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Martin Davies – CEO of the #1 Largest farmland Asset Manager in the World: Sustainable Farmland Investing and the Implications of Foreign/Corporate Ownership of Our Food Supply

Sep 17, 2020

Since the 2008 financial crisis, agriculture has become a hotbed for investment: food consumption withstands recessions, demand is expected to double by 2050, and agriculture has largely proven to be a low volatility investment that can serve as an inflation hedge (as inflation goes up, so do ag land values)… But not everyone supports the institutionalization of ag land ownership.

We sit down with Martin Davies, President and CEO of the Westchester group, the #1 largest farmland asset manager in the world to talk about:

  • how institutional ag land investing really works
  • what separates an extractive investment from a sustainable one
  • the implications of increasing corporate/foreign ownership of domestic ag lands.
  • how climate change plays into the investment thesis.

Westchester has been a frontrunner on sustainability and continues to push the envelope on setting a positive standard for the industry. Westchester manages over 2 million acres and is a subsidiary of TIAA, a fund managing over $1 trillion in assets.

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TRANSCRIPT

Borna (ClimateAi) 0:03
This is Agriculture Adapts by ClimateAi. We’re a team of climate scientists and agriculture entrepreneurs on a mission to make agriculture more resilient, sustainable and profitable in the face of a changing climate. This podcast is our journey as we speak with industry leading executives, farmers and thought leaders to uncover the challenges and opportunities that lie ahead for the industry that feeds the world. I’m your host Borna Poursheikhani. Welcome to agriculture adapts. Hey, everyone, really insightful episode coming up here and I want to just make sure I lay out the right foundation for you. So I’m going to provide a bit of background here to help capture the significance of this episode because this recording truly is a special opportunity. Over the last decade, there has been an increase in interest amongst institutional investors to invest in food and agriculture, largely because of its relatively high average returns, low variability and low correlation with financial markets. Which is all just a fancy way of saying that it does pretty well when everything else doesn’t. After the 2008 financial crisis, when the world economy was in disarray, agriculture seemed to be doing fairly well. At the same time that 2007 2008 world food crisis, last governments looking for better ways to secure their food supplies. This marked the trigger point when institutional investors started accelerating their footprint in agriculture investments. Agriculture has since become a key pillar in the investment portfolios of some of the largest investors managing the biggest pools of money around the world. Today, we sit down with Martin Davies, President and CEO of the number one largest manager of farmland assets in the world. To better understand how institutional investing and ag works, how it intersects with climate change and agricultural resilience, what sustainable ag means to them and what all this means for the future of agriculture. Martin runs the Westchester group focusing on farmland investments for the parent company, Tia Tia manages over $1 trillion in assets with holdings in more than 50 countries. West Chester is the farmland focused subsidiary that covers over 2 million acres across seven countries. Martin, very excited for this episode. Thank you for joining us here today.

Martin Davies 2:12
Thanks. It’s great to be looking forward to the conversation face to join.

Borna (ClimateAi) 2:18
So I just gave the over formalized high level intro. But could you start by telling us a bit about your background and your journey into the world of agriculture.

Martin Davies 2:27
I grew up on a farm and I’ve been working in the agricultural sector for 28 years studied agriculture and farm management, and business agribusiness at university, worked in corporate agriculture in the UK for 13 years ran a pretty substantial business. 85,000 acres farming various commodities in the UK, left that business in the early 2000s and started working on investment projects for private investors in Eastern Europe. So countries Poland, Romania, Bulgaria I also did some work in Ukraine and Russia and that was really a it’s a natural transition for me to move from corporate agriculture. I was very familiar with scale and some of the disciplines governance disciplines which is so important from an investment point of view to the national transition to make. Whilst I was working in Eastern Europe, I was approached by a London based asset management business to set up a farmland strategy and that was to raise capital from really pension fund investors who have really been attracted to the asset class. I did that for about five years and I’ve been working for Westchester now for six years. I started out setting the business up in Europe and I took over running the the overall business three years ago. So yeah, I spend a lot of time looking at agriculture and what’s going on globally, across all the different locations where where we invest.

Borna (ClimateAi) 3:56
Awesome and when you talk about your your background in corporate agriculture, Were you kind of like an agronomist, were you in charge of setting up strategy there? What What was that role? Like?

Martin Davies 4:05
Yes, it was an operational role. So running the business. I do have qualifications in agronomy, the really business management, yeah, multi commodity business, so endearing in crop production, vegetable production, top fruits and, and soft fruit. So very good grounding, and very good understanding that that gave me across different aspects of the agricultural sector. It was part of the wider business as well. And there was some vertical integration. So it gave me some pretty good insights into upstream activities, processing, packing of produce, and then on to the onto category management at the supermarket.

