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Investing in Organics – a Profitable Endeavor

Ten years ago, buying organic seemed like a luxury reserved for the rich and famous – with pictures of celebrities in tabloids carrying Whole Foods bags under headlines like, “They’re just like us! They go grocery shopping!”

The times have changed, however.

With so much research on the pitfalls of non-organic and GMO (genetically modified organisms) products readily available to every consumer, organic produce and all-natural products have become more popular than ever.

From GMO to Organic

Genetically modified (GM) corn was introduced to the market over 20 years ago. At the time, it seemed like a godsend.

The bacterium Bacillus thuringiensis was inserted into every GM corn plant cell, rendering it resistant to pests. Suddenly, farmers were guaranteed massive crop returns and didn’t have to worry about weeds and insects destroying their crops

With GM, pest-resistant crops and heavy doses of weed-killer, farming was more efficient than ever before – at least for the moment.

The GMO honeymoon phase, however, came to an end.

Research quickly arose, challenging the safety assumptions of consuming GM farmed products.

It also turned out that weeds are smarter than science had predicted. “Super-weeds” adapted to survive exposure to herbicides and began infesting GMO fields at an alarming rate.

Glyphosate, the world’s most commonly use herbicide, was amongst those rendered dramatically less effective.

At a sudden disadvantage against these “super-weeds,” farmers began increasing their use of glyphosate and other herbicides.

Not only was the safety of GMO technology being called into question, but there was also the added health concern related to public ingestion of more herbicide.

These consumer concerns continue to be a major hot button issue in the farming industry.

Much of the big business farm industry had already adopted GMO farming by the time these issues developed and maintain integral partnerships with herbicide companies. These relationships ensure that both parties stay in business.

Investing in Ecology

Since the year 2000, we’ve been living in the era of what’s best described as the “Biological Revolution.”

Paul McMahon, Managing Partner of SLM Partners – an asset manager of rural land – explained the evolution of organic farming, beginning with the mechanical revolution (1830-1920), into the chemical revolution (1920-2000).

McMahon points to five key principals of successful ecological farming:

  • Focus on soil health
  • Minimization of external inputs
  • Recycling nutrients and energy
  • Exploiting the benefits of diversity
  • The ability to grow healthy and nutritious food

He emphasizes that ecological farming isn’t simply the domain of small farmers, and debunked the myth that it’s anti-technology. In fact, farming as a whole has become highly technical with more room for innovation and longevity than most industries.

There will always be risks involved in farming – be they conventional or organic – but there will also never be a time when humanity doesn’t require the nutrients of the natural world. Thus, it’s vital to continue the push for the advancement of farm capabilities.

More than any other risk, farms remain vulnerable to extreme weather that can cause the loss of crops, soil erosion, and other damages. (Just take a look at Munich RE’s natural catastrophe database for more evidence of this.)

Additionally, farmers have to endure higher input costs (fertilizer, fuel, seeds, etc.), unexpected degradation of natural assets (four to six tons/acre/year of topsoil loss), environmental externalities (climate change), and are subject to ever-shifting consumer trends.

Yet, the benefits to organic farming continue to outweigh the risks on multiple fronts.

As demand for organic foods increased by 50% every year, General Mills saw its net profits from GMO products plunge by 24% in Q1 2015. In an effort to keep up, the food giant is doubling its organic purchases this year.

Overall, organic farming can produce better yield while lowering operating costs. Additionally, it enhances the natural capital (restoration of degraded land), and has climatic resilience.

Plus, organic farming produces positive externalities and the chance to monetize them – like global carbon stocks sequestration. There’s three times more carbon in the soil than in the air.

There are also higher value markets that demand a massive premium (three times as much for corn) and more profitable farming – $300 versus $100 per acre than in conventional farming.

That’s a major profit!

Serving the People, the Planet, and Profits

Sustainable Farm Partners LLP (SFP) is a U.S.-based firm committed to socially responsible investing in organic farmland, and is dedicated to developing organic row crop operations.

The firm works to convert conventional U.S. farms using GMO methods to organic production.

SFP is based out of Iowa, the home state of Founder Harn Soper, who first saw the advantages of organic production when he converted his family farm in 2010.

