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Category: Insight

One Up On Main Street – A Farmer’s Daughter’s Guide to Farmland Investing

Written by Ailie Carlene Elmore

Author’s Note

“This past month, I defended my master’s thesis on the Role of Farmland in a Mixed Asset Investment Portfolio. Under the direction of Dr. Bruce Sherrick at the University of Illinois at Urbana-Champaign, I explored how an investment in farmland can interact in an investment portfolio of equities, bonds, and treasuries in addition to how it can hedge against inflation. Using data maintained by Dr. Sherrick and courtesy of the TIAA Center for Farmland Research, I analyzed the returns to farmland from 1970-2020 and some of my results are discussed below in addition to introducing farmland as an asset class to institutional and individual investors.” – Ailie

Background on US Farmland

Farmland is a unique asset class in that it has a limited supply and potentially an unlimited useful life. Only 17.2% of the United States landmass is considered arable.  With a growing world population projected to reach 9.7 billion by the year 2050, farmland is well positioned as a production source for a basic human need: food. Not only is the population rising but income levels are also expected to follow suit with world GDP projected to double by 2050. These statistics suggest that demand for food is going to go up and the composition of caloric intake is expected to change. Research shows that protein consumption rises with rising income levels.  With a significant portion of farmland acres dedicated to either feeding livestock or producing other protein sources like chickpeas or lentils, farmland owners and operators are uniquely positioned to meet this demand and profit from it. So long as humanity needs food, there will be economic rewards for the cultivators and landowners.

Farm Balance Sheet

If an institutional or individual investor was investing in a company’s common stock or buying a corporate bond, they would typically examine the balance sheet of the company. The same is true for investing in farmland. Farmland has grown in value significantly over the last 50 years with a 55% increase in the last 10 years alone. Farmland (Real Estate in the table below) dominated the asset side of the farm sector’s balance sheet encompassing close to 83% of total assets. Under the recent low-interest-rate environment, farmland’s debt level has also grown but this is still significantly less than the portion of farm assets it supports. The overall low debt to equity ratio of 16.2% demonstrates a very conservative leverage position relative to other real asset sectors and the relative strength of the U.S. Agriculture industry as a whole.

Data maintained by the TIAA Center for Farmland Research based on data from the Economic Research Service, a sector of the USDA

Returns to Farmland

Like any real estate asset, farmland receives returns when held by an investor in two ways: appreciation in value and cash flow generated from rental income. In 2021, the U.S has experienced a rise in both. According to the USDA, farmland prices are up 8% from last year.  Record sales prices of farmland have been occurring throughout the U. S.’s key growing regions.

August 2021 USDA Land Values Summary

On the rental income side, most investors would be participating in a straight cash rent system meaning a farmer pays the landowner a fixed amount per year for the use of the land. Recently, the U.S. has experienced growth in cash rent values along with the rise in farmland prices.  Fueled by strong commodity prices, healthy farming profits, and appreciating land value, cash rental rates are projected to rise 10% in 2022.

To examine a longer-term horizon of historical returns to farmland, data from the TIAA Center for Farmland Research was utilized from the years 1970-2020. During this period, the average return to all U.S farmland was 9.7% with a standard deviation of 6.4%. This composite return encompasses all 50 states.   However, not all regions of the U.S. are suitable for farming or have optimal productivity. An institutional investor also has to consider that that are nine anti-corporate farming states that would make it difficult for them to invest in certain key production states like Iowa.

One way for an investor to maximize their potential returns while gaining operational efficiencies from scale is to invest in a farmland fund that provides broad diversification with farms in several key states. The Promised Land Opportunity Zone Fund (“PLOZ” or “Promised Land”) is one way for investors to capitalize on the durable returns of U.S. farmland while also receiving favorable tax benefits such as a reduced capital gain taxes depending on how long the asset is held. The government defines opportunity zones as urban and rural communities that need significant investment to foster economic revitalization. The current PLOZ portfolio is managed by Farmland Partners in conjunction with Servant Financials’ founder, John Heneghan. Currently Promised Land owns 10 properties of 8,000 acres in North Carolina, South Carolina, Illinois, and Mississippi. These states encompass some of the highest performing states in the U.S.

Using this state composite for Promised Land, the weighted average return of states represented in the fund can be used as a proxy to compare farmland returns with other traditional investments. This is done by weighting the allocation to each of the 5 states by purchase price then finding the average return of these states using the TIAA Center for Farmland Research’s data on cropland return. The return from 1970-2021 across the Promised Land proxy states was 11.1% with a standard deviation of 8.4%. Looking at the more recent term, this farmland proxy had a return of 8.2% with a lower standard deviation of 5.2%.

Note: This analysis uses USDA state-level averages to compare historical returns and does not necessarily represent the returns that an investor would achieve with an allocation to the Promised Land Opportunity Zone Fund.

Relationship of Farmland with Traditional Investments

The proxy returns in the Promised Land Opportunity Zone Fund can be compared with other traditional assets such as corporate bonds, stock indices, REITS (real estate investment trusts), treasuries, and gold. Using a risk-return plot under two different time horizons, the position of farmland as an investment can be compared with other investments. Performance metrics from 1970-2020 were examined to show farmland as a longer-term investment compared to a shorter time horizon of 2000-2020. See the figures below for full details.

Data maintained by the TIAA Center for Farmland Research.

