Farmland investment: challenges, opportunities, and the future with Fractal

Paul

Neiffer: I'm Paul Niefer, and we're bringing this from the 2025 Executive Business Conference. I always have to look at it, make sure I say it correctly. But, uh, today we're going to have a conversation with Ben Gordon from Fractal. Ben, how are things going?

Ben

Gordon: Going well. Good to see you again, Paul.

Paul

Neiffer: And I'm going to say you're from North Dakota, right? Is that how we want to say it?

Ben

Gordon: It's from North Dakota. But, you know, I can tell you want me to admit to everyone I live in San Francisco. So some questionable life choices somewhere along the way.

Paul

Neiffer: Now, are you really in San Francisco or are you in one of the suburbs?

Ben

Gordon: Right in the city.

Paul

Neiffer: Oh, you are. Better you than me. Let's keep it at that. So, but now you just got done with a conversation here at the conference dealing with why, let's say farmland investment is either maybe a good investment or potentially a bad investment. So let's get the bad stuff out of the way. What are some of the things why the perception is it might be a bad investment?

Ben

Gordon: Yeah, I mean, I'll maybe hit that from a general investor standpoint and then a farmer standpoint. I mean, I think on the farmer side first, which I think is probably a little more important for all of us, it's really darn hard to cash flow.

Paul

Neiffer: —But Ben, sorry to interrupt. It's always been hard to cash flow when you first buy it.

Ben

Gordon: —Absolutely. But I don't think that lessens the risk or the shock, either emotionally or in the financial analysis. And I think it's really hard to think through, like, is my job here to speculate on the asset or project where it's going to go in forward? So I get why it's hard. And I also get why some of these long-term rules of thumb actually end up working pretty well. But I think where commodity prices are at, farm profitability, obviously, we've had a little bit of improvement here recently, which we're all thankful for, but we're still in a spot where prices are lower, rates are higher versus the averages that we've had in the last 3 to 5 years. And that's a harder time for many folks to buy assets when they're looking at their own operation. Now, that's also a great time from a macro view to buy those assets.

But I think it's hard to get away from that sting, especially if there's been— let's say unique local pressures in a market that have either kept it higher. So you haven't seen prices kind of come back a little bit or even continue to go up. So that's really tough from a farmer side. And then I think there's always those feelings, whether you're an investor or a farmer, of how sure of a footing are we really on here? What happens if ethanol goes away? We just saw a blender's tax credit that you know a heck of a lot more than I do go away. Like that's gonna have an impact on supply and demand and what happens with China tariffs. Brazil, are they gonna see more and more acres come out? You know, what happens? And that uncertainty, I think, is a very fair both feeling for folks to feel and a thing to look at.

But it's really important then to say, okay, those are our feelings, those are our risks. What now? And how are we thinking about that in our business strategy 5, 10, 20 years in the future?

Paul

Neiffer: And again, from the investor standpoint, a lot of those are either pension plans that have a very long-term horizon or a family office. And they're looking at maybe if the pricing is going down, that they view that as being an opportune time to come in, which actually sort of props up the price a little bit.

Ben

Gordon: Yeah, I think there's a reason that even with extreme hikes in interest rates and an extreme fall in farm profitability that we haven't seen, you know, it has not been the 1980s. It hasn't even been close. If you look at farm defaults, yes, we've seen little upticks somewhere, but not on real estate. And we have a really, really strong farm economy. And there's always that next buyer in. We still have pretty darn strong farm balance sheets, not to mention the investor propping it up. So I think it's just a good reminder that those fundamentals, like we think about them in grain marketing all the time, it's a much longer time period with farmland, but those fundamentals still matter.

Paul

Neiffer: I guess I'm just old enough, I always sort of laugh when people say extreme rise in interest rates. I'm still going, my first house was 12% and I was tickled pink. So when we hear 7 or 8, I'm like, oh, okay, let's not get too excited.

Ben

Gordon: The increase, not the nominal amount. There we go.

Paul

Neiffer: It's the percentage increase, I know. Now that's sort of the, maybe the bearish side. Over on the bullish side, what are some of the bullish sides, especially for American row crop farmland?

Ben

Gordon: Well, I won't pretend to know other, other forms, so we'll stick there. You know, I think it really looks at, if you look at the time horizon, let's just start with the basics because that's where really probably the biggest drivers are and it's supply and demand. And I usually go global and then national and local. And if we look globally, you know, there's a lot of folks that think we're at peak farmland. In terms of just the total amount, because we have a lot of land globally that's coming out of production from the same things we see here, urban development, renewables, or just degradation of land. And then you see the impacts of climate change, which is going to impact both the number of acres, but the productivity of those acres.