With four generations of Iowa farming in Soper’s family tree, he’s well-versed in the nuances of successful agriculture in the state.

Iowa is known for its high-quality soil and adequate precipitation (28 to 32 inches per year). As such, Soper doesn’t depend on irrigation, which is, after all, an unsustainable source.

He began the transition to organic farming by first eliminating genetically modified corn and soybeans in favor of organic corn and oats. As a result of his successes, he launched Sustainable Farm Partners in November 2015.

The company plans to acquire an initial 12,000 acres of row crop land, and then eventually up their stake to 40,000 acres. Soper has already overseen the conversion of 640 acres of his family’s 800 acres of farmland from GM to all-natural, and the results have not only made him a believer in organic, but they’ve made him a lot of money, as well.

Soil Restoration = Growing Profits

It currently takes between two and three years to transition a farm to organic, but there’s still revenue to be made during the interim, through the sale of GM products.

In a crop share arrangement with the operators, net income from the first two years of Soper’s transition (2010-1011) averaged $134 per acre. But by the final year of the transition and in the first year of organic certification, his net income soared to approximately $900 per acre.

The bottom line is, Soper Farms increased its net income from $180 per acre with GMOs to $578 per acre with organics. Meanwhile, the cost to run the farm fell by as much as 40% once it was certified organic, because it no longer required expensive patented seeds or synthetic inputs.

An additional cost benefit is that, over time, the soil health began to improve, requiring less maintenance, further decreasing costs.

Soper also saw major rewards due to the sheer demand for organic products. The price of their certified organic crops increased two- and three-fold as compared with their previous GM crops.

In 2015, their corn sold for $12 per bushel (versus $3.50 conventional) and their certified organic oats sold for $7 per bushel (versus $2.85 conventional). These profits alone offer them insurance against potential crop loss.

Soper estimates that supply for organic grain in North America will meet demand from food manufacturers for at least another decade, thanks to the opportunity created by falling conventional grain prices.

Deep Roots, New Shoots

Planting corn with an alternating hay crop rotation of oats, alfalfa, and clover has offered unforeseen benefits: It mitigates weed and pest damage, limits water loss and soil erosion, and improves nutrient management.

“Soil is our most important asset,” Soper claims.

In addition to increased profits from crops, the value of farmland has also gone up. Operators that lease with SFP will have the right of first refusal to purchase the land after a 10-year investment period.

Other risks have created bountiful opportunities. While state regulations prohibit corporate ownership of farmland in Iowa, these regulations also create barriers to entry for potential competitors allowing SFP to reach the scale it aims to achieve.

Furthermore, reduced revenue in those two to three years of turnover to organic stop many farm owners from abandoning conventional farming, which in turn gives Soper an upper hand in the market.

The fact that for every $1 of organics exported from the U.S., it imports $8 worth is living proof that demand outweighs supply. With key demographics – particularly millennials – keen on the move toward organic eating, the demand for organics is here for the long haul, validating a clear and profitable investment opportunity.

Good investing,

Shelley Goldber

This article was originally published by Wall Street Daily
www.wallstreetdaily.com

About The Author

Shelley Goldberg is a consultant, advisor and board member in environmental sustainability. Previously she served as a macroeconomic strategist, trader, and investment advisor for multi-asset top-down portfolio managers. She has served in the capital markets on both the sell and buy side for over 25 years, with sector expertise in global resources, commodities. Shelley was a hedge fund manager for her own fund – G3 Capital Partners, LLC – and a fund-of funds manager for Union Bancaire Priveé, a Swiss private bank. She has also served as a trading and investments strategist for Brevan Howard Asset Management LLP, a multi-billion-dollar hedge fund manager, and for Roubini Global Economics. In 2013, Shelley transitioned into venture capital and private equity focusing on environmental sustainability. She consults to a number of businesses from sustainable farming to clean-tech energy and solar powered green houses, and works toward the reduction of single-use plastic pollution, all with an emphasis on a double-bottom line initiative. Shelley is a frequent writer, speaker, and panelist at industry conferences, and is regularly featured as an expert commentator on television and online segments.
Investing in Organics – a Profitable Endeavor обновлено: May 25, 2016 автором: admin

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