"Costs are increasing, and there's no reason to believe this trend will change," he says. "But the price [farmers] get is subject to public markets and risks. So the return for commodity-based farmland funds is driven by factors outside their control."
Beyond Organic
What's not to like about cutting the costs of a farm enterprise and boosting its revenues? That, in effect, is Wichner's pitch for the "beyond organic" farmland management system he plans to scale.
According to Heinberg and Bomford, U.S. farms reduced their fossil fuel use by 30% between l979 and 2000-mostly by reducing their dependence on synthetic nitrogen and fertilizer inputs. Similarly, Wichner argues in a white paper that organic agricultural practices can reduce the energy required to produce a crop by 20% to 50% (depending on the crop and soil), and thereby reduce the "exogenous risks" of high-energy prices on production and profits.
But not all organic is created equal. Organic vegetable farmers, for example, usually plant cover crops such as clover and legumes in rotations with the vegetables to restore soil fertility. Others use compost consisting of animal manure and other organic materials. But according to Wichner, many of these farmers still buy seeds or import compost from off-site.
"There's still a cost associated with that," he says. "It's not free."
Farmland LP is taking that to the next level by incorporating closed-loop systems on diversified, multi-crop farms. The process begins by planting pasture for livestock, which will graze and restore the fertility of the land by depositing their dung.
"Animals are an essential and extraordinary part of maximizing soil fertility and the production of food from an acre of land," Wichner says. "Rotating land with livestock is a wonderful way to enhance sustainability and investment returns."
The model is based upon a rotation of specialist farmers around the property at management's behest. At the firm's Ferndale Farm Road Farm in Oregon's Willamette Valley near Corvallis, for example, there is a sheep farmer, a chicken and hog farmer, and a vegetable farmer.
The farmers lease the land in a profit-sharing arrangement with the firm and its investors, which reduces their risk and lease payments in the event of bad weather. But in general, Wichner estimates that the lease payments will be two to three times higher than they would be under a fixed rate.
"We don't grow just one giant mono-crop," Wichner says, explaining why the fund's volatility will be lower than that for conventional cropland. "We get a greater return than commodity cropland, and it has very low correlation to the cost of inputs used in conventional agriculture. But our system for growing is more complex. It's more management intensive, and it takes more intellectual and physical work."