Borna (ClimateAi) 4:46
And I think that definitely says a lot to have someone who has the operational background as the head of the team there. And just so I can lay down the foundation properly before we dive in, in a general sense, who invests in farm lands and why and Can you explain this as if you’re explaining this to someone with no finance background, like what draws investors towards agriculture, as opposed to another type of investment,

Martin Davies 5:08
any investment in the agricultural sector really is underpinned by what’s happening globally, population wise. So the FAO talk about 9.7 billion people by 2050. And on top of that, you’ve got increased calorific consumption in developing countries. So, over the next 50 years, food production needs to double. So really, very attractive fundamentals to the sector. But if you look at farmland returns, agricultural returns historically, because you’re producing the necessities of life and through the pandemic. We’ve seen lots of industries, very significantly disrupted by the pandemic, but through any type of economic events or any, anything that happens globally, people still need to eat so that the demand for agricultural products remains Very strong. So that inelasticity in demand that agricultural product tab means that there’s very low volatility in returns in the sector. So that really is attractive from an investment point of view. Historically, we’ve seen capital growth in farmland values as well as productivity as improved. So the things that really attracted investors through time, the concept of institutional investors in agriculture is by no means you pension funds or investing in agriculture in the UK go back to the mid 80s and into the 90s, low volatility of returns and solid income returns plus capital appreciation. But what are the other things which has been very attractive aspect is farmland as very close correlation with inflation. So if you’re a pension fund and you’ve got floating liabilities, something which gives you a very good inflation hedge as well. value from a diversification point of view for a portfolio?

Borna (ClimateAi) 7:04
That makes sense. What is West Chester’s business model and approach to investing? What is Westchester? Exactly doing how they make money? And how do you interact with farms and farmers?

Martin Davies 7:15
Yeah, so let’s, let’s take a step back there. So if you look at agriculture, generally it’s an industry where there’s a lot of inherent risks. So there’s commodity price volatility, there’s weather risk, climate change risk to consider now of course, there’s government intervention and regulation. So to deliver consistent returns to investors over time you have to diversify in what you invest in in the sector. So we would advocate diversifying by the country, the location within the country and by the crop type, and also by the way that you operate the assets. Now, it is all about simple cropping. So row crops, so exchange traded commodity crops, Our approach there would be more of a passive strategy because it’s more difficult to add value when you’re growing those crops so we leave the land, whereas in the case of permanent crops, where there are far more opportunities to add value, so if you think about wine grapes, we produce in California about 100,000 tonnes of wine grapes on an annual basis. We’re selling to over 100 wineries. Some of those are very consuming so very much more opportunity to add value than there is in wine grapes, there is growing soybeans in the Midwest. Okay, so what are we where are we looking to generate income so, income return comes from the rental payments in the case of leasing act, and we’re we’re operating the assets income return comes from the physical so that the cop, we’re looking for capital appreciation. Also in the farmland that we’re buying. We tend to see in row crops and lower income returns. But we expect to see a higher capital appreciation. Whereas where we’re taking risk on permanent crops, we expect to see a much greater income return. So greater return for the additional risk we’re taking on. But we wouldn’t expect to see as much value appreciation because in the case of a pin crop, and you’ve got the biological assets to think about, so you’ve got biomes or almond trees or trees, those have a set lifespan, so you depreciate that biological asset over time. So, although you have underlying land which is increasing in value, the biological asset is appreciating. So put those two together you do see some appreciation, but not to the extent that you see in in row crops, so income return coming from lease payments and say crop value appreciation, adding to that total two component. So all you asked about is the relationship with with farmers work so in the case of grow crops, we are predominantly. And this applies to the majority of locations where we manage land on behalf of our investors. We’re leasing out to local farmers and invariably those local farmers are private family operated type businesses. In the case of permanent crops were operating those assets. Were outsourcing the the yard or the orchard operations to a professional contractor who provides those services. So the farmer tenant base that we have is very important to what we do and I think of our investors as a client, but I also think of our farmers who we’re leasing land to as a client as well. And we’re performing an important function in the sector, certainly in the row crop sector. We are an additional source of capital coming into the sector. So the significant transfer of wealth between generations or generational transfers mean that you’ve got land coming to the market, institutional capital is, is coming into the sector and is replacing ownership in that way. It’s pretty important for the sector generally.

Borna (ClimateAi) 11:19
What are the key crops that you guys focus on? Like? Where does the focus really lie for you? Is it just identifying where the specialties are in each region that you’re focused on? Or is it you know, we’re focused on XY and Z crop because we know how to do those well, and we’re going to find the right places to do those.

