Why We Started Fractal
By Ben Gordon, Co-Founder and CEO of Fractal
“Betting the Farm” means something different when you “Lose the Farm”
I have a mentor who I grew up with in eastern North Dakota. While my immediate family was two generations removed from farming, I spent much of my childhood around Jason’s and other friends’ farms, getting a firsthand look at modern agriculture.
These weren’t “Old McDonald’s” farms. These families ran sophisticated operations with satellite terminals reporting on global markets and self-steering tractors. They tracked events in far flung places that missed mainstream news and managed a balance sheet better than most bankers.
A few years ago, Jason shared a story. His family had made it through the 1980s farm crisis, but they had to sell a parcel of family land that they had homesteaded at the turn of the century. The new owner rented this land back to Jason for a decade or so. When the owner passed away, his kids were eager to sell the land fast, that spring, for as much as possible.
Spring also happens to be when most operations have their working capital tied up in that year’s crop. Couple that with a recent land purchase, and Jason’s normal “reserve” wasn’t there. He couldn’t just go to the bank because of the large down payments (up to 60%) required on farmland.
The family lost that piece of land to an outside investor who then rented it out to another operation further away. 90+ years of experience on that land evaporated overnight.
I couldn’t comprehend why someone else was buying the land and making this call. Why was the family who had farmed for 90+ years and demonstrated above-benchmark productivity not the best manager of the asset? It made zero sense.
Sadly, this storyline is all too pervasive.
Farmland isn’t just for farmers anymore
When last surveyed by USDA Economic Research Service, nearly 40% of all U.S. farmland was rented or leased, with 80% of that owned by non-operator (non-farming) landlords. While about half of farmland is in small family farms, only half of those fully own the land they operate. Farmers are now competing with outside investors – from Bill Gates to professional athletes and institutional asset managers. These investors are savvy to farmland’s steady return profile, inflation protection, long-term outlook, and low to negative correlation to other major assets.
Couple that with the impending massive generational land transfer. Today, over 40% of US farmland is owned by individuals 65 years and older, with an estimated 370 million acres of land – a $3 trillion asset class – expected to change hands by 2030. This puts tremendous pressure on farmers to access the capital needed to secure their rented acres and expand their operations. With that, land prices are hitting all-time highs (as high as $25K/acre in Iowa), making new pieces of land more and more difficult to cash flow. And that was before the recent, massive increase in interest rates.
Farmers today – even top notch operators like my mentor – face a magnitude of challenges. Between investor competition, higher borrowing and input costs, and extreme weather, the costs to get a crop in the ground have only increased. We’re also facing the most turbulent time agriculture has seen in 30 years, with massive potential repercussions – all in the midst of dealing with climate change.
To this day, however, farmland investing is a quasi-feudal system that separates ownership of an asset from its management. As important as agriculture is to the global economy, farmers still aren’t at the center of investment strategies, often with dire results. I saw this with my mentor, and I also saw it half a world away serving as an Army Infantry Officer deployed in the Middle East and Afghanistan where agricultural mismanagement would lead to increased insurgent activity.
It was glaringly obvious to me that something had to change. I looked ahead to the next 50 years in agriculture and the massive implications for society, our environment, and the rural communities that I grew up in. It was equally obvious that to leave the farmer out of the equation was a massive risk and a major opportunity
Looking for answers
After leaving the Army and a brief stint in management consulting, I finally had my opportunity to dive into ag. In 2018, I joined Granular (acquired by Corteva Agriscience in 2017) with the promise of developing software for the most professional, growth-oriented farms in the world. In that time, I met some extraordinary people – one of them being Emma Fuller, Granular’s new head of sustainability. Emma helped build AcreValue (the “Zillow for Farmland”) and was hungry to bring the power of incentives to agriculture given her graduate research [1] and experience running a small organic farm.
Together, Emma and I launched Corteva’s agriculture carbon program and enrolled over 1M acres into what we believed were the highest rigor carbon credits on the market [2]. We had Pioneer and Corteva salespeople talking about regenerative agriculture and profitability in the same sentence.
Silver bullets don’t exist in agriculture…but real needs do
While we were proud of the impact we were making for our farmer customers, it was obvious to us that agricultural carbon programs weren’t the silver bullet that farmers and regenerative agriculture needed. Even more, they weren’t solving the key problem of farmer-aligned capital.
Inherently these programs fall short.
Carbon program payments fall well below what’s needed to offset the required investments in new practices.
They don’t reward the people who have already adopted regenerative practices, some for 30+ years.
Ag infrastructure (including commodity markets) is still geared toward conventional practices, and a lack of training and technical support keeps farmers from adopting new practices.
Most importantly, they don’t integrate the impacts of the practices into the underlying asset value (i.e., the land) or provide enough new capital to solve the key farmer need.
In reality, early adopters do deliver measurable impact, both in terms of soil health, carbon sequestration and farmland profitability. They are scaling and expanding regen practices for business reasons, not carbon credits. Despite these stronger results, we didn’t see any scalable solutions from capital providers. Nor were current capital providers pricing in climate risk or the upside of regenerative agriculture.
We began to ask ourselves a question – instead of measuring carbon, what if regen practices and climate risk were priced into the value of farmers’ land? And what if we could help farmers unlock their equity in that land, so they could access the capital needed to expand their operations?
It was becoming clear that the fundamental problem most farms were facing was a lack of equity capital – similar to what my mentor had faced. It was forcing all types of farmers to risk losing rented land to sale, and this was hitting regenerative farmers extra hard given the additional investment they had put into the land. Access to capital was keeping farmers from building the profitable, productive and sustainable operations they wanted.
We needed to find a way to pull all the pieces together:
Investors want to deploy capital into farmland [3].
Many farmers are sitting on loads of equity in land that they can’t access for capital to grow their farm.
Farmers are best positioned to find the best local deals, manage the land to get the best yields at the best costs, and to steward the asset for the next generation (their own). In short, farmers are best positioned to drive returns on the land they farm.
So how do we make it happen? That’s what I, Emma and our co-founder Brian Grundtner [4] committed to answer.
Our solution: Fractal
We built Fractal to help farmers own the land that they farm, believing that farmland investment is an investment in a better future – for farmers, investors, and the world.
We have built an extraordinary team of people passionate about the future of farming and our planet. We want to see a farmer-led agricultural system where farmers continue to serve as stewards of the land they farm, sustaining their land and operation for the next generation.
What do we do?
Simply put, Fractal invests alongside farmers by taking passive, minority stakes in land that farmers already own. Farmers receive needed capital to expand their operations, while investors access high quality farmland. The farmland remains in the hands of the farmer, who is best positioned to manage the operation and drive higher returns.
Farmers decide how to use the capital to best grow their business – whether it’s reinvesting in more land, on-farm infrastructure or equipment. We don’t tell farmers how to farm. Farmers that demonstrate agronomic excellence get better pricing when they invest. And for farmers that have introduced regenerative practices (regardless of when they adopted them), we discount their annual payments and encourage them to stack these discounts with carbon and other climate-oriented payments.
By solving the farmer need for equity capital, we are filling a gaping hole in farmland financing, creating an asset class that will benefit farmers and investors. At the same time, by providing the capital and financial support of regenerative practices, we hope to serve as a level for both returns and climate impact.
As for the investor, they reap the fruits of having a farmer with vetted and proven operational experience manage the land.
If you want to learn more about what we’re doing, check us out at fractal.ag or reach out to me directly at ben@fractal.ag.