WEBVTT - At The Money: Monetizing Dirt

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. Here's to the farmer,

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<v Speaker 1>the plants, the funerals, and the spring, the turn from

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<v Speaker 1>the green to that harvest honey.

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<v Speaker 2>Hold on all the banker downtown with the guide in

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<v Speaker 2>mon Steed, with handshake the money.

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<v Speaker 1>Have you ever thought about what makes land valuable? It's

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<v Speaker 1>much more than just a place to build a house

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<v Speaker 1>or commercial building or place a farm. Real assets have

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<v Speaker 1>become increasingly popular, accessed through alternatives like private equity funds.

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<v Speaker 1>I'm Barry ritholtzs and on today's edition of At the Money,

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<v Speaker 1>I'm going to discuss alternative land rights investing. To help

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<v Speaker 1>us unpack all of this and what it might mean

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<v Speaker 1>for your portfolio. Let's bring in Brandon Zick. He's the

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<v Speaker 1>chief investment officer at Sarah's Farmland Fund, managing about two

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<v Speaker 1>billion dollars in AG assets. Saras not only looks at farmland,

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<v Speaker 1>but a slew of additional rights that can help monetize dirt,

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<v Speaker 1>as Brandon likes to say. Sarah's was recently purchased by

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<v Speaker 1>Wisdom Tree Investing and full disclosure, I'm also an investor

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<v Speaker 1>in Sarah's through my own personal investing So, Brandon, you've

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<v Speaker 1>been investing in and around farmland for decades. You grew

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<v Speaker 1>up on a farm. What makes this kind of land

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<v Speaker 1>a compelling real asset?

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<v Speaker 2>Well, thanks, Barry. I think when you look at farmland,

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<v Speaker 2>one of the things that's so interesting is just what

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<v Speaker 2>are the optionality buckets that come with land. So when

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<v Speaker 2>we buy farms, generally we're thinking of this is going

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<v Speaker 2>to be a farm for the long term. But when

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<v Speaker 2>you own the real estate, when you own the dirt,

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<v Speaker 2>you have a lot of optionality. Starting with mineral rights.

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<v Speaker 2>That's something that on the family farm I grew up

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<v Speaker 2>at Northeastern Pennsylvania, no one knew what Marcella a shale was.

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<v Speaker 2>But over time there's been a tremendous amount of value

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<v Speaker 2>created through those mineral rights, well above the farmland value.

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<v Speaker 2>And when you think about other things that when you

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<v Speaker 2>buy a farm, in many cases there's timber on the

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<v Speaker 2>property that could be harvested selectively over time. There are

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<v Speaker 2>you know, opportunities to lease outland for hunting and other

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<v Speaker 2>sorts of recreation to generate revenue. And then you start

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<v Speaker 2>thinking about other optionality that can come to.

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<v Speaker 1>Well, before we go to other optionality, let's spend the

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<v Speaker 1>little time with each of those. So when you say

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<v Speaker 1>mineral rights and you're referring to Marcella shale, which is

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<v Speaker 1>natural gas made accessible by fracking, you're not giving up

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<v Speaker 1>the farm. Because of the fracking technology, those natural gas

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<v Speaker 1>companies and oil companies can access that from a single

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<v Speaker 1>point in the corner of the farm without disrupting the

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<v Speaker 1>farm land. And they could go literally miles down to

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<v Speaker 1>access how signa in how valuable are those natural gas leases?

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<v Speaker 2>Yeah, so it depends on the area specifically. But yeah,

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<v Speaker 2>the great thing is that you're not strip mining a property.

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<v Speaker 2>To your point, you can access it from a corner

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<v Speaker 2>of the property or even lease it without any service

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<v Speaker 2>intrusion on your property. They have to access it from

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<v Speaker 2>a neighbor's property who would allow that. And then in

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<v Speaker 2>the Marcella's shale region, you had land that probably would

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<v Speaker 2>have transacted almost any acre for fifteen hundred to two

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<v Speaker 2>thousand dollars an acre and then it was generating four

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<v Speaker 2>or five thousand dollars per acre and revenue per year.