The Promised Land OZ proxy demonstrated the highest risk-adjusted return compared to the other asset classes over both time periods.  PLOZ has the optimal position in the upper left-hand quadrant of the graph with a high return and overall lower risk compared to equities, REITS, and gold. Even in the last 20 years, the PLOZ proxy still yielded high, relative returns with lower risk.

The relationship between farmland and other investments can be further compared by examining the correlation of returns in the chart below.  A value of 1 means two asset classes are perfectly correlated and would be expected to move up or down in tandem.  A negative number suggests the two assets move in the opposite direction over time.

Promised Land’s negative correlation with stocks (S&P 500, Dow Jones, NYSE) gives reason to believe that farmland would provide diversification benefits and offset some of the volatility of these assets with high standard deviations (risk measure). In the more recent past (2000-2020), farmland’s negative relationship with stocks is even stronger with a -.32 correlation with the S&P 500. Note that when the S&P 500 dropped 48.6% in 2008 after the great recession, the Promised Land proxy maintained a positive return of 8.9%.

Relationship of Farmland with Inflation

Recently, investors have been concerned about inflation and how they will affect investment portfolios.  The Labor Department recently reported that inflation had hit a 31-year high in October with the consumer price index (CPI) rising to 6.2%. Investors and economists across the globe are wondering if we are witnessing the death of Fed’s “inflation is transitory” narrative.  Historically, stock indices have had a negative correlation with inflation and investors are concerned that these inflationary trends are long-term and secular in nature. Farmland on the other hand has historically provided a nice hedge against times of inflationary pressure. Examining the PLOZ proxy returns with CPI trends shows a positive correlation of .71, meaning historically an increase in the CPI will also increase returns to farmland. Recently this trend has held as some Midwest land is up 20% in value along with the higher consumer prices. See the figure below for more details.

Investment Opportunities

With its potential return and diversification benefits along with its track record as an inflationary hedge, farmland is positioned well to have a complimentary role in a traditional 60/40 (equity/bonds) investment portfolio. To optimize on this potential, investors have a few different options to partake in farmland investing. The most obvious option is to buy farmland directly.   However, this could be costly and comes with the requirement that the investor find capable management for the parcel. Buying a single parcel of farmland also puts the investor at more risk that comes from regional concerns like weather or farm-level (or idiosyncratic) risks like loss of production due to water or soil nutrient levels.

To alleviate some of the parcel management burden while still participate in farmland’s return and diversification benefits could be to invest in the Promised Land Opportunity Zone Fund. The fund is targeting internal rates of return between 8% and 14%, before consideration of the tax benefits it would provide to OZ investors. PLOZ’s mission is to help investors and agricultural communities achieve mutually beneficial outcomes through profitable, durable investing in farmland and the revitalization of rural American communities.  In addition to its core “opportunity zone” impact, Promised Land is evaluating other environmental, social, and governance (ESG) principles, such as farmland preservation, wetland and forestland restoration, organic conversions, and soil health and carbon management practices.  Promised Land’s vision is for these agricultural communities to prosper by feeding the world while OZ investors do well by doing good for these communities and the environment.  If you are interested in learning more about the Promised Land Opportunity Zone Fund, please contact Ethan Rhee at ethan@servantfinancial.com.

Another option for investors would be to invest in Promised Land’s partner: Farmland Partners Inc. Farmland Partners Inc. (FPI) is a publicly traded company that acquires and manages high quality farmland throughout North America. FPI manages the farmland in the Promised Land Opportunity Zone Fund as well. FPI’s current portfolio consists of 157,000 acres in 16 different states. Currently FPI’s stock is trading for just over $12 per share which is up 50% from this time last year. We believe this is an attractive entry point below the fair value of the farmland that FPI owns.   On their third quarter 2021 earnings call, CEO Paul Pittman, commented that the net asset value of the farmland was closer to $14-$15 per share. FPI has also restarted its growth and consolidation strategy.  In addition to direct farmland acquisitions, FPI is growing its asset management business with its property management arrangement with Promised Land and its recent acquisition of Murray Wise & Associates.

With the risk of secular inflation on the rise and the inherent portfolio diversification, an investment in farmland is something all investors should be considering. By including an allocation to farmland in your investment portfolio, you’ll have a much more efficient portfolio and be “one up on Main Street” investors enamored with a traditional 60/40 investment portfolio.

Rural Broadband: An Investment in Connectivity

Written by Ailie Carlene Elmore

Author’s Note

“Growing up on a farm in rural Illinois, access to internet was always a hinderance in my family’s household. The screeching sound of the dialup internet starting up was all too familiar until about 7 years ago when my family was finally able to have WIFI connectivity (wireless local area network). Even then, video streaming was still out of the question, and it would take several minutes to send an email. When my brother and I moved home in March of 2020 because of the COVID-19 pandemic, we were both finishing up graduate school then both had to start jobs working remotely in May. We needed to coordinate Zoom calls because we would easily overload the WIFI network if both of us were on one at the same time.  Even then, our internet would crash at least once a day. This is a familiar story for many rural American households that has been heightened as millions of Americans began working or learning from home due to the pandemic. Investment in broadband coverage is something that I happen to find very important if we are to be socially responsible investors.” – Ailie Elmore

Current Status of Rural Broadband

The need for digital interaction is increasingly becoming a necessity for people around the world. From working remotely, learning virtually, telehealth appointments with providers, and accessing other essential goods and services through E-commerce, the world has never been quite this connected. However, that isn’t quite true for all Americans. 22.3% of rural Americans and 27.7% of Americans in tribal areas still lack basic broadband coverage. The Federal Communications Commission (FCC) defines broadband as 25 megabits per second (mb/s) of download speed and 3 megabits per second (mb/s) of upload speed, however this continues to evolve with technological advances. For reference, the size of this article is roughly 1 megabyte which would take around .32 seconds to download with an internet speed of 25mb/s.