Martin Davies 11:34
We’re looking for good diversification generally. But within that diversification, we’re looking at crops which don’t, they’re not, the returns are not correlated, or the pricing is not correlated. So if you think about the cereal grain, complex prices of corn, wheat, sorghum generally tend to track with each other and the same could be said of the old complex. soybean and canola, sunflower, tend to move together we start talking about some of the horticultural crops, the way that they behave. They’re not correlated. So wine grapes don’t vary in the same way as corn or soybeans equally avocados behave in the same way. So what we’re looking to do is to achieve diversification across a portfolio or mixture of crops which the returns are not correlated, but scale is important. And are these crops investable? So people talk about investing in hops because there’s been a significant increase in the demand for hops with wood craft brewing, but to us it’s just not a sector that is easily investable at scale. So today, across our portfolio 43 different crop types are growing. So avocados almonds, week, two walnuts. good mixture of cropping and that is really Courtney in delivering consistent returns, but not only it’s offset the risks that exists from a government intervention and regulatory point of view, and this is a great example here. So everybody’s aware the trade dispute between the US and China, which I think overall, we are reasonably well beyond that. But during the the pandemic is being a little bit of a trade dispute between Australia and China, China imposed an 80% tariff on Bali exports from Australia to China. So if you were only invested in barley in Australia, things wouldn’t look so great. Whereas in Brazil, Brazil in 2020, today is recording record soybean exports, and the majority of those soybeans are going to China. So this concept of investing in different locations in different crops really does offset risks that are inherent in the sector. But how do we Think about this at a base level. If you think about the globe, there’s four main brain LC producing regions. So North America, South America, Europe and Australia, New Zealand, were looking to invest in those locations as a foundation of a portfolio, investing in row crops in in those locations. And then we look to invest in permanent crops where there’s a comparative advantage for production of that crop. We like the concept of investing in the northern and southern hemisphere, because there are windows of supply in the market where you have for example, avocados coming out and chili going into Europe when the northern hemisphere does not have supply so you can capitalize on that uranium demand through investing in the southern hemisphere as well. So that’s the basic approach that we we have. We do a lot of analysis around what the trends are. One of the things is the link between health and nutrition. So, superfoods will continue the growth in demand. So can we align what we’re doing around some of the trends in the sector. And if you think about some of the locations, we’re looking as new opportunities today, Spain and Portugal are countries that we’re looking at from an investment point of view. We’re interested in olives. We’re interested in almonds, we’re interested in walnuts, avocado, citrus and table grapes, all crops which have seen they’ve got a health halo around them, and they are seeing significant demand.

Borna (ClimateAi) 15:39
Yeah. And so I want to go back to one quick thing. So obviously, it sounds like you guys are invested in a pretty large array. I think you mentioned 40 of different crops. But you said that hops was not really investable, can you help us understand what makes something investable versus not?

Martin Davies 15:55
One of the reasons why is low production is on a relatively small scale. Other areas globally where hot production is concentrated. So if you’re an institution investor, you have to be able to invest at scale. So, although is it there’s been significant growth in demand. And the market is very looking pretty good. It’s not It’s not something that right now we consider to be be investable institutionally. And there always going to be limitations on what you can do. But even with those limitations is the ability to achieve good diversification across different crop types.

Borna (ClimateAi) 16:35
I want to go into the climate piece of this now, a changing climate adds a lot of uncertainty, variability and risk to agriculture operations around the world have some crops or regions felt like they have been more vulnerable or susceptible than others. With this increasing weather variability or increased risk of extremes or shifting seasons.

Martin Davies 16:56
There is no location globally where there are not subtle changes in climate. So whether it be changes in the seasonality of rainfall, or higher temperatures or lower temperatures or volatility in temperatures, pretty much every location creator think there is there is some impact in climate change. But I think we should we should always look at this in the context of what’s happened historically, there have been floods within drives through time and agriculture has been impacted by that which goes back to the point I may make about diversifying where you invest, but there’s no doubt that the volatility of climate is increasing. If you look at the current situation, literally right now, Francis is recording a heat way. record temperatures in France. We’ve got wildfires in California, which are caused by freaking storms. Literally in the last month, we’ve had a massive storm go through the Midwest, so significant swathes corn and soybeans in Iowa damaged terminally by that storm. And last week we had hurricane Laura, which when it made landfall, mainland 50 mile an hour winds. So there undoubtedly is change. If you look at the seasons, I’m in the UK at the moment. And in Cambridge, which is what 60 miles north of London, they all take. The serial harvest is finished at the start of August and things seem to get earlier every year. So there is undoubtedly change going on. But I think what what we think about when we’re making our investments is land quality is everything. And when I mean land quality, I mean the quality of soil that you’re investing in the reliability of rainfall, and if you’ve got irrigated crops, the reliability of water so having both surface and groundwater, if you have fundamentally good quality land, which drains well it has good soil types. The volatility in climate, that type of land deals with it far, far better. And when you overlay on top of that some of the same technology, you’ve got hybrid seeds and seeds, which can deal with that greater volatility. There’s a fair degree that you can go to offset some of the challenges that undoubtedly there is, there is changes taking place, but it really does reinforce this approach of diversifying what you invest in and where you invest as well.