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<v Speaker 1>Wow, so it's a lot.

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<v Speaker 2>So that's completely changed. So even with within our portfolio,

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<v Speaker 2>you don't see any farms purchased in Pennsylvania because of

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<v Speaker 2>the Marcellus and Utica shale, there's so much cash flowing

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<v Speaker 2>around that land just isn't available at an attractive price

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<v Speaker 2>from a farmland investment.

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<v Speaker 1>Let me ask you a naive question about this. How

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<v Speaker 1>do I, as a farmer maintain my mineral rights if

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<v Speaker 1>the adjacent farm is sucking the natural gas out of

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<v Speaker 1>the ground, doesn't mind natural gas then flow into that vacuum.

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<v Speaker 1>How do you manage around that?

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<v Speaker 2>Yeah, so they try to put them together into units

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<v Speaker 2>so that that doesn't happen. And there are rules around

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<v Speaker 2>what you can and can't do, especially with these as

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<v Speaker 2>opposed to vertical wells that would be on one property,

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<v Speaker 2>and depending on where it was on the property, you

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<v Speaker 2>might actually be extracting from the neighbors without paying them.

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<v Speaker 2>With these horizontal wells to go underneath, there are requirements

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<v Speaker 2>that you have to be paid. You do see an

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<v Speaker 2>interesting dynamic in Pennsylvania and New York where it's not

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<v Speaker 2>allowed in New York State, but if you own a

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<v Speaker 2>farm on the Pennsylvania side of the highway there that

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<v Speaker 2>you're definitely generating a lot of revenue. And there could

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<v Speaker 2>be an argument that maybe some of that's coming from

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<v Speaker 2>across the way, but that's where regulation probably doesn't really

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<v Speaker 2>meet up with the reality.

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<v Speaker 1>So let's talk about some other sorts of leases that

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<v Speaker 1>farmland can generate revenue from. You mentioned hunting. What do

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<v Speaker 1>you put up a gate and charge people on the

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<v Speaker 1>way in? How do you charge fees for hunters and

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<v Speaker 1>other recreational users if you own a couple hundred or

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<v Speaker 1>a couple of thousand acres of prime land?

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<v Speaker 2>Yeah, so usually typically it's in the off season when

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<v Speaker 2>the crops are off the field. But hunting in the

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<v Speaker 2>Northeast and the Midwest is something that I didn't grow

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<v Speaker 2>up doing, but you know, it's a way of life

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<v Speaker 2>for a lot of people. And everyone wants to have

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<v Speaker 2>a specific place that they can go to to hunt,

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<v Speaker 2>their own land, a private place to hunt. And if

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<v Speaker 2>you don't own land, that comes through the rental market,

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<v Speaker 2>and there is a robust rental market. When you drive

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<v Speaker 2>through rural areas, you'll see posted signs on trees saying

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<v Speaker 2>this is like you're not allowed no trespassing. Typically it's

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<v Speaker 2>landowners or hunters who are paying for those rights who

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<v Speaker 2>are posting that. And yeah, we go through third parties

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<v Speaker 2>that will require insurance. There's a lease being paid, and

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<v Speaker 2>once someone's paying and paying for the insurance, they're enforcing

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<v Speaker 2>the boundaries such that we don't have to which is great.

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<v Speaker 1>Let's talk about other leases renewable energy. I know you

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<v Speaker 1>guys are big with wind turbines. The President may not

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<v Speaker 1>love those, but farmers sure hacks seem to like it.

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<v Speaker 1>What are the economics of putting up a wind turbine

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<v Speaker 1>on a farm?

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<v Speaker 2>So wind has been around now for quite a while.

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<v Speaker 2>You've seen thirty years worth of wind farm construction, and

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<v Speaker 2>it's very incremental in nature to the farm, but it

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<v Speaker 2>could add anywhere from twenty to forty or fifty basis

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<v Speaker 2>points of income depending on the property, which and it

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<v Speaker 2>takes up a very small footprint.