Unfortunately, many rural communities have been left behind in this technological advancement which has not only cost the United States socially, but economically as well. For example, many jobs have moved to remote work due to the COVID-19 pandemic, and companies have realized they can cut down on costs by not having employees come into a physical building. McKinsey estimates that remote work offerings will continue to grow as a result of the pandemic which could mean more job opportunities for those living in rural areas. However, improved access to jobs traditionally performed in an office setting only increases the demand for rural broadband connectivity.

Broadband Subscription by County in the United States.

Last month, we focused on education technology advancements that are reshaping the way we learn. However, 12 million school-aged children are left without broadband access in their home, inhibiting virtual learning potential. The COVID-19 pandemic shed light on this as these children were left without broadly available resources to complete their schoolwork. Likewise, remote employment has also been one of the positive outcomes of the pandemic, however the rural workforce struggles to keep up with the connectivity needs for video conferencing, transferring files, or collaborating virtually. The need for a digital infrastructure exists however the upfront costs for providers to initially invest becomes a tough pill to swallow. The initial cost to create a fiber network costs around $80,000 per mile which makes it difficult for companies to recoup their investment in rural areas where the population per square mile is much lower. This cost alone has disincentivized many major providers from investing in high-speed internet in rural areas.

The United States government has worked to spark growth in rural broadband through investing in broadband infrastructure. $47.3 billion was invested from 2009 through 2017 in this industry, and the USDA has invested heavily in programs, loans, and grants for rural connectivity infrastructure. In August of 2021, Agriculture Secretary Tom Vilsack announced $167 million in capital deployment for 12 states lacking access to high-speed internet in rural areas. “Broadband internet is the new electricity. It is necessary for Americans to do their jobs, to participate equally in school learning and health care, and to stay connected.” – Secretary Vilsack.

However, is this enough to bring rural America up to speed? In an analysis performed Deloitte on behalf of the USDA, they estimated an investment totaling between $130 billion and $150 billion would be needed to fully support rural broadband coverage and ensure high speed access. The U.S. government’s targeted, minimalist approach to rural broadband has left the door open for private companies to capitalize on this investment opportunity.

The Potential Economic Impact of Rural Broadband in the United States

While the need for rural broadband is apparent, it begs the question what kind of impact could investment in this space have? The USDA projects that if rural broadband enhancement was realized to its full potential, then it would boast an additional $18 billion of annual economic improvements in the United Sates. Furthermore, $1 billion in additional e-commerce sales would occur if broadband coverage was equivalent in rural areas to that of urban regions. Not only would rural broadband access improve the economic environment, but would also improve the quality of life for rural Americans. 60% of Americans who live more than 70 minutes from a physician do not have internet coverage that can handle telehealth visits. Additionally, lack of broadband inhibits peoples’ ability to connect digitally to sources of entertainment, knowledge, and social interaction.

A revitalization of rural communities could also occur if people are able to have the comforts of an urban digital infrastructure anywhere in the country from improved access to rural broadband. Improved rural internet connectivity could give people the capability to work remotely and more affordably live anywhere in America. The COVID-19 pandemic has already sparked a movement away from cities to the suburbs. Adequate investment in rural broadband could drive that movement even further away from metropolitan areas to the ex-burbs and towards the pristine, scenic mountains of Colorado, the beautiful deserts of New Mexico, or amber waves of grain of Iowa.

Not only would investment in broadband help the everyday person in rural America, but it could have substantial benefits to the agriculture industry, the lifeblood of many rural communities. Like many industries, technological advancements in agriculture have pushed the industry into digital integration. Precision agriculture has had substantial impacts on the productivity and efficiency of U.S. food production which has been driven by the farmer’s ability to connect to a digital universe. Currently, broadband is giving farmers access to a wide array of digital technologies, but the USDA projects that $47-$65 billion (Table 2 below) could be added in gross benefit to the economy if the full potential of broadband, and the digital landscape was reached in America’s heartland.

The impact rural broadband could have on the U.S. Agricultural Economy. 

Row-crop farming operations have more widely adopted precision agriculture technology but there is still room for improvement in broadband infrastructure for livestock and specialty crop production. An investment in digital infrastructure could reap substantial environmental benefits as the USDA projects an 80% reduction in chemical application and up to 50% reduction in water usage as a result of precision agriculture. The World Economic Forum estimates that if just 15-25% of farms adopted precision agriculture technology then by 2030 there could be a 15% decline in greenhouse gas emissions and a 20% decline in water usage. A reduction in water consumption like this could provide 64.4 billion gallons of water additionally to Americans every day. Achievement of these kinds of broad-based outcomes would be major milestones across many of the United Nation’s 17 sustainable development goals, particularly 2) Zero Hunger, 3) Good Health & Wellbeing, 6) Clean Water & Sanitation, 8) Decent Work & Economic Growth, 11) Sustainable Cities & Communities, and 12) Responsible Consumption & Production.