Borna (ClimateAi) 19:31
Yeah. And so when you go in on a new parcel of land, what are the different considerations that you’re trying to make, like you mentioned that the soil needs to be good needs to have access to water? How much of a role is climate playing in that decision? Like, are you trying to look out to see what the climate will be in that region over the next 1020 years for some of these permanent crops? Or are you really just focusing on that soil quality component and these other things that you mentioned are kind of like the anchors of the investment Now,

Martin Davies 20:00
let me explain the way that our business works for us. So agriculture is a local business. So one of the things which I believe differentiates our platform and really is underpinned the success that we’ve had over the last 15 or 20 years is that we, every location that we invest in, we have people locally on the ground, where we’re invested. Those are people that know the geography. They know the region, they know the local farmers, they know the differences in microclimate. They know the differences in soil type. So that knowledge and expertise is critical in what we do. However, data and information, whether that be about climate, whether that be about performance of crops, when the bad thing about frost incidents over time, that’s increasingly important. And as part of the underwriting process, we’re trying to look at that information, climate change overtime and what the long term trajectory is, for the locations, the factories, the underwriting, but local knowledge and expertise is critical in the agricultural sector

Borna (ClimateAi) 21:12
is agriculture becoming a less stable source of returns now, because of a lot of these changes that we’re seeing,

Martin Davies 21:20
I think there is, when you look at a production level there, there is more volatility in production. And ultimately, that’s coming from different different weather cycles. Now, I think the technology that exists, whether it be we can talk about seed technology in genetics or whether it’s technology around seeding, machinery, remote sensors, I think a lot of that goes to offset some of the challenges around volatility but I think resilience ameriwood cultural sectors is really important going into the future, but even within individual business, diversification is a good thing. And if you look back through time that without the aid of technology and many things that we take for granted today, the fundamental approach that farmers had was to try and diversify their activities to offset the risks that are inherent in in the sector. So we really do need to capitalize on what technology can offer us. And I think better business management disciplines, understanding the risks that existed in with building businesses, not just from climatic influence, but many other things that impact agriculture, as well as required in today’s environment.

Borna (ClimateAi) 22:40
Yeah, and I guess just on the topic of volatility, how has COVID impacted your returns or your operations? Have you started to get data back on that or have you?

Martin Davies 22:48
So I think we ultimately we need to look at consumer trends through through the pandemic and I would say generally, what we’ve seen across all groceries, We’ve seen very stable demand, if anything, and there’s been an increase in demand. So across all groceries, whether you’re looking at beverages or whether you’re looking at basic grains and pulses and so on. Now, there are certain crops where there has been some downturn in consumption. So I think cotton would be a good example. So of course, China is a fairly major player in cotton spinning and the textiles industry. So very early impact there from the pandemic. So 2020 total cotton spinning is forecast to be down 7%. But if you look at the basic foods, there’s been some movement in consumer trends within grocery sector. So one of the things that’s been seen as a significant increase in organic consumption in most locations UK, US, France, organic consumptions at 25% Wow, that’s really

Borna (ClimateAi) 24:02
tomorrow since like the start of

Martin Davies 24:03
since the start of the pandemic. And that’s, I guess, driven by a number of things. One being that quite a bit of organic produce comes through boxed in. So think about delivery of groceries that naturally fits in there. But one of the things which pandemic is brought is a closer connection between food and nutrition, people being more focused on eating healthily, so that is definitely a trend there. But there’s definitely a trend on sustainable food production. But overall, if you look at the total consumption, the sector it’s pretty stable. And really, that translates its way through it’s too early to say for 2020, really from if you look at the northern hemisphere, you were through some of the cereal harvests that were coming into corn harvest. Now soybeans will be later but generally speaking, there doesn’t appear to be any impact. And we’re coming Intel was to nuts in California and wine, gray wine grapes doesn’t seem to be any significant drop in demand for what’s being produced on farmland. So the theory suggests that returns will hold up very well. If you think about that very strong demand and the fundamental case, farmland and demand for to produce. It’s pretty understandable why you’re seeing a very limited impact in the sector.

Borna (ClimateAi) 25:29
Yeah, when when this whole thing started, I was really curious to see like, what crops would be impacted in which ways and and I don’t know the information, maybe you do, but I was particularly curious to see how biofuels would be impacted and thus, like what the impact on a lot of maize production would be. But I mean, now we’re seeing people traveling all over the place with their cars going to go into airbnbs and remote lands. So maybe, maybe the consumption is not as far down as I initially thought it would be.

Martin Davies 25:54
Yeah, of course, if you look at if you look at the agricultural commodities that they’ve got a closer link to toil. So sugar cane and corn, so called ethanol in the US is still pretty important as an oxygenate in gasoline in Brazil, to cane being produced into into into ethanol is really important. So if you look across the full spectrum of agricultural commodities, corn and chuco net probably have been impacted a little bit more than some of the other commodities. But if you go wheat, look at other oil seeds, they don’t have quite the same connectivity with that oil complex not. They’ve recovered fairly well from initial downturn back in March.

Borna (ClimateAi) 26:39
Gotcha. I want to shift gears here. I want to talk about what Westchester is doing on the Sustainable Agriculture front. And I think this question is extremely important primarily because Westchester is the number one largest farmland asset manager in the world and the decisions you make bear a lot of influence on others. So I know you are Operating globally and across a number of crops, but give us a sense of how your team thinks about sustainable agriculture principles.