And if we look at that, you know, not everyone was blessed with glaciated soils in the American Midwest, and especially our big commodity competitors in Latin America, they certainly weren't. And they have some other things to deal with in terms of the impacts on water cycles. And so if the climate modeling is even remotely correct, we're going to see more volatility. And our positioning relative to those competitors, that is a strong tailwind for farmer profitability, or say, uh, I would say agriculture profitability. Now, where does that value then go? Usually down to the land versus the farmer, right? And so now when I'm thinking about that from my business, what are the other reasons that I maybe should look at, you know, either maintaining or increasing my exposure to farmland for my operation just as an asset? And so I feel pretty good about that.

And then if I layer in the farm-level impacts of, there's real benefits to scale, often, not always, but where there are, you know, having that access to that owned asset as part of my scaling strategy, or at least not going backwards, is absolutely critical. And if we look at combine, you know, the things that we were worried about with these kind of tailwinds, we need to make a plan and actually see what's a viable way to invest, to grow, to get that compounding early without putting our operation at risk. Good solid fundamentals. We're not talking about speculation here. It's just combining the short-term with the long-term. And especially if you have that thing you're really good at, go find land that fits that and be willing to pay for it.

Paul

Neiffer: Yeah, and of course we already maybe we're gonna get E15 nationwide. That might be a demand lift. I also think, let's say ethanol, we know eventually it probably will slowly or quickly dissipate, but there's still so much of that ethanol to me that's used for feed. I mean, the DDG, one way or another, you still gotta get that protein. Out to the animals. So I guess I'm still cautiously optimistic.

Ben

Gordon: So yeah, and I like the way that you frame that. It's, you know, if you look at that world where ethanol goes away, well, what are the other sources of demand? Like, what else is happening in the world if you believe that? And it's probably environmentalism, it's probably carbon. Well, if we're in that world, then fossil fuels go away. Well, fossil fuels are used for a heck of a lot more than just passenger cars where frankly EVs probably will win out. Well, what about other forms of transportation? What about chemical feedstocks? And then if you think about the biotechnology that's coming online that could allow us to grow specific corn for that specific feedstock, all of a sudden the cost of that feedstock goes down. We have the sun and we have darn good soil and we have great agronomy-minded folks in our country.

We're gonna be able to grow something that's valuable at a great marginal cost would be the bet that I would make on just where technology goes. So I think, you know, every headwind is an opportunity and vice versa. And I think at the end of the day, Good agronomy, good solid fundamentals, and then how do you catch the tailwinds and then not lose your shirt, not lose the farm, not lose that legacy. That's the balance that we're really talking about.

Paul

Neiffer: And I think eventually, certainly we're not gonna fly an airplane with batteries. I mean, it's a long ways away. I mean, it's too heavy and we know that. SAF may, we may just cycle from ethanol over to SAF, which would be helpful. It'll be interesting. I think personally, I think that's going to have to be some type of mandate. I mean, I think 45Z or whatever the credit may be is probably unrealistic, but we'll see on that. That's a different discussion.

Ben

Gordon: Yeah. And it doesn't have to— like, we're not just talking the US, right? I mean, if we look at the existing markets for that, it's just been a couple of states now, a couple of big ones. But, you know, if you look at things that Europe is still signed up for, I mean, that could be enough to drive a market. And where else are they going to get this stuff? It's not from Brazil because we are more competitive from a sustainability angle, whatever. What that word means. Um, and so yeah, I think I like the way that you kind of frame it up as like, where are those headwinds and tailwinds? And there's a lot of good ones, even if we don't have to believe every single assumption. Yeah.

Paul

Neiffer: And I think also, if you look at like Netherlands, you know, there— and of course there's a little bit of a battle going on— that they're restricting the amount of fertilizer that a farmer can use. Yeah. Now genetic, we know the agronomy and the genetics is going to continue to increase the yields, but if suddenly we can't use natural gas-provided fertilizer or whatever it might be, you know, that's also a way, I think, of propping it up is that, you know, yeah, we're going to produce more, but what we used to produce more with may not be there. So we'll see what happens. I laugh at that.

Ben

Gordon: I mean, if you look at that world, we probably have a pretty abundant renewable energy that doesn't work for everything, but what it does work for are some chemical feedstock processes. And all of a sudden now we have separated our nitrogen cost from the natural gas market itself. We just isolated farm income in one more way. So I mean, everything's a headwind/tailwind. I think when we get our political beliefs involved, we maybe don't see as clearly. And so it's just what's going to lead to more bushels or higher price bushels. And that gets me excited as long as we're also looking at the downside case.

Paul

Neiffer: And of course, I think you mentioned it in your discussion, there is plastics as, as, as fossil fuel disappears, it's going to be replaced with corn as an option. I mean, there is corn plastic right now. It does a pretty good job, not as good as not as good as fuel, or not as cheap, let's say. But we'll see what happens. Because again, oil was at some point some type of carbon. It was plants that create carbon. Well, same as corn or whatever it might be. So now, just for the audience out there that may not know what Fractal is, let's just spend a little bit of time. What is Fractal? What does it offer for the farmer?