Investment in Rural Broadband

In addition to the U.S. government making targeted investments in rural broadband, many private industries are also taking part in the broadband rollout only where investment is economically viable. Cellular-based internet providers such as AT&T and Verizon offer rural broadband coverage, but internet speeds are still troublesome for many consumers. There has also been a push to deploy fiber optic internet infrastructure by several private companies. However, this option is questionable economically for lower density communities with cost estimates of up to $80,000 per mile for broadband lines. The Federal Communications Commission offers assistance through the Alternate Connect America Model to private companies building fiber infrastructure in underserved areas. Unfortunately, this assistance is again targeted as the program is usually only available for very remote areas. As a result, private investment in rural broadband is economically constrained and limited in its scope and effectiveness.

A potential champion for rural broadband deployment has recently emerged in the founder of Tesla, Elon Musk. Through his company, SpaceX, he is revolutionizing the way that internet is provided in a capital intensive, winner-take-all approach. Using low-orbit satellites that are closer to earth than standard satellites, SpaceX has launched a program called Starlink that can provide internet service at triple or quadruple standard “high speed” internet. Currently, Starlink can provide between 80Mbps and 150Mpbs in download speeds and 30Mbps of upload speeds which is close to 6 times the definition for rural broadband mentioned earlier. Starlink advertises it will be able to provide its broadband coverage to anywhere in the world.  While there is an initial consumer setup cost of $499 for a satellite and router then a monthly fee of $99, Starlink is a highly, attractive alternative to many Americans yearning for faster internet.  The estimated payback on setup costs for a rural broadband subscriber at $150 per month is about 10 to 12 months.  Musk said in May 2021 that the company had received more than 500,000 pre-orders for Starlink service.

Starlink has deployed more than 800 satellites thus far and says it still plans to launch 12,000 satellites costing around $10 billion to provide high speed internet to the masses.

Opportunities for Investment

As an industry that is experiencing rapid growth and is likely to continue to do so, rural broadband could be attractive for investors seeking to deploy capital in a socially responsible space. An investment in broadband coverage could take a variety of shapes as there are many players in the telecommunications industry. An investment in Starlink could be a particularly attractive long-term investment given its unique ability to provide high speed internet around the globe.  The resulting business moat achieved through Starlink’s highly capital intensive ($10 billion) business plan could boast substantial returns in the future if Starlink is successful in establishing their low orbit satellite network and achieve subscriber goals.  It is unlikely that another competitor will emerge with the boldness to spend $10 billion or more to compete.  A publicly available Starlink would be an intriguing pure play on the rollout and associated societal and economic benefits of rural broadband deployment.

Musk has not announced a target date for the IPO for Starlink yet, but it is projected to come in the near future.  In advance of a potential Starlink IPO, the First Trust Index NextG ETF – NXTG offers a broadly diversified play on the digitization of rural communities across the globe.  NXTG’s strategy is to invest in public companies applying substantial resources to the research, development, and application of fifth generation (“5G”) and next generation digital cellular technologies within two sub-themes of 5G: infrastructure & hardware and telecommunications service providers.  5G infrastructure & hardware consists of data center REITs, cell tower REITs, equipment manufacturers, network testing, validation equipment, software companies, and mobile phone manufacturers.  Telecommunications service providers consist of companies that operate the mobile cellular and wireless communication networks that offer access to 5G networks.

Our expectation is that NXTG would likely capitalize on a Starlink IPO when it becomes available. Currently, NXTG’s current holdings include companies developing digital technology such as Apple, Nvidia, HCL technologies, and NEC Global. NXTG’s 1 year return is just over 33% and has just over $1 billion in assets with exposure domestically and in foreign markets.

The deployment of rural broadband has the potential to provide for lasting economic and societal benefits that touch a variety of industries and rural communities left behind in the digitalization of commerce and social interaction. From an improvement in agricultural production and sustainability, to better access to health care and education, an investment in rural broadband will widely benefit mankind economically and socially and potentially achieve clients’ investing with purpose goals and objectives.

What is Education Technology?

Written by Ailie Carlene Elmore

Chalkboards, pencil sharpeners, and slide projectors: all represent old school educational tools. Today these low tech devices are being rapidly replaced by virtual reality, white boards that can record what is written, and most importantly, computers. The locus of education has quite literally changed, from a physical lecture hall to a virtual classroom in the cloud. Leading this revolution is education technology, also known as “EdTech.” Education technology combines information technology and computer software with a wide array of educational methods to foster learning and student growth. Combining tools like virtual reality and artificial intelligence with other forms of media like podcasts and instructional videos, Ed Tech is re-shaping the way people learn from ages 2 and up. The COVID-19 pandemic spurred growth within this sector and has some wondering whether this trend will continue post pandemic.

Spurred Growth from COVID-19 Pandemic

1.2 billion children around the world went from sitting in classrooms to sitting behind a computer in April of 2020. A new wave of e-learning, which uses computer assisted teaching to educate, persisted throughout school districts. Prior to the COVID-19 pandemic, online resources such as Coursera and Kaplan existed but were not as widely adopted. As teachers navigated e-learning, students and parents had to take a more self-taught approach to learning. E-learning offered students more flexibility in their learning environment and gave them opportunities to seek out more widely available resources in the digital world. As a result of COVID-19, researchers are projecting a $70 Billion increase in the e-learning investments in the next five years.

