a question about modeling individual farms. Is there kind of standard assumptions that you know, like as a company or are you really blank slate on every project trying to get through, this is how we think this farm and the returns will evolve?

Colson Tester: We have a, a base set of assumptions that we hold constant across all farms. So when we look at the potential appreciation of our properties and the increase in value over time, our assumption is that across the whole period we can average the 50 year USDA average, which is something like 5.9 to 6% average annual appreciation. On our internal financial modeling, we don’t devate from that in terms of how we project the return, or how we target our, our future return. Sure.

We do spend a lot of time looking at where individual farms and what we think we can buy it for is relative to the market. So our entire, like North Star as a company is buying farms at or below market. So we don’t ever want to overpay you for something because the, the likelihood of hitting that launch or appreciation number is obviously diminished if you pay above what the current market rate would be. And then the assumption then that’s, that’s more gray that we have to spend a lot of time working on is the annual income. So what is the potential rent from the farm and how do we think that evolves over time?

[00:19:33] Farm due diligence and working with tenants
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Todd Kuethe: And so, uh, how much do you travel? Are you, are you going to visit these farms before acquisition at some point or someone from your team?

Colson Tester: We do have somebody go visit the farms, but typically that’s a local farm manager. Okay. So we have in all, we, we operate pretty much a coast to coast. We have everything from California to New York to Georgia, and everywhere in between. So in all those places, we have a farm manager who checks on the farm, handles the individual leasing with tenants. They handle all the capital improvement projects, things like that.

So that’s our boots on the ground in the vast majority of farms is getting them out to the farm and getting their, their take, and then getting all the info we can from operators. So that’s one of the things that we’re really interested in working with tenants on is if they’ve been operating the farm, do they have tile maps? Do they have historical yields?

A lot of times you ask like, Hey, if just don’t, don’t worry about what it costs. Like if you could tell me what you could do to make this farm better, what would it be? Get that feedback from them and then consult with the farm manager on like what, what’s the potential cost of that? What does that do to the return and how much more marketable does that make the farm?

[00:20:51] What “water chasers” do in Delta irrigation systems
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Chad Fiechter: And now what became the fixation of the trip? Another role that many Midwestern farmers might not be familiar with — water chasers.

Colson Tester: So we talked about this last night. In the delta where we are, almost all of crop production here is non irrigated. So everybody is irrigating and most of the irrigation is not from a center pivot system. It is furrow irrigation and flood irrigation for rice. So specifically for rice producers, they’re putting on a ton of water and managing that water to keep the optimal depth on all of their rice fields is very time and labor intensive.

So a water chaser is somebody who is going from field to field, farm to farm, and managing water monitoring wells. Making sure there’s enough water, surface water reservoirs, that wells are in good operating condition, the pumps are running, shutting pumps on and off. And just managing all that system is

Todd Kuethe: Yeah, you’re maybe tearing down levees, right?

Colson Tester: Yeah. Rebuilding levees, rebuilding levees, rain, you know, looking at weather forecast, trying to make sure how much

Todd Kuethe: naturally there are gonna be there. Yeah.

[00:22:01] Why pivot irrigation land may be less valuable in the Delta
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Colson Tester: So an interesting like farmland values thing in the delta is hopefully this too controversial of a take, pivot ground is typically inferior to furrow irrigated ground.

Chad Fiechter: Interesting.

Colson Tester: You put pivots on stuff isn’t leveled is harder irrigate. And and obviously pivots you miss acres. have dry where you otherwise wouldn’t have if you’re watering on furrows the edge of field.

Todd Kuethe: And is this stuff then, it’s un irrigated, essentially worthless? So those dry corners, couldn’t do anything with them.

Colson Tester: there’s still some non-irrigated production, but a, I would say the value it holds is what it would go for irrigated minus how it would cost to irrigate that’s the kind of like market value.

Chad Fiechter: Conversations like this highlight how farmland is increasingly viewed not only as a production asset, but also as an investment asset. Platforms like Acre Trader are creating new ways for investors to access farmland.

At the same time, these investments still depend heavily on the farmers operating the land and the production systems that drive returns.

In next week’s episode from the Delta, we’ll continue exploring how irrigation systems and water management shape both farm productivity and farmland values in this region.

If you’re finding value in this series, make sure to subscribe to the Purdue Commercial AgCast so you don’t miss what we’re doing next. We’ll continue this Delta series over the next several weeks alongside our regular Ag Economy Barometer insights and implication episodes.

And if you wanna see some of what we’re talking about, the fields, the levies, the water management, we’re sharing short video clips from our Arkansas trip over on our YouTube channel.

Those visuals may help really bring these conversations to life. If this episode sparked a thought for you, consider sharing it with a friend or another producer who might benefit from this discussion.

Thanks for listening to the Purdue Commercial AgCast.