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<v Speaker 1>So you're still farming. You just have a couple of

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<v Speaker 1>big turbines in the corner.

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<v Speaker 2>That's exactly true. So you know, I think when people

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<v Speaker 2>started doing it, they thought, well, this is essentially free

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<v Speaker 2>money as long as you're fine with looking at wind turbines,

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<v Speaker 2>which some people like, some people don't. But it was

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<v Speaker 2>incremental and it was meaningful enough to farmers because they

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<v Speaker 2>were still farming those properties. The thought process around that

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<v Speaker 2>has changed a little bit. They're much more difficult to

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<v Speaker 2>permit now because not only do they take up a

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<v Speaker 2>huge footprint, A large wind farm could take up a

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<v Speaker 2>very large footprint, so anywhere from twenty to thirty thousand acres.

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<v Speaker 2>There's a lot of neighbors involved there, and there's also

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<v Speaker 2>people who fight those wind farms on behalf of migratory birds.

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<v Speaker 2>So I think they're much more difficult to permit now.

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<v Speaker 2>What you tend to see on the solar side, which

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<v Speaker 2>is significantly different, is much higher impact on the land,

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<v Speaker 2>So they're taking up the majority of the footprint, so

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<v Speaker 2>you're not continuing the farm, so the revenue has to

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<v Speaker 2>be not just incremental, has to replace the farm income

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<v Speaker 2>and be transformational. So what you tend to see on

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<v Speaker 2>the solar side is revenue that could be anywhere from

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<v Speaker 2>three to five times the total return of farmland plus wind,

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<v Speaker 2>so it's much more meaningful, and you can also do

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<v Speaker 2>it on a much smaller footprint. So whereas you might

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<v Speaker 2>need those twenty or thirty thousand acres for wind for solar,

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<v Speaker 2>you can do it on fifteen hundred to twenty five

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<v Speaker 2>hundred acres, so many fewer neighbors, maybe just one landowner.

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<v Speaker 1>Huh really really interesting? Another naive question migratory birds and

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<v Speaker 1>wind turbines. How hard would it be to embed you're

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<v Speaker 1>generating electricity, to embed some form of light, even something

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<v Speaker 1>in a range that's specific to birds that maybe doesn't

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<v Speaker 1>disturb humans or planes, or even just put a little

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<v Speaker 1>high frequency sound c you know, you're spinning these blades

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<v Speaker 1>through the air. Should be interested easy to generate some

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<v Speaker 1>sort of noise, and I know there are lots of

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<v Speaker 1>frequencies that don't disturb humans. The dogs aren't gonna like it.

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<v Speaker 1>But is that really that difficult of a problem to solve.

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<v Speaker 2>It seems like it hasn't been solved yet, so someone

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<v Speaker 2>might be on it. But this could be an idea

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<v Speaker 2>for you.

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<v Speaker 1>That's my gift to the wind farming and land owning community.

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<v Speaker 1>Just put a couple of reflectors up on the edge

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<v Speaker 1>of the blades and the birds will be able to

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<v Speaker 1>be able to see it. So we've talked about solar,

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<v Speaker 1>we've talked about winds. What about projects like biogas? Is

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<v Speaker 1>that a significant source of potential revenue.

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<v Speaker 2>As a landowner? Maybe not as much, but we have

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<v Speaker 2>farm tenants that own dairy farms that they have anaerobic

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<v Speaker 2>digestors that are great for them. They can use some

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<v Speaker 2>of the waste product from the cows and turn it

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<v Speaker 2>into green energy, so that's and sell it back into

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<v Speaker 2>the grid. So that's something we've seen a lot of

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<v Speaker 2>in states like Wisconsin, Ohio, Michigan, New York State. And

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<v Speaker 2>I think that'll continue to grow because it seems like

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<v Speaker 2>the dairy industry is continuing to grow. More cows means

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<v Speaker 2>more opportunity.

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<v Speaker 1>And this is a very heavy protein cycle of how

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<v Speaker 1>people are consuming food, less sugar and carbs, a whole

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<v Speaker 1>lot more protein, or at least that's what it seems like.