Major Players in Education Technology

There are a variety of interlocking participants within the education technology market. The government has been involved in the space since 1994 with the creation of the Office of Educational Technology within the Goals 2000 Educate America Act. As part of the United States Department of Education, it works to develop policy, media tools, and digital infrastructure to support education technology for K-12 learners. Prior, to COVID-19 there was little funding available to build an e-learning infrastructure and even post pandemic, resources are scarce particularly in rural or lower income areas.

Private industry has been eating up the opportunity to build out an education technology infrastructure and flourished even further during the pandemic. Experts predict by 2025 that there will be more than 100 publicly traded companies listed as an education or training companies with market cap’s greater than $1 billion. The ability for these companies to create cost-effective technology that can be integrated into a classroom setting or at home will be crucial to their growth. Companies such as Course Hero and Coursera help students learn a variety of subject matters such as calculus and biology through online courses and interactive platforms. Other companies such as Wondrium have capitalized on the fact that millions of Americans of all ages are seeking continuous learning experiences by offering courses in traditional university level topics such as history, economics, psychology, etc. as well as special interest topics like food, music, travel, and many more.

Education and training companies are projected to continue increased market cap growth.

While some traditional learning institutions may fight the education technology boom, many more public universities are embracing new ways of instruction and learning. For example, the University of Illinois at Urbana-Champaign has been at the forefront of investing in technology for classrooms and e-learning. In particular, through the Center for Innovation in Teaching and Learning, investments in eTexts have been made to integrate classrooms with online media. Craig Lemoine, the Director of the Financial Planning Program at Illinois, has worked to build 3 personal finance eTexts that not only can be used for student courses but eventually can be sold to private individuals or companies. “The final product matched our goal… High quality from authorship to final digital product, accessible across any number of learning styles,” said Dr. Lemoine.

Investment Opportunities in Education Technology

The market for education technology reached close to $75 billion in 2019 and is projected to grow at a 20% annual rate to $319 billion by 2027. In 2020 alone, $2.2 billion in venture and private equity capital was raised for U.S. education technology startups focused in augmented reality, artificial intelligence, and online course development. Block chain technology integration is also expected to drive innovation and investment in education technology as the academic world seeks better options for safeguarding student records and performing analytics.

Hardware development in EdTech dominants the market.

While the United States and other countries have embraced investment in education technology, it has not been as well received in China. In July of 2021, China announced regulations that banned companies from making a profit in the education sector. Particularly, companies offering tutoring services must be registered as non-profit. This caused many Chinese EdTech companies’ share prices to plummet. Domestically, investment in education technology continues to boom with no signs of similar government heavy-handed prohibition on for-profit business models.

There are a variety of options for investing in the nascent EdTech sector whether that is by investing directly in listed companies in the sector such as Chegg,Inc. (NYSE: CHGG) or Kahoot (Oslo: (KAHOT.OL). Note neither CHGG or KAHOT has yet achieved profitability.  Another new, more diversified approach to publicly listed investment vehicles in this space is Global X Education ETF – EDUT, first listed on the NASDAQ on 7/10/21. EDUT seeks to invest in companies providing products and services that facilitate education, including online learning and publishing educational content, as well as those involved in early childhood education, higher education, and professional education. This ETF’s top holdings are major players in EdTech such as Chegg, Pearson, and Zoom. As a newer ETF, EDUT has only $8 million under management today.  We will continue to monitor EDUT progress as a thematic investment possibility in education technology.

Future Implications and Growth Potential

As a challenger to traditional learning, EdTech has some people questioning if it will replace traditional learning methods. We believe EdTech will aid and augment traditional learning rather than replace it by creating more collaborative and productive learning environments that increase student engagement while increasing educator efficiency. EdTech is geared towards creating a more accessible environment for students to learn. However, many of EdTech’s benefits are highly dependent on a student’s ability to access this technology through broadband networks. Shockingly, 22.3% of rural Americans and 27.7% of Americans in tribal lands lack even basic broadband coverage.

We believe there is a high correlation between Opportunity Zones (low income communities), food deserts, and educational deserts. In the coming months, we plan to explore this overlap and devise purposeful investment strategies to improve the lives of children and families across the country. Check back next month for an in-depth analysis on investing in broadband and the opportunities it could present.

Controlled Environment Agriculture: the Inside Scoop on Indoor Ag

Written by Olivia Glunz

Raging wildfires. Extreme droughts. Violent hurricanes. Rogue tornadoes… Nature is unpredictable.

2020 was a record-setting year for natural disasters, and 2021 has already witnessed numerous extreme weather events. Meanwhile, experts predict that the frequency and severity of storms is only rising.

California’s Dixie Wildfire, August 2021.

Nature is unpredictable, yet her whims govern our most fundamental need: food. Worldwide, droughts, flooding, and famine are an all too familiar story. One in every nine people is hungry, while one in three is malnourished.

As our global population nears 8 billion, it is imperative that we create a reliable, resilient agriculture system, one insulated from nature’s caprices. A solution may lie in CEA.

What is CEA?

CEA, or Controlled Environment Agriculture, wields cutting-edge horticultural, engineering, and computer technologies to produce high-quality crops in efficient, indoor environments. Bringing crops indoors shields them from pests, disease, and extreme weather, permits year-round growth, and facilitates cultivation of plants in any climate zone.

