How Equity Capital Can Help You Grow

Fractal’s Ben Gordon and Brian Grundtner joined Damian Mason of the Business of Agriculture to discuss the evolving landscape of capital in agriculture and how financial trends are shaping the future of farm ownership.

Here are their key takeaways on how capital can enhance your ability to grow.

1. Investor interest in farmland remains strong

There’s a significant amount of capital right now waiting to be deployed. Institutional investors like pension funds and family offices want to invest in agriculture, believing that government programs and policies help temper farmland value volatility. Continued farmland consolidation driven by retirements and changes in farming practices will also impact farmland value.

“If you look at the amount of money we’ve printed in the last 10, 20, 30 years, it’s just seeking different types of return. The trick is finding the right match between the capital and investment. You have to compete with other assets. And that comes back to is this an attractive investment to them? And how do you make it a more attractive investment to that investor, while still meeting that farmer need?” – Ben Gordon

2. Investors can help fund growth, particularly when cash flows are tight

High interest rates and low commodity prices are squeezing operating capital and farm cash flows, making it harder for farmers to access new debt. Given lower loan-to-value ratios, farmers must put more cash down or collateralize more land to access the same amount of capital. Equity capital allows farmers to unlock more of their equity while protecting their cash position, so they can access the capital they need to grow in this down-cycle. It positions you to pursue new opportunities that may have been out of reach with just cash and debt financing, while helping to maintain your financial health and solvency.

“Many farmers want to do more than their current financial resources allow – you can only go so far with cash on hand and debt. There are a lot of good debt partners out there, and you should use debt as it’s designed to be used. But you still need cash to go get debt, and you only have so much working capital. So you can tear that down payment out of your current assets, or you can take it out of your long-term assets. We’re giving the farmer another financial tool to grow and still maintain those healthy ratios that they need.” – Brian Grundtner

3. Land values should soften so it’s important to have capital on hand

Market conditions indicate that the next 18 to 36 months could present good farmland opportunities, especially if certain areas decline in value (top-tier farmland is still holding its value, likely propped up by farmer demand). Many top-tier farmers will have more investable opportunities than they have available capital. Equity capital can fill that gap. 

“Equity capital gives you that capital to invest in that land, and go deploy it into your business. It helps you grow your net assets, to pick up that new piece of ground you haven’t touched, and touch less of your current working capital.” – Brian

4. Look for investors with similar goals, time horizons and philosophies

Focus on investors whose goals, time horizons, and investment philosophies align with your long-term vision and operational needs. Avoid opportunistic investors who are focused on short-term gains and perceive farmland to be undervalued. With Fractal, for example, farmers maintain ownership and control over operational decisions, and Fractal only wins when the farmer wins.

“We can bring that investor advantage alongside the farmer. Our investors are locked in for 10 years, a farmer can buy us out at two years. You have to have that alignment. Investors are willing to accept 10 years as it’s usually two maybe three commodity cycles. Over that time, if you look at historical returns, a lot of that volatility comes out.” – Ben

You can listen to their full conversation here.

Note this is not investment advice. The information contained should be used for informational purposes.