Three Trends Driving the Growth of Organic Agriculture
Blueberries at Burns Farms, Planting Phase 2
It was a breakout year for organic agriculture in 2022. Consumer demand for organic food continued its steady rise, with strong prices for producers, rising land values and excellent returns for investors.
Beyond these results, three significant trends were sharply apparent last year that will continue to affect not only organic farming but the entire agriculture sector – rising consumer demand for healthy food, the fragility of the conventional farming system and investor interest in sustainable farmland practices.
Organic’s Strong Market Fundamentals
The organic market is enjoying strong momentum. Demand is growing because consumers increasingly recognize the benefits of pesticide-free healthy organic food. They also see that conventional chemical-based farming and food production are increasingly industrialized and commoditized, harming the environment and producing unhealthy, pesticide-laden food.
Today, organic food is a $56 billion market and represents 6% of all U.S. food sales. Demand is growing at 13% annually and is constrained by a lack of supply, since organic cropland is only 1.2% of all farmable acreage in the U.S. and is growing by just 7% yearly. The result is a 50-200 percent price premium for organic produce.
Those strong fundamentals were reflected in our business, too. Farmland LP marked its 14th year in operation in 2022, and we have demonstrated over that time that organic farming is profitable at scale. Today, we manage more than 16,000 acres, valued at $250 million, and 40 crops are grown on our farms. By converting conventional farmland to organic, we have increased rents from $300/acre to $750/acre. We have also increased revenue per-acre up to ten times by converting from commodity crops to higher value and permanent crops.
Conventional Farming is Vulnerable
Last year, the organic sector was able to avoid many of the pitfalls that disrupted traditional agriculture. The war in Ukraine was a colossal blow to conventional chemical-based farming because it sparked a price jump in natural gas, a key input for the fertilizer on which it depends. Fertilizer costs for conventional farmers reached record levels in 2022 and accounted for 36 percent of a farmer’s operating costs for corn and 35 percent for wheat, according to the USDA.
Meanwhile, the cost for compost, the main fertilizer for organic acreage, was up only marginally.
It’s not just the impact of the Ukraine war that showed how fragile conventional farming is today. Climate change is also affecting costs and output. Climate change is expected to produce rainstorms of higher frequency and severity, with potentially devastating effects on farming. Heavy rains late in the growing season in the Midwest impact the drying period needed for corn production and are a stark illustration of these risks.
Very few farms – and certainly almost no industrial-scale producers – are adapting their management methods to the realities of climate change.
By contrast, we invest with climate change in mind. We use computer modeling and satellite mapping to identify farms that are well placed to withstand climate shocks. Once we add them to our portfolio, we convert the acres from environmentally damaging, chemical-dependent commodity crops to an organic and regenerative system that can be productive, profitable and resilient as climate change advances.
Overcoming the Barriers to Organic Production
There are significant barriers to converting farmland to organic. It starts with the way farmland is owned. Approximately 40% of US cropland is owned by absentee landlords. Many received it generations ago during the Homestead Acts, but now their descendants live in cities and no longer farm directly. Most of this land is farmed by tenant commodity farmers who farm one or two crops, usually corn and soybeans. Expertise is another barrier, as owners and tenants often lack the knowledge on how to transition to and farm organic crops.
But perhaps the most significant barrier is economic. It takes three years to convert land to Certified Organic and at least five years for value-added permanent crops to reach full production. Absentee owners would have lower rental income during this transition period, as would tenant farmers. And the tenant farmers also would not benefit from the increase in land values once the organic conversion is completed.
(There are also deeply entrenched federal policies that subsidize industrial farming and impede the growth of organic, but that is topic for another time.)
We have overcome these barriers through our operating expertise, market knowledge and, most importantly, our capital structure, which enables us to make the multi-year investment in organic conversion.
Let’s look at an example. We acquired Burns Farm, a 4,000-acre farm in northern California, in 2013. It had been farming the same three crops for 50 years, rotating them about every five years. It had no organic acres or permanent crops.
Today, after completing the conversion process, 80% of the farmable acreage is Certified Organic and grows a dozen permanent and row crops, from organic blueberries, green beans and squash to olives and almonds. Revenue per organic acre is up more than 2x to $800/acre today, and the appraised value of the farm has increased 3.0X since we acquired it.
Investors Want Sustainable Farmland Investments
Finally, the past year has seen a dramatic rise among investors for sustainable farming opportunities as they seek to align their capital allocation with their values.
Sustainability is at the heart of our strategy, and we do not compromise on returns. Indeed, many of our 1,000+ investors participate in our funds because of our sustainable farming practices and favorable financial performance. They understand that best-in-class soil health and farmland management practices drive both financial returns and ESG benefits.
And, unlike most other farmland managers, we can document our environmental improvements. In a USDA study, our first farmland investment fund demonstrated $21.4 million in net ecosystem benefits using regenerative farm management practices at scale. There is economic value in clean water, diverse pollinator habitats and healthy soils.
We advise investors – both individuals and institutions – to watch for managers that make marketing claims about sustainability. Empty rhetoric and greenwashing have spread into farmland investing like an outbreak of ragweed. Any farming standard that supports chemical-based monocropping cannot be considered “sustainable,” no matter how appealing its branding might be.
Our practices have made Farmland LP the highest-rated company globally for corporate sustainability, according to HIP Investor, a leading independent sustainability ratings service. Our 82.0 rating (of a possible 100) places Farmland LP as #1 in HIP Investor’s worldwide corporate universe of 10,000 corporations, as well as at the top of the agricultural real estate investment trust (REIT) category, the closest comparable peer group.
In the year ahead, we expect capital to continue to flow into the sector as more investors recognize the benefits of farmland investing. Managers that can demonstrate their positive impact on the environment and a track record of favorable returns will be best positioned to attract investor capital – and help drive the growth of a more sustainable food system.
Article by Craig Wichner is CEO of Farmland LP, the largest manager focused on organic and regenerative farmland in the US, with 16,000 acres in Washington, Oregon and Northern California valued at $250 million.