A rapidly evolving field, CEA nevertheless started simply: beginning in the first century A.D., the Romans used rudimentary greenhouses to protect crops during the winter. Over time, greenhouses became more sophisticated: their walls were built of glass, warm water heated them in winter, and electric light bulbs provided supplemental lighting. Today, advanced greenhouses optimize plant growth conditions: computer systems control brightness, temperature, humidity, and even carbon dioxide levels.

Vertical Farming: the Up- and Downsides

Traditional greenhouses, however, are only the beginning of CEA’s many techniques. Global population projections—over 10 billion people (80% of whom will live in cities) by 2050—encourage scientists to develop new, compact farming methods like vertical farming. Vertical farms turn traditional farms sideways. In vertical farming, plants are stacked one atop another as they grow. The resulting farm is both space efficient—vertical farms can be placed in basements or old shipping containers—and water efficient—vertical farming’s water use is 5% that of standard agriculture.

Nevertheless, vertical farming has downsides. One major challenge is lighting. Each plant contained in a vertical stack requires adequate light to grow. Because the uppermost plants shield lower plants from overhead light, each individual layer of a vertical farm must also be lit. The resultant need for numerous LED lamps increases input costs (and, in turn, crop prices) and lowers vertical farming’s energy efficiency. Additionally, vertical farms pose challenges to workers, who often spend their days ascending and descending costly, cumbersome scissor lifts to complete tasks like planting and harvesting on each layer.

A vertical farm.

The benefits of indoor horizontal farms, therefore, should not be underestimated. One innovative horizontal farming operation is Pure Green Farms. Located in South Bend, Indiana, Pure Green Farms’ horizontal greenhouse relies on natural light and uses minimal artificial lighting to increase energy efficiency. Additionally, the entire planting and harvesting process is automated, creating a more uniform product and labor savings compared to traditional production.

Horizontal farms also offer opportunities to combat microclimates, unintentional byproducts of CEA. One greenhouse contains numerous microclimates—slight shifts in location can significantly alter plants’ growing conditions. For instance, a plant directly beneath a growth lamp may be subjected to higher temperatures and brighter light than the plant beside it. Such inconsistent growing conditions in turn produce inconsistent crops.

Purdue University researchers recently constructed an automated horizontal greenhouse to address this problem: plants constantly circulate around the greenhouse on conveyor belts. Consequently, no plant remains in one microclimate for too long, and all plants are exposed to nearly uniform conditions. This innovation allows horizontal farms to produce more consistent crops.

Hydroponics

In both vertical and horizontal CEA agriculture, farmers are looking beyond soil. For instance, many CEA farms are hydroponic: plant roots are submerged in regulated, nutrient-rich water solutions rather than soil. Hydroponics not only allows detailed regulation of nutrient and pH levels but also minimizes water usage by recirculating water. Further, hydroponics allows plants to grow more quickly and closer together.

A hydroponic greenhouse.

One variation on hydroponics is aeroponics: plant roots are placed not in soil but simply in the air. Surrounded by oxygen, vital for cellular respiration, plants are frequently sprayed with mist containing water and dissolved nutrients. This process not only reduces water usage by up to 98% but also increases plant nutrient levels, offering potential health benefits for consumers.

Another twist on hydroponics is aquaponics, in which a plant growth environment is coupled with a fish tank. Fish provide nutrients for the plants, which in turn clean the water for the fish. Nevertheless, the aquaponic system is not perfectly self-sufficient: aquaponics requires significant electricity to heat and circulate water and often utilizes supplemental water filtration systems.

Cost-Benefit Analysis

The benefits of CEA are numerous. By growing plants inside, CEA minimizes or even eliminates the need for pesticides, which are not only potentially detrimental to human health but are highly water-intensive to produce. Additionally, grown in optimal conditions, plants mature faster and more consistently. With CEA, crops can be grown in population-dense urban areas; thus, fresh, nutritious, locally grown crops can be delivered at reduced transportation costs.

CEA’s advantages, however, come at a high monetary cost. CEA technology is expensive. Simply building a modern greenhouse equipped with LED lights, O2 and CO2 monitors, and ventilation systems is a costly enterprise. Additionally, CEA requires a constant supply of electricity, which is both expensive and poses environmental risks. Even greenhouses powered solely by renewable energy create challenges: solar panels, for instance, are expensive. Further, using solar energy to simulate sunlight for indoor crops seems convoluted, especially considering that outdoor crops simply use free, natural sunlight. CEA also requires space. In urban areas, where CEA offers great potential, real estate is especially expensive.

The many costs of CEA often translate to higher prices for consumers, especially for commodity crops. For instance, producing a loaf of bread with CEA-grown wheat costs roughly $11. Currently, CEA is most economically viable for expensive, highly perishable specialty crops, such as tomatoes and lettuce, grown on a large scale.

Investment Opportunities

Although CEA is not set to replace traditional agriculture in the near future, investors are nevertheless exploring CEA’s potential for feeding our growing population sustainably. There exist several private fund investments in the space. Ceres Partners, for instance, is investing in greenhouses, aquaculture, and specialty crops as well as CEA artificial intelligence systems. Equilibrium Capital, a sustainability-focused investment company, manages an extensive CEA private equity fund platform.