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<v Speaker 1>You mentioned timber. I know that there's a very specific

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<v Speaker 1>form of agricultural husbandry with harvesting trees, planting. It's a

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<v Speaker 1>very long term process. You're thinking in cycles of ten, fifteen,

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<v Speaker 1>twenty years. How significant is timber.

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<v Speaker 2>So, timber is a huge asset class, specifically you know

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<v Speaker 2>in parts of Canada, northern Michigan and then in the southeast.

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<v Speaker 2>It's huge in terms of hardwoods and pulp woods that's

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<v Speaker 2>been in an institutional asset class or investment class for

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<v Speaker 2>a long time now. And you tend to see these

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<v Speaker 2>really large owners owning hundreds and hundreds of thousands of

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<v Speaker 2>acres selling to those very large end users. So that

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<v Speaker 2>is a little bit of a different beast, and it's

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<v Speaker 2>a very well developed investment structure where you tend to

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<v Speaker 2>see maybe a little more nuances around some of the

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<v Speaker 2>very high value hardwoods, so black walnuts and things like that.

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<v Speaker 2>But that's something that I don't think is really scalable

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<v Speaker 2>the way that some of the large timber investments currently are.

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<v Speaker 1>What about various conservation programs and things like carbon credits,

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<v Speaker 1>how significant are those?

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<v Speaker 2>Yeah, So, I mean there was a lot of noise

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<v Speaker 2>around carbon sea questration and credits associated with that maybe

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<v Speaker 2>two or three years ago, and we took a hard

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<v Speaker 2>look at it because we own so much real estate

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<v Speaker 2>and the idea of regenerative ag being great for the

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<v Speaker 2>land and being able to benefit from that with a

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<v Speaker 2>payment cycle was very interesting to us. What we found

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<v Speaker 2>was the strings attached, and in many cases farmers were

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<v Speaker 2>already doing a lot of these practices. The people that

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<v Speaker 2>we worked with, they were already using cover crops. The

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<v Speaker 2>question is can you get paid for that in a

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<v Speaker 2>way that doesn't attach strings that jeopardize things later on.

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<v Speaker 1>What are cover crops.

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<v Speaker 2>Cover crops would be so once your crop is harvested,

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<v Speaker 2>you're planting a second crop there to prevent erosion, to

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<v Speaker 2>maintain nutrients in the soil. So winter wheat. When people

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<v Speaker 2>plant wheat, generally that is a cover crop that they're

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<v Speaker 2>deciding in the spring. Did it winter over well enough

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<v Speaker 2>that they're going to harvest it or are they going

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<v Speaker 2>to just leave it there and then eventually kill it

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<v Speaker 2>and plant another crop into it. But it helps prevent erosion.

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<v Speaker 2>Soil erosion helps maintain nutrients and moisture in the soil.

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<v Speaker 2>So cover cropping is a great form of regenerative egg

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<v Speaker 2>or sustainable agriculture that's been around for a long time.

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<v Speaker 1>And if they don't harvest it. And we talked to

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<v Speaker 1>earlier about some of the shows I watched, like Clarkson's

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<v Speaker 1>Farm and Harry's Farm, they just essentially run the combine

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<v Speaker 1>through a ShredIt and then.

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<v Speaker 2>Yeah, they can till it under put it right in there, and.

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<v Speaker 1>That becomes a resource for the next crop.

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<v Speaker 2>Yeah, exactly, more nutrients in the soil. So when we

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<v Speaker 2>looked at those carbon credits, we thought, well, the land

0:12:37.800 --> 0:12:40.560
<v Speaker 2>is the only means of production for generating this credit,

0:12:41.000 --> 0:12:43.800
<v Speaker 2>the landowner and the farmer should probably get a bigger

0:12:43.840 --> 0:12:46.960
<v Speaker 2>portion of the credit than the person who's transacting, and

0:12:47.000 --> 0:12:49.320
<v Speaker 2>in a typical Wall street where that's not how it works.