Martin Davies 27:06
Yeah. So sustainability is embedded in everything we do in our investment process in our thinking about what we do in the management of the assets. So we are custodians of farmland, and we have a new, we have an obligation to leave that farm land in, in in a better condition than when we when we took ownership of it. So sustainability and ESG is key to us. If you think about us as an organization, we’re owned by Tia Tia is managing the time of benefits for 5 million people working in the education sector in the US. So people who are very thoughtful about environment, social considerations, they’re thinking about climate change. So we’ve always had a very forward thinking approach to this really desire to set the standard. So we were one of the original signing signatories to the principles were responsible investment in farmland. We reported against those principles. We have been involved in the sustainable ag working group in the US who have developed the leading harvest certification standards. We have historically wherever possible, had to occation standards in place. So those could be global gap. They could be better cotton initiative, they could be on sapiro, the sugar certification standard in Brazil amongst various other certification standards, we see the opportunity to in our investments and particularly capital investment in the properties that we’re acquiring to make investment which improves the environmental factors. So whether that be water use, whether it be investing in technology, we see very good alignment with the US Sustainable Development Goals. And this is a great example one of the properties in one of our structures, a bean yard in in Monterey, California, a vignette where we bought existing vines that also had the opportunity to develop some new vineyards. But one of the things that we were able to do within that investment, which was to was to dramatically improve the efficiency of water use by lining irrigation reservoirs and irrigation canals, and investing in more sophisticated water to deliver to the vine. So, by default, very good alignment with the UN Sustainable Development Goals. And as an investor, as an institutional investor, you have the inclination to put capital to work in properties, which wouldn’t necessarily be the same under maybe private ownership. So sustainability is very important for us. And I think one of the things which is a is a great focus first right now is just working out, we monetize natural capital value. Agriculture has received a lot of negative negative publicity about climate change. And the IPCC report said that agriculture was responsible for 26% of greenhouse gas emissions, partly from land use change, partly from the agricultural activity. But if we think about the ability to sequester carbon in soil, agriculture can be a big part of the solution to climate change and by you subtly evolving the way that you operate and manage properties, go and cover crops, no tillage approach, grown companion crops, there are many ways that agriculture can be an important part of the solution to climate change. Now, capital markets need To drive change, and there needs to be a market that develops for the carbon that farmers can sequester the land tradable carbon offsets or whatever it is. So that is an increasing focus. from a business point of view. That all fundamentally starts off with having a framework to be able to monitor and measure sustainability metrics. So soil organic matter, water quality, to know too many metrics that we are looking to measure it and so

Borna (ClimateAi) 31:33
you guys are tracking carbon now too, right? I think I read some of you get to tracking carbon as well.

Martin Davies 31:37
We’re trying to look at the carbon footprints in the the assets. We acknowledge the fact that it’s quite early days, and we’re just trying to develop better systems to to analyze and to look at what we do. So just as an example, one of the things which we haven’t really gotten to grips with fully DCA is if we have for example, an element orchard so we trees in the almond orchard. What is the impact? Where they’re taking carbon dioxide to the atmosphere? We have to think about the offset that exists there because at the end of their lifespan on the tree last 1520 years, what do you do with the trees? Is there a biomass market? What’s the energy consumed there, but those are those are important things. If we look at portfolio that we have in Brazil, assets in Brazil, there’s a requirement across the different regions of Brazil down what’s called conservation reserves. So native vegetation as a certain percentage of the total crop area. We know that our Conservation Reserve on the properties that we manage in Brazil contains 32 million tons of carbon and the trees and the shrubs and the native vegetation, which is on that Conservation Reserve area. So agriculture is a big part of the solution to climate change is not part of the problem. And that’s something that increasingly is a focus for us. from a business point of view is getting to grips with that and how we can monetize some of that value for our investors, but also how we can make agriculture an industry which is, which is part of the solution.

Borna (ClimateAi) 33:13
Yeah. And it’s also one of the only actually necessary things that we that we need. So it’s kind of weird when we pose it as, as only a negative, but you guys are doing a ton with with a lot of transparency. You have the map that shows where all your operations are around the world, and kind of some details on that stuff. And your your sustainability report, I think was was pretty extensive and pretty impressive to look at as well. You mentioned land use change, and I wanted to talk about some of the work that you guys were doing in Brazil. So in the sustainability report, some work on Brazilian deforestation is mentioned. Can you speak a little bit to to what’s happening on that front?

Martin Davies 33:48
Yes, so in 2018, we implemented zero deforestation policy in Brazil. So we do not want to acquire any assets in Brazil, which cannot pass that deforestation test which is independently validated. So in Brazil, there’s been a huge amount of focus on deforestation in the soeharto. And also in the Amazon. Deforestation policy does apply to the other biomes as well. So the Atlantic Forest in the Pantanal but the majority investments we do have are the salado and the Atlantic Forest. To our knowledge, no other asset manager has a zero deforestation policy in in Brazil. So we’re really trying to set a standard and trying to improve. One of the things that institutions who invest in farmland frequently get criticized about is what they’re doing. They’re displacing family farmers that are doing things which are perceived not to be good for the sector of institutional investment does bring with it a standards that is required and our introduction of zero deforestation policy in Brazil is a great example of trying to change mindset and approach in practice. And if that gains momentum and you have other institutional investors who have the same view that incentive for farmers or for landowners to deforest, if they take the view, that part of their exit routes no longer exists because buyers will look at that. I think it’s an important game changer. That policies is designed around the round table for Responsible soybean production. So what we’re looking at is, if we do invest in properties in Brazil, the property’s certifiable, as part of that process of putting this policy in place, we went right back retrospectively, and looked at all the properties that we acquired historically in Brazil and made sure that they were safe. fiable for roundtable for Responsible soybean production as well. So institutions are critical in the sector to change thinking and to change practice and saying that institutional investment is a bad thing. It’s just a misconception that people have it’s actually a good thing for the sector. The World Bank say agriculture needs $80 billion of outside capital on an annual basis, institutional capital can fit into that role very well.

