The organic food movement has gone from the realm of hippies and back-to-nature types to becoming mainstream and, perhaps, a long-term secular growth trend that investors can ride for healthy returns, let alone healthier food.

Many investors have already harvested bountiful gains by investing in the stocks of organic foods-related companies such as Whole Foods Market, the Hains Celestial Group and United Natural Foods. But accredited investors, through their financial advisors, can invest in this growing trend through a private equity offering that buys into organic farmland and provides a different risk/reward profile.

Iroquois Valley Farms LLC (IVF), which started in 2007 in Iroquois County, Illinois, invests directly in farmland and organic food production by helping established, midsize family farmers acquire more land. IVF buys the land and leases it to farmers through long-term tenancies—initially five years, with evergreen renewal options. As of year-end 2013, IVF had bought more than 1,850 acres of farmland in Illinois, Indiana, Michigan and New York for transition from conventional to organic production.

And IVF says it’s in growth mode, both in terms of its plans to diversify operations into other states and through an ongoing $6.9 million capital raise that, when completed, will double the equity size of the company and pad its wallet to buy more farmland.

For investors, IVF can be seen as a private equity or real estate play, or both. “We’re definitely considered an alternative investment,” says David Miller, co-founder and CEO of IVF, which is based in the Chicago suburb of Wilmette, Ill. “Few people have farmland in their portfolio mix. Farmland is positively correlated with inflation, has produced solid double-digit returns the past 10 years, and it’s less volatile than the S&P 500. It has a legitimate place in an asset allocation.”

IVF also markets its offering as an impact investment––the company is included in the ImpactAssets 50 database of impact investing firms, and is a certified B corporation, which denotes it meets standards of social and environmental performance, accountability and transparency.

The IVF team is passionate about its mission and the company’s model is intriguing, but investors should realize this is very much a long-term investment. For starters, investors need to stick around seven years before they get voting rights. “It gets people thinking longer-term,” Miller says.

And while IVF says an initial investment in its product in 2007 would’ve more than doubled five years later, the company doesn’t have a formal redemption structure (though that might change shortly). IVF executives say there has been very low turnover with few redemptions, and those were partial redemptions from still-extant positions that were facilitated via private transactions with other shareholders.

“If an investor thinks they’re going to need liquidity, then we’re not a place where they should have their money,” Miller says.

Organic Growth
According to the U.S. Department of Agriculture, consumer demand for organically produced goods has steadily risen since the USDA created national standards for organic production and processing in 2002. Although demand dipped during the Great Recession as consumers opted for less-expensive, conventionally grown fare, the growth rate has rebounded since then and sales of organic products in 2012 jumped 11% over the prior year’s sales, to $28 billion, or more than 4% of total at-home food sales. Nonetheless, that growth rate trails the mid-teens growth rate seen from 2004 through 2007.

Meanwhile, the growth rate of certified organic cropland and pasture also stalled during the recession, but had rebounded to a record 5.4 million combined acres in 2011, according to the most recent USDA stats. That represents just a wee drop in the bucket of overall agricultural land in the U.S.

The USDA notes that U.S. producers of organic foodstuffs have been challenged to keep pace with growing consumer demand. And that’s where IVF comes in. “There’s definitely a shortage [of organic acreage] because we get calls from producers such as Stonyfield Farms looking for more product for dairy, and same with Chipotle for black beans and Seneca Foods for pumpkins,” Miller says. “They get in touch with us because that’s our focus. We’re seeing more demand, and every one of our farmers wants more land.”

IVF maintains a list of young farm families who are growing their sustainable farming business and want to lease or purchase more farmland. The company has done significant outreach to the sustainable agriculture community through conferences, where it meets farmers and creates word-of-mouth advertising.
“We don’t look for farmers,” Miller says. “They bring the opportunities to us.”

After an extended review by company management, these farmers become eligible for tenancy on future farmland acquisitions by IVF. “We visit the farmers to see what they do and look at their business plan,” Miller says. “We don’t have a formal application process. There’s a lot of comfort when we meet them and their families––it’s pretty rock solid. We won’t buy [land] without a lease in hand with a farmer we haven’t already developed a relationship with.”

Triple Bottom Line
IVF is private equity, but it’s not a private-equity fund with the traditional general partnership or limited partnership structure. Instead, IVF has a corporate structure with a staff that’s compensated primarily by salary and stock options. Corporate governance is through a seven-member management board that’s elected by voting members. This structure, IVF says, best solidifies the company’s long-term commitment to its product and to its farmers.

“I think our corporate model, rather than a hedge fund model, definitely has a bigger impact because we don’t sell farms to pay back investors,” says John Emrich, IVF’s chief investment officer. “Our farms and the company should outlive everyone on the management team. The model is scalable on the investment side.”

IVF investors run the gamut from accredited investors and family offices to foundations and endowments. The investing minimum for individuals is $34,500. “People invest in us for growth of capital and future income,” Miller says. “I say ‘future’ because we haven’t paid a dividend in seven years, though I expect that to change.”

According to IVF, an initial $10,000 investment in the company in 2007 was worth nearly $25,000 through 2012.

IVF asset valuations are done annually and based on conventional land appraisal, and all income has been reinvested into new farms. As organic farming income stabilizes, Miller says, it may supplant asset valuations as the primary driver of corporate value.