An exciting new investment opportunity in this area is Global X AgTech & Food Innovation ETF – KROP, first listed on Nasdaq in July of 2021. KROP identifies and invests in trailblazing companies in the food and agriculture sectors. The focus of these companies ranges from food waste minimization to agricultural robots to dairy alternatives to CEA. KROP has only $2.3 million under management today, but we will continue to monitor its development as a potential purposeful investment in the essential food and agriculture sector.

As the global population continues to grow, nature’s unpredictability poses a hazard to the traditional agricultural system. Boasting efficiency and reliability, CEA offers a promising niche complement to traditional outdoor agriculture and an exciting opportunity for sustainable innovation for the benefit of humanity and the planet. To learn more about sustainable, ethical investing, contact Servant Financial today.

Investing with Purpose: Mid-Year Reflections and Resolutions

Written by Olivia Glunz

Investing with Purpose isn’t an oxymoron. At Servant Financial, we believe that profit and principles go hand-in-hand. In early 2021, we identified five purposeful investing opportunities for this year and beyond. In light of the COVID pandemic, turbulent economic conditions, and the accelerating sustainability movement, we predicted growth in ESG investments, alternative investments, essential businesses, inflation hedges, and education.

As we pass the halfway point of 2021, we take the opportunity to reflect: were our predictions directionally accurate? Simultaneously, we look forward: what developments do we expect over the remainder of the year and beyond?

1. ESG Investments

ESG, or environmental, social, governance, refers to a company’s attitude and behavior toward its employees and community. ESG investing prioritizes the wellbeing of employees, society, and the earth. This trend is especially appealing to millennials and women, who continue to demonstrate their support for ESG investments in 2021.

In the first quarter of 2021, US sustainable funds set a new net inflow record of $21.5 billion. One analysis of 27 ESG funds from December 31, 2020 to May 17, 2021, found that 16 of the funds outperformed the S&P 500. ESG has become a momentum factor, as ESG funds and their underlying equities attract more fund flows which beget more fund flows. Experts predict that the sustainability market will only continue its tremendous growth—by 2030, the ESG market could reach $1 trillion.

Servant Financial’s ESG research continued in 2021. In recent articles, we explored markets and trends in energy storage, organics, and carbon credits. At Servant Financial, we are committed to learning and innovation to help you invest in a sustainable future.

2. Alternative Investments

Alternative, or nontraditional, investments not only diversify your investment portfolio but have tremendous potential to benefit communities in unique ways. Alternative investments look beyond traditional stocks and bonds: real estate, infrastructure, gold, and bitcoin are just a few of the myriad alternative investing possibilities.

Servant Financial has identified farmland as a meaningful and profitable alternative investment. Traditionally, the farmland market has boasted high returns and low volatility; furthermore, investors profit not only from land value appreciation but also regular rent collection.

Farmland, however, is more than a vehicle for profit—it provides a means for doing good. In January 2021, Servant Financial partnered with Farmland Partners (NYSE: FPI), the farmland industry’s leading REIT,  to launch the Promised Land Opportunity Zone Fund. Promised Land purchases farmland in Qualified Opportunity Zones, economically-challenged areas designated by the IRS for preferential tax treatment. After acquiring the properties, Promised Land improves the farmland, perhaps by upgrading irrigation and drainage systems, increasing grain storage, or installing solar panels or wind turbines. In turn, land improvements benefit investors and farmers and revitalize rural communities.

Since its launch, Promised Land has acquired over 3,700 acres of farmland in three states, and the fund continues to grow. Witnessing our Promised Land vision materialize encourages us to continue to invest with purpose.

3. Essential Businesses

Over the past 16 months, the tumultuous events of the COVID pandemic have underscored the necessity of essential businesses. Crisis forced reconsideration of priorities, needs, and wants: ultimately, humans need food, shelter, healthcare, and energy. Over the past months, essential industries have demonstrated substantial growth, with impressive performances from the energy, real estate, and healthcare sectors.

Investing in these essentials, however, is not only financially savvy but socially impactful. In a recent article on the food industry, we highlighted the prevalence of food insecurity in America. Tragically, over 10% of American households experienced food insecurity in 2019. Further, about 19 million Americans live in food deserts, areas with limited access to food. Especially vulnerable to food insecurity are rural counties: 87% of the least food-secure counties are rural.

US food desert map.

These surprising, grievous statistics motivated us to take action. Why not augment Promised Land’s strategy—investing in and actively improving farmland in rural Opportunity Zones—to combat food insecurity in these communities? Currently, we are mapping the overlap between food deserts and Opportunity Zones. After identifying target counties, we plan to evaluate strategies and partnerships to invest in and improve food access in these vulnerable regions. Our two-pronged approach—improving both farmland and food access—will address food insecurity on both the production and distribution levels.

4. Inflation Hedges

Groceries, gas, hotels, hospitals: as any post-COVID consumer can attest, prices are on the rise. In the past year, prices have increased by 5.5%, the highest rate of inflation since 2008. While economists foresaw price jumps in the wake of the economic emergence from the pandemic, inflation rates have been higher than predicted. Although many experts are hopeful that inflation rates will dissipate as economic conditions normalize, continued inflation is a distinct and alarming possibility.