Borna (ClimateAi) 36:32
Yeah. And I really want to dive into this piece about public perception of institutional capital and agriculture. But before we do, what is the deforestation standard in Brazil, like how are you quantifying that is, are you just not investing into lands that are kind of on the perimeter, bordering areas that would be considered forest or how’s that actually break down

Martin Davies 36:51
right. Responsible so so the, the validation is carried out by, independently by controls union today do the validation for the certification for the standard. So any individual property, there are various layers that they look at. As they start looking at areas of preservation, there is a scientific value. And then they also look at the timing with which is harder was cleared. And then one of the majors which they can look at is the biomass density collector. So from memory, I think, is 88 tonnes per hectare of biomass. If the level of biomass is above that falls into category where it can’t, it couldn’t if it has been cleared. It’s not certifiable. And this is a this is an example where data and technology comes into play. All of this is possible because you can get satellite imagery and analyze what the change has been to the cropping area with time by looking at those historic satellite images. So there’s a very, very robust and rigorous approach on how the standard is certified. Now I think what we need to get in the context is today, less than 2% of globally traded soybean carries the roundtable for Responsible soybean certification. So it is a relatively small volume, but consumer pressure means that that will increase. So we firmly believe that putting in place these set of standards and these initiatives are really important to change mindset and thinking in the agricultural sector. I just

Borna (ClimateAi) 38:36
want to play devil’s advocate for a second, if you’re investing in land that has not been deforested or clear cut over the last some odd years. Doesn’t that just mean that someone else will own that land? So like, are we creating any additional value right now or is it is the goal to to set up the system to be able to realize that in the future,

Martin Davies 38:55
ultimately the marketplace is what drives change? And it’s quite conceivable that we will reach a point in time some, somewhere in the future where there’ll be a two tier market, there will be a market for soybeans which are certified. And there will be market for soybeans, which are not certifiable, the round table for Responsible soy production. Now in that event, if you don’t have certification, you’re penalized from an economic point of view. So what we’re doing doesn’t change the world. But if you don’t have organizations, so rtrs ultimately was put together by a group collaborating to try and improve practice. So if you’ve got a consumer call and you’ve got a trade, so the cargo Louise costcos in this world also doing things to procure soybeans, which are certified, this is what changes things over time. So I think multiple efforts need to take place to drive change. And what we’re doing is just one one example of that. But yeah, it’s a very, very complex topic, isn’t it? Because if we look agriculturally globally, many, many areas which we consider to be cropping areas, and we we think they’ve been crop in eternity that’s not the case. So what’s the climax vegetation in? in the Midwest? What’s the plan max vegetation in the black Earth region of Ukraine and Russia it was set grass on past year, which is why you got soils with very high organic matter because you had pasture sequestrate in carbon over hundreds of yours. So land use change. Most land has had a change of use at some point in time. It’s just a case of when it was changed and where we were we arrive at that we can’t necessarily reverse what happened historically, there are certain things that we can do, we can plant up areas which are only economic and we can look to improve efficiency. through doing things like that, but we can plant trees across Western Australia and Western Australia, if you go back a couple hundred years they’d have significant tree cover. So what can we do? We can we can grow crops in such a way. We can have no tillage, we can grow cover crops, we can grow companion crops, we can try and integrate livestock into the the arable cycle. I think its challenges associated with that because of the specialization in in agriculture these days, but we can do multiple things which can make a significant difference. So it’s all about changing your thinking and the mindset over time, but the best way to do that is through the capital markets and people being rewarded for what value they can bring in natural capital terms.

Borna (ClimateAi) 41:52
Yeah, Mary Wilson. I want to go back now to the discussion about public perception of institutional capital. So Some adversaries of institutional ownership of Ag lands might say that institutional capital is a bad thing for agriculture. And it’s not hard to imagine a situation where a purely financially motivated investor pursues short term games at the detriment of soil environment, and climate to name a few. But one can just as easily imagine a situation where an institutional investor is able to take a longer term view, perhaps the detriment of short term returns, and really build and improve the land with the goal of potentially selling it at a higher value in the future. So how would you feel this concern or this skepticism that institutional capital is a bad thing for agriculture?