There’s not a big price difference between conventional versus organic farmland, and U.S. farmland prices in general have boomed during the past decade thanks to low interest rates and a commodities supercycle that’s brought fat prices and surging farm income. Times are so high on the hog that the press has been percolating with stories about an emerging bubble in farmland. Folks with long memories might recall the farm belt crisis of the 1980s caused by low farm prices and highly leveraged farmers, and while experts don’t believe things are heading in that direction, they caution that rising interest rates and falling commodity prices bear watching.

There are other private-equity funds devoted to purchasing farmland, but IVF believes it was the first for-profit entity in the U.S. to connect investors with farmers transitioning farms to organic practices. One outfit doing something similar is Farmland LP, a San Francisco-based real estate investment fund that acquires conventional farmland and converts it to organic farmland. Its forte is enhancing soil fertility through livestock and crop rotation, and it manages 6,300 acres in the San Francisco Bay Area and Oregon’s Willamette Valley.

IVF says its focus on organic achieves a triple-bottom-line benefit for both shareholders and stakeholders. “First and foremost, we think farmland is a great investment because it provides portfolio diversification,” says Kevin Egolf, IVF’s director of business development. “Second, we’re investing in organic soils that boost productivity over time. And third, there’s the social function of supporting family farmers and the environmental benefits of transitioning land from conventional to organic.”

Reaching FAs
Egolf says IVF started reaching out to financial advisors several years ago by attending industry conferences, telling its story and preaching the benefits of diversifying client assets by investing in farmland. But it has upped the outreach with its current capital-raising that began in mid-2013, which Egolf says was halfway completed by the end of December. He notes more than half of that has come from financial advisors and their individual clients. “We’re seeing a big pickup in the advisor network, which excites us because we see that as a great sales force for us,” he says.

One advisor who jumped aboard is Andy Loving, a certified financial planner at Just Money Advisors, a Louisville, Ky., firm focused on socially responsive financial strategies. Loving got involved with IVF about two years ago when it was brought to his attention by another financial advisor, and he sees it as a socially responsible way to add an alternative investment to client portfolios. “What I like about IVF is that it’s a pure land play and it’s organic farmland,” he says.

Loving says he’s put roughly 15 of his accredited clients into IVF, but he notes that it’s not for everyone. He says some clients don’t want to tie up their money for such a long time, while others see the lack of a dividend as a drawback. But for those clients willing to put money into IVF for the long term, Loving believes it’s a proactive way to be socially responsible. “Climate change and organic foods are two big things for my clients, and they want to take investment positions and not just avoid oil companies,” Loving says.

Regarding liquidity, CEO David Miller says a new redemption structure for vested/voting members was expected to roll out during the first quarter, subject to board approval. Longer term, Emrich says IVF has some liquidity options in mind such as going public or becoming a real estate investment trust. “To me, being a REIT signals the end of growth because if you want to grow you have to do a secondary offering,” he says. “But a corporation retains some of its cash flow and can use it to grow rather than be required to pay it out. It’ll be a function at that time, whether we think we’re still a growth company or have become more of a mature, dividend-paying company.”

Emrich says IVF believes it could be big enough to go public within seven to 10 years.

IVF was initially funded mainly with rollover IRA money from friends and family, and Miller says IVF’s product is ideally suited for IRA accounts placed with custodians that allow private equity. In addition, the company is considering several non-accredited ventures for select local markets in 2014. “For the most part, these new ventures will connect smaller investors and small farmers using the Iroquois Valley Farms corporate model,” Miller says.

On the investment front, IVF plans to diversify its portfolio away from its heavy leaning on Illinois and Indiana by making a bigger push into New York and expanding into other Northeastern states, including Vermont. Both states in particular have a plethora of family farms and a strong organic farmland culture.

Meanwhile, IVF’s overarching goal is to help young farmers expand their organic farm operations. One such farmer is 25-year-old Andy Ambriole, who, along with his wife and his parents, farm about 1,800 acres in Huntington County, Indiana, near Fort Wayne. Of that, he personally farms 700 acres that’s either certified organic or being transitioned to organic, and it’s a mix of land he owns and leases. Ambriole raises organic corn, soybeans, wheat and popcorn in the field, as well as organic greenhouse tomatoes. He also raises Nubian goats for cheese production.

Although demand for Ambriole’s organic crops is growing, he didn’t have money to buy more land. But he knew he could go to IVF to lease additional land because he was already an investor in IVF, which he found out about after he read a newspaper article about its first land purchase in Iroquois County, Illinois. In addition, he’s currently the only farmer on IVF’s board. (Andy Loving, the financial advisor, is another board member.)

During the past two years, IVF has bought two properties in Indiana and leased them to Ambriole to transition to organic.

Why lease instead of buy? “Farming is a very capital-intensive business and it costs a lot to buy land,” Ambriole says. “There’s no way you can afford to buy 100% of the land you farm and still expand at a reasonable pace.”

Ambriole says he’s had successes and failures as an organic farmer, but he believes going organic is the only way he can support himself in farming. “I couldn’t farm full time without being organic because it gives me an extra premium for my labor,” he says.

As part of IVF’s social impact mission, Miller believes organic farmers like Ambriole embody efforts to improve the nation’s food production network. “All of our farmers are young farmers, so there’s an optimistic viewpoint that the world’s moving in a better direction,” he says.