Ben

Gordon: Yes, we are a passive minority farmland investor. And actually, we're probably less of a— yes, we are an investor, but we're really trying to be a farm capital provider. Not replacing the bank, but to complement the bank for that growth-oriented farm or just folks that are looking to invest. So it doesn't have to be acres. It's just, where do you have a capital need that you could use some support on with your existing capital provider? So often it's new land or think grain storage or that on-farm infrastructure, high-value projects. And so what we do is we will invest in a minority position up to 45% to start on a piece of land. We go to evaluation, we show you the whole valuation. I do every one of them in terms of showing our work, 'cause we like to be on the same side of the table with the farmer.

If we get to an agreement, they'll take that capital, they'll go make that investment. We don't tell the farmer how to use it. Then they're gonna continue to manage that land. We don't have agronomic control, though we do give them discounts for soil health practices that they use. Think your no-till, cover crops, in-season nitrogen, increased crop diversity, livestock integration, all those things. But again, we don't enforce it. And then we lock that investor in for 10 years. So really it's a way to get more capital. There's an annual payment plus the, we get our share of kind of the appreciation. So it can be more expensive or often is more expensive than debt.

Which equity usually is, but we win when the farmer wins and we lose when the farmer loses and try to reduce that cash flow burden so that way that farmer can go use that playbook they have to go build their operation even better. And at the end of the 10 years, hopefully we've earned the right to renew and do it again, or they can buy us out there, or frankly, at any time after 2 years.

Paul

Neiffer: So essentially, instead of being debt, it's sort of like an option agreement that then is secured by the land itself.

Ben

Gordon: Exactly. That is exactly what it is.

Paul

Neiffer: Okay. I got my CPA hat on there.

Ben

Gordon: So yeah, I just, just, I, I had a sense you would intuit the structure.

Paul

Neiffer: But so I, I guess maybe just as we come close to the close here, you know, I'll ask you a direct question. I mean, I think I've already asked direct, but a little bit more direct. Are you bullish or bearish over the next 10 to 25 years on farmland?

Ben

Gordon: I like to think about folks' incentives and their own actions, not their words. A disproportionate of my personal net worth, and I don't come from a lot of that outside of this work is in our fund, which is investing in farmer-managed land. I think there's plenty of smaller markets that I maybe wouldn't invest in, and we don't go there in areas that have long-term water risk exposure or climate exposure. But if you're talking vanilla row crop farmland in the United States over 10 years, and I look at just where we're at politically, economically, where supply and demand is at, and just the potential for American agriculture, I think it is a heck of a bet in a portfolio. It is a very safe bet that has a lot of upside. Yeah, I would say pretty darn bullish. I would say even more bullish over 20 years and even over 30 years, just given nature and supply and demand.

Paul

Neiffer: I know there are certain states, I think North Dakota, Oklahoma come to mind, that have some pretty restrictive on maybe a fund like yours can do. Are there certain states that you can't go in or not?

Ben

Gordon: Yes, we only do machine-harvestable row crops. We don't invest in the Southwest or Texas. We can't invest in Georgia because they have some option contract rules, and a lot of East Coast states we'll stay out of even if there might be an operation or two. So think greater Corn Belt into the Central Plains, but generally in a little bit more of the water-rich area. We are lucky in our structure because we are not taking full ownership of the land. It's just an option. Yeah. And we don't take ownership even in that option. We then immediately sell it or go through and, we use a mortgage structure similar to debt that, you know, we have investments in North Dakota and Iowa in these states, um, because we like to really adhere to both the spirit and the letter of the law because we're not owners of the land, right? We get a set of cash flows, and that is what our investors get.

They're getting access to cash flows from great operators. They do not own the land. They don't get to come around and tell the farmer what to do or say, hey, I need you to do this or that. That is not the thesis. It's the opposite of the thesis. For us, it's a great actively managed piece of land by the farmer. And with the aligned incentives that they own, they farm it like they own it because they do.

Paul

Neiffer: Yeah. And so like you said, you want it to be a win-win. It has to be. You're not in it for the farmer to lose because then you lose.

Ben

Gordon: Yeah. It's aligning those incentives makes it a heck of a lot easier for us all to get the same side of the table and us just find great operations that want to grow their business, often to bring a next generation on. And yeah, there's a lot of opportunity out there for, for great operations. Okay.

Paul

Neiffer: Well, Ben, thank you very much for taking some time here on the Ag View Pitch. Is there anything else you'd like to add before we sign off?

Ben

Gordon: Nope, I appreciate the time, and, uh, yeah, this is always a good time.

Paul

Neiffer: Okay, again, this is Paul Niefer signing off for the Ag View Pitch.