Martin Davies 42:41
Well, if you think about what drives the value of land, so the intrinsic part of the value is soil, the quality of soil and the asset that you have, so really, there’s no no logical reasoning to deplete or erode or damage that intrinsic value over time. So I commented earlier that we’re custodians of the assets that we’re investing in, and we should leave them in a better condition. Leaving them in a better condition is entirely logical because they’ll have a greater value. If that’s the case, so any institutional investor as a best interest to invest in the land, we’re not interested in short term ism. If you think about our clients, our investors, what are they looking for, they’re looking for quality assets, which are not correlated to the economic cycle which can generate stable cash flows in the long term, long dated asset. So investing in the long term for the future and to enhance that capital value is really what it’s all about. So I wouldn’t agree with some of the comments that are made about what institutions do now. Okay, I think people take an approach where And I would call this a irresponsible approach where they just put all the land out to tender on an annual basis. So option for lease or whatever it may be. Yeah, okay, you could, you could argue the case that somebody comes along and leases the land, they don’t really care about the long term. So if I think about assets that we have, and the two lease agreements, we do think in the long term, and that does vary by market, but lease agreements that we have in Australia and Poland in Brazil are five to 10 years. The precedent in the US is a much shorter lease terms. And really, that’s because farmers prefer to be in a shorter lease term, which they believe gives them more optionality around negotiating rent levels. But if I look at the portfolios that we have in the US, we have a very low turnover of tenants. And that’s because it’s a partnership. So I said that we think attendances as a client, so you want to be in relationships with people in the long term. There’s trust built around those relationships. And if I look at the turnover of tenants that really is reflected in that, those good tenants who work with him in the long term, their view on what they’re doing, the fact that they’re looking at the assets in the long term aligns with ours. So it’s a partnership, which makes complete sense.

Borna (ClimateAi) 45:27
Yeah. So you guys are fairly hands on approach with a lot of the folks that you’re leasing out to like your, I guess, how does that oversight level play in? And when does this statement actually hold true that an institutional investor might be more extractive or depleted of the land because of the way that the incentives are set up with the lease structure?

Martin Davies 45:46
It’s entirely reasonable to say that if you don’t try to have a relationship with your tenants, you don’t interface with them. You’re not necessarily going to have relationships which are going to stand the test of time so I made a comment earlier. All of our business is based around having people on the ground in the locations where we invest. Those people have very deep relationships from the farming community with the tenants. And that alignment that I talked about, really is what it’s all about. So that’s, that’s a differentiator for our business. Now, that’s not to say that we don’t take advantage of using technology and we can look at things remotely, but that on the ground relationship, people respect each other relationships that have been built over time is critical to what we do and across our business that is true wherever whichever location that you look at. Now, one of the concerns that certainly exists from my point of views is institutional investors think they can invest without having a local presence, because technology means that they can do that. I think it’s a it’s a sector that’s very difficult to be able to do that. And And I would caution any investor who thinks that they can look at it in that way, you have to have a local presence because 85% of agriculture globally is in private businesses. And many of those businesses have family owned generations that have been operating assets, not so there’s not corporate agriculture. But family, small private businesses predominate. And just because their family operations, I think there’s a misconception that exists there. Some of the family businesses that we work with and work with over long time are as sophisticated as any of the large corporations or listed companies that you could look at. And they also have incredibly good alignments and what they do because they own they own the business so they have a vested interest to make it work.

Borna (ClimateAi) 47:50
Now, within institutional ownership, there’s a subset of foreign ownership. And clearly a lot of people are concerned about this in the US, I think six states ban foreign ownership. farmland and three or more are kind of on their way there. What are people afraid of here? And is this an illogical reaction from the public? Yes. So

Martin Davies 48:10
you’ve done your research this the states in the US that we’ve got that don’t have a foreign ownership and there’s also states that don’t allow corporate ownership. And the great example of a state which is a in the Midwest is an agricultural powerhouse is Iowa, which doesn’t allow foreign or corporate ownership. What are people concerned about? And let’s be clear here, it’s not just the US where there’s concern about ownership of farmland. There are other locations globally, where the same thing exists. Australia as the Foreign Investment Review Board, which looked at all agricultural farmland acquisitions, New Zealand as the overseas Investment Office, Argentina has a restriction on foreign ownership. So there are other locations as well. Why does this exist? Because it’s an emotive topic. Where does our food come? It comes from farmland who owns our farmland. Now, some of the concerns probably being driven by some of the land grabbing, you could say is going on and that land grabbing, it’s being driven by food security related issues. So if we look at Australia, New Zealand, has seen significant investment out of China there. And you could argue that that’s driven from a food security point of view. So ultimately, what drives the legislature to put in place measures to control ownership is the fact that it’s an emotive topic. Where is my food come from? Who owns the land that produces my food? If we think about commercial real estate, in contrast, who really cares about who owns an office building or a shopping mail or hotel? nobody really cares, because it’s just not that same connectivity. Yeah, everything Iowa agriculture is a very, very important sector in Iowa. But I think one of the things interesting things to look at is, look at Iowa, you look at Illinois, and you look at size of business. And if you look at land values, there’s very little difference. So in one state, you’ve got no corporate or foreign ownership, whereas Illinois has no restrictions. So to the people that say, institutional investors, foreign investors are driving land values to unrealistic levels. If they did, they, in theory would be a significant difference in value between farmland in Illinois in Iowa that doesn’t exist. This size is very similar, so that this proves the theory.