0:12:49.360 --> 0:12:53.359
<v Speaker 2>So we have not been a big mover on the

0:12:53.400 --> 0:12:56.360
<v Speaker 2>carbon sequestration side because we don't think it's a real

0:12:56.440 --> 0:13:00.440
<v Speaker 2>benefit to landowners financially. Now maybe from an agronomy standpoint,

0:13:00.679 --> 0:13:02.199
<v Speaker 2>but if they're doing it anyway, you don't need to

0:13:02.240 --> 0:13:05.400
<v Speaker 2>sign a contract. So as we think about that, you know,

0:13:05.520 --> 0:13:10.760
<v Speaker 2>conservation in terms of payments, you need a special structure

0:13:10.800 --> 0:13:13.079
<v Speaker 2>to really benefit from that. There are folks that sell

0:13:13.120 --> 0:13:16.280
<v Speaker 2>conservation easements. That's not something we do, but there is

0:13:16.559 --> 0:13:18.840
<v Speaker 2>a group around that. One of the things that we've

0:13:18.880 --> 0:13:23.520
<v Speaker 2>taken a harder look at is wetlands banking because when

0:13:23.520 --> 0:13:26.280
<v Speaker 2>there's development going on, specifically in the Midwest, a lot

0:13:26.280 --> 0:13:30.439
<v Speaker 2>of industrial development, Departments of transportation, as they expand highways,

0:13:30.440 --> 0:13:34.839
<v Speaker 2>there's always wetlands to mitigate. So there are a number

0:13:34.880 --> 0:13:38.160
<v Speaker 2>of developed markets for creating a wetlands bank and then

0:13:38.200 --> 0:13:41.600
<v Speaker 2>selling credits into that for development, and that's something we've

0:13:41.640 --> 0:13:43.720
<v Speaker 2>been taking a hard look at. In states like Michigan,

0:13:43.720 --> 0:13:44.319
<v Speaker 2>and Wisconsin.

0:13:44.480 --> 0:13:49.600
<v Speaker 1>Huh. Really interesting. Let's talk about the use case for farmland.

0:13:49.640 --> 0:13:54.359
<v Speaker 1>That is the single biggest shocker to me. Artificial intelligence.

0:13:54.840 --> 0:13:57.720
<v Speaker 1>What's going on with these big data centers that seem

0:13:57.760 --> 0:13:59.199
<v Speaker 1>to be popping up everywhere.

0:13:59.640 --> 0:14:02.920
<v Speaker 2>Yeah, I mean they seem to really be targeting areas

0:14:02.960 --> 0:14:06.760
<v Speaker 2>with great power resources and capacity on the grid on

0:14:06.800 --> 0:14:10.280
<v Speaker 2>the electric side, natural gas lines or natural gas fired

0:14:10.320 --> 0:14:14.400
<v Speaker 2>power plants close by, fiber optic networks that are close by,

0:14:14.559 --> 0:14:18.160
<v Speaker 2>and then access to water for cooling, whether it's groundwater

0:14:18.280 --> 0:14:21.480
<v Speaker 2>or otherwise. And it seems like in the Midwest there's

0:14:21.480 --> 0:14:23.760
<v Speaker 2>been a huge push into this. So the old rust

0:14:23.760 --> 0:14:27.120
<v Speaker 2>belt is done and there's new manufacturing coming in, and

0:14:27.240 --> 0:14:30.960
<v Speaker 2>data centers seem to be the highest value that's being built.

0:14:30.960 --> 0:14:33.600
<v Speaker 2>And it's being built at scale by a number of

0:14:33.640 --> 0:14:37.000
<v Speaker 2>different players out there now. And it just seems as

0:14:37.080 --> 0:14:40.440
<v Speaker 2>though land that you might have said ten years ago,

0:14:40.480 --> 0:14:42.640
<v Speaker 2>well that was not the best land because it has

0:14:42.640 --> 0:14:45.840
<v Speaker 2>a transmission line running through it. Now that's like being

0:14:45.880 --> 0:14:47.880
<v Speaker 2>right next to the exit on the interstate. It's a

0:14:48.000 --> 0:14:49.480
<v Speaker 2>huge bonus for that land.