Borna (ClimateAi) 50:46
So then, if we look at the example you just gave Illinois as opposed to Iowa, are we seeing any sort of difference in how those markets are run?

Martin Davies 50:54
I would say that in Iowa, a lot of land is owned by private investors. So they might be originally from Iowa and they like to invest in some farmland. From a from a return point of view, it makes sense to them. So I think the ownership farm business structure is very similar. If you look, look at Illinois, the majority of the entrepreneurial farming businesses, they own a core of land and invariably that’s the land that the family settled. They bought more land to complement that, but they also leave some land and I can think of tenants we have who lease on multiple land or landowners, they lease off institutional owners, they lease or private owners. So I don’t think the structure of business businesses is different than Iowa you probably have more private investment in in farmland. It could be local people investing in farmland could be people from away investing in farmland, both private and Non corporate and they’re not foreign. So of course from a, we’ve been talking a great deal about institutional investment in the sector. If you look at real assets, generally, retail investors have not invested in real assets generally to any extent and particularly in in farmland. So we have a couple of rates in the US where private investors can invest. But generally speaking, it’s not a sector, which really is seen a great deal of activity with retail capital.

Borna (ClimateAi) 52:33
Yeah, that makes sense. One last question here is, is COVID making people want to reclaim their own land for food security purposes? Like, are there are there countries or regions of the world where we are seeing food security issues that are now thinking, Okay, I no longer want this foreign entity to be owning this land. I need that land to be producing what I need for my people.

Unknown Speaker 52:55
I think it’s how you move the if you look at the range of things that The pandemic as brought about it has heightened awareness about nationalism. It has heightened awareness about food security. So through the pandemic, we had governments looking at strategic reserves of food. So a number of Southeast Southeast Asian countries put limitations on rice exports. So there’s no bag that has increased the focus. But I think when people actually think about what producing their own food involves, I think many people probably looked at gardening and this year because there’d be so much if they do have a garden they contemplated growing some vegetables will do some gardening and indeed, certainly in Europe, seed sales for garden plants. Vegetables increased significantly through a pandemic, but I think we many things can change subtly, but we’re not going to do a wholesale reverse on how supply chains have evolved and how the market is evolved. One thing that’s been very clear from the pandemic is that some of the convoluted supply chains that we have are very vulnerable to disruption. So, technology has a role to play at every level. And adoption of technology in the agricultural sector undoubtedly has been accelerated as a result of the pandemic. If we think about blockchain, and the ability technologies like blockchain offered e commerce platforms, we can connect the consumer closer to the producer. I think, rather than the wholesale move to repatriating land and people taking possession of the land that day in history, we’re going to see people more concerned about provenance and wanting to be closely connected to the producer. And what we have available to us in digitization of the sector means that that is possible disruption wise middle men, as you might call them in the sector, I think are going to be squeezed as the consumer and the producer or the processor and the producer are brought closer together by shorter supply chains with unparalleled traceability, which can be bought about by blockchain, amongst other technologies.

Borna (ClimateAi) 55:29
Yeah, well, I mean, it’s great to hear that the largest fine line investor is kind of thinking about a lot of stuff on these progressive lines, sustainability, transparency, innovation. So that’s certainly very heartening. How can people support your work just just continue being teachers and contributing to their their pension funds or is there another way people can support your your a lot of your guys’s work?

Martin Davies 55:50
Yeah, so our focus is on institutional capital. So we invest capital for the Tia jemele account and we invest capital for other investors as well. I certainly think one of the things that we’re going to see, with the recognition of farmland being a very good asset class which provides stable returns over time, we are going to see increased focus from retail investors, private investors, there are one or two vehicles which have been mooted, which will be publicly listed vehicles. And I’m sure we will see that so the sector needs external capital. Whether that comes from institutions, whether it comes from retail investors, that capital is needed to invest in technology to invest in the supply chain pathway to market to invest in increased efficiency. And that’s required to deliver this double in production that we need over the next 50 years, but that doubling it production takes place in an environment where the availability of land decreases on a daily basis, but also where we have to be Extremely measured in resource use. And we need to be very reflective on the impact of what we do in agriculture on on climate and changing climate.

Borna (ClimateAi) 57:13
Yeah. Am I and this has been an extremely insightful episode and I learned a ton. I think this was a very unique episode. So thank you so much for your time.

Martin Davies 57:21
Right. enjoy it very much. Thank you very much.

Borna (ClimateAi) 57:25
All right, everyone. Thanks for listening. If you liked the episode, please rate us and give us a review on Apple Stitcher, Spotify or Google Play. And if you really liked the episode, or if you just want to help push forward the climate resilience movement, share the episode with friends and family. If you have any feedback, or you’d like to add your own two cents on the topic discussed today, feel free to shoot me an email at media@climate.ai. I do respond to all emails. At its core. This podcast is a way for us to learn and to share our learnings as we go. So we’re always open to building on these conversations and hearing more perspectives. for your support, see you next time.

Guest:

Martin Davies

President and CEO of the Westchester Group

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