0:14:49.760 --> 0:14:53.560
<v Speaker 1>And when you say big players, I'm thinking Microsoft, Google, Amazon,

0:14:53.600 --> 0:14:55.040
<v Speaker 1>who are the big players in this space?

0:14:55.120 --> 0:14:57.800
<v Speaker 2>Yeah, those are the groups as well as meta that

0:14:57.840 --> 0:15:01.120
<v Speaker 2>they have a seems like a real thirst for these

0:15:01.160 --> 0:15:05.040
<v Speaker 2>single user data centers, and they tend to target the places.

0:15:06.080 --> 0:15:07.960
<v Speaker 2>Those groups tend to target the places that are the

0:15:07.960 --> 0:15:10.120
<v Speaker 2>most attractive, and they're the most aggressive and trying to

0:15:10.120 --> 0:15:13.440
<v Speaker 2>put them under contract. Even where we're based in South Bend, Indiana,

0:15:13.480 --> 0:15:16.320
<v Speaker 2>there's two very large data center projects going on now,

0:15:16.600 --> 0:15:20.040
<v Speaker 2>one by Amazon one by Microsoft that are transforming the area,

0:15:20.120 --> 0:15:21.720
<v Speaker 2>and I don't think they'll be the last ones.

0:15:21.960 --> 0:15:26.720
<v Speaker 1>So there are a variety of different land use options

0:15:26.760 --> 0:15:30.640
<v Speaker 1>that can either generate revenue or drive appreciation. Did I

0:15:30.880 --> 0:15:32.800
<v Speaker 1>forget any do we miss anything? Those are a lot

0:15:32.800 --> 0:15:33.520
<v Speaker 1>of different things.

0:15:33.720 --> 0:15:38.320
<v Speaker 2>Yeah, those are the big ones. And traditional manufacturing distribution centers.

0:15:38.480 --> 0:15:40.640
<v Speaker 2>These are things that have been happening at least in

0:15:40.680 --> 0:15:44.480
<v Speaker 2>the Midwest now for generations and it just continues so

0:15:44.600 --> 0:15:47.960
<v Speaker 2>the more that the economy continues to grow. That's one

0:15:48.040 --> 0:15:50.640
<v Speaker 2>area where maybe farmland is a little more levered to

0:15:50.680 --> 0:15:53.520
<v Speaker 2>the economy for some of these non farm uses because

0:15:53.560 --> 0:15:56.440
<v Speaker 2>of that, and these tend to be multiples of anywhere

0:15:56.480 --> 0:16:00.440
<v Speaker 2>from five to ten to twenty x farmland value, so

0:16:00.480 --> 0:16:02.960
<v Speaker 2>it can be very meaningful in the market.

0:16:03.200 --> 0:16:06.040
<v Speaker 1>So to wrap up, there are a number of things

0:16:06.040 --> 0:16:09.040
<v Speaker 1>that make land valuable. Sure, it's a place to build

0:16:09.080 --> 0:16:12.080
<v Speaker 1>a house or a commercial building, or to farm to

0:16:12.160 --> 0:16:17.160
<v Speaker 1>grow crops, but real assets have become increasingly valuable due

0:16:17.200 --> 0:16:23.080
<v Speaker 1>to things like water rights, solar winds, mineral rights, and

0:16:23.200 --> 0:16:28.080
<v Speaker 1>now artificial intelligence data centers. It's a fascinating development and

0:16:28.400 --> 0:16:31.200
<v Speaker 1>they ain't making any more land, so this is likely

0:16:31.320 --> 0:16:35.680
<v Speaker 1>to keep staying popular in the future. I'm Barry Ritolts.

0:16:35.880 --> 0:16:39.200
<v Speaker 1>You've been listening to At the Money on Bloomberg Radio

0:16:40.880 --> 0:16:47.640
<v Speaker 2>Farmable