High inflation rates threaten investors; investment shares may be stable or increase in price, but if their growth rates cannot keep up with inflation, then these assets lose real worth.  For example, US 10-year treasuries nominally yielding 1.3% have a negative real yield of (4.2%) with an inflation rate of 5.5%. Intent on protecting the value of their assets, investors are increasingly turning to inflation hedges, investments which boast relatively stable or diminishing supplies, i.e. scarcity value. While the value of the dollar decreases, inflation hedges like gold, bitcoin, commodities, and real estate resist price fluctuations or may rise in value with inflation.  For example, farmland values are highly correlated with inflation.

Correspondingly, the prices of inflation-protected assets are important indicators of current inflation trends. Although gold value has slightly declined in the past twelve months, prices remain significantly higher than before the outbreak of the pandemic. Meanwhile, bitcoin prices have fluctuated greatly over the course of the pandemic; nevertheless, bitcoin prices are currently three times the price of twelve months ago.

As Federal Reserve Chairman Jerome Powell’s recent comments indicate, inflation rates will likely remain high in the coming months; the Fed has signaled markets that it will allow near-term inflation to run higher than its 2.0% inflation target. Consequently, savvy investors should consider safeguarding their portfolios with inflation hedges.

5. Education

Education is both personally and economically empowering. Teaching skills essential for high-wage jobs, education develops human capital, increases earning power, and alleviates poverty. According to UNICEF, an individual’s income increases 10% with every year of education received.

Conversely, barriers to a quality education hinder development; this fact has caused particular alarm during the pandemic, as many students were forced to pivot to virtual or hybrid learning. The fallout from this transition is staggering: 97% of educators report that students experienced at least some learning loss, while 53% described that learning loss as significant. This learning loss translates to real earning loss. McKinsey & Company predicts that white students will experience a 1.6% annual income reduction and Black students a 3.3% annual income reduction because of substandard virtual learning.

Educators report learning losses during the pandemic.

As these disturbing statistics indicate, improving and investing in education and educational infrastructure is urgent. Edtech companies are one appealing option. Innovative technologies enable independent learning and could allow students to make up for learning loss. Further, as the pandemic’s resolution remains uncertain, developing more effective virtual learning technologies and investing in broadband and other infrastructure in low-income communities is crucial.

Charter schools, high in demand especially in low-income communities, provide another investment opportunity. Investors can provide low-interest loans or purchase charter school bonds.

Finally, we believe there exists a strong correlation between Opportunity Zones (low income communities), food deserts, and educational deserts. In the coming months, we plan to explore this overlap and devise investment strategies to improve the lives of children and families across the country.

 

2021 has witnessed both frustration and excitement, turmoil and healing. Although the details of our post-COVID world remain uncertain, we are hopeful that the future will bring stability and opportunity. As we reflect on the past six months, we remain confident that our investments can build a bold, auspicious tomorrow. ESG investments, alternative investments, essential businesses, inflation hedges, and education provide opportunities to make a profit while making a difference. From farmland to food access, education to renewable energy, investing with purpose addresses societal challenges with integrity, creativity, and compassion.

Promises and Pitfalls: the Uncertain Future of Carbon Credits

Written by Olivia Glunz

Modern-day Americans enjoy a standard of living that our forebears could only have dreamed of. Cell phones and computers, ready-made clothes and food, airplanes, microwaves, and air conditioning contribute to our convenient, comfortable existence. We can access food, transportation, friends, and entertainment with a few choice taps of a handheld screen. Still, our easy modern lifestyle has drawbacks. Although we no longer rely on bodily energy to heat our houses, travel, and obtain food, these activities nevertheless require energy—mechanical energy. Today, humans benefit from the convenience of an industrialized world… but at what cost?

5.1 billion metric tons. That’s the amount of energy-related carbon dioxide the US emitted in 2019 alone. Carbon dioxide, or CO2, is a greenhouse gas. Like methane and nitrous oxides, CO2 traps heat in earth’s atmosphere—the so-called “greenhouse effect” keeps our planet warm and hospitable for life. However, many scientists suspect that the rise of human industry, especially in the past two centuries, has unnaturally elevated atmospheric CO2 levels, which, in turn, result in climate change.

CO2 levels over time

Rising ocean levels, droughts, and severe storms are just some of the phenomena attributed to climate change, a controversial issue, to say the least. While some experts believe that climate change poses a dire threat to our planet, others are more reserved. These climate change “skeptics” do not necessarily deny climate change; rather, they believe its severity and its connection with CO2 levels are exaggerated.

However one views the climate controversy, all can agree that climate change is an influential political issue. Intent on mitigating the “climate crisis,” activists are targeting all areas of human activity in the name of the environment. Business and industry, closely tied with fossil fuels and greenhouse gas emissions, are an especial focus. Environmentalists have proposed numerous plans to regulate, limit, and improve industry with the ultimate goal of net-zero emissions. One particular strategy, although still nascent, is gaining prominence: carbon credits.

What are Carbon Credits?

Harnessing the power of markets, carbon credits incentivize businesses to reduce greenhouse gas emissions. A carbon credit, also known as a carbon offset, is a license to emit one metric ton of CO2 or the equivalent amount of another greenhouse gas. Based on its size and nature, a business receives a certain number of carbon credits. If a business desires to emit more CO2 than its credits permit, that company must purchase subsequent carbon credits. Conversely, should a business emit less CO2 than its allocated carbon credits allow, the company may sell its unused credits. Furthermore, businesses which actively engage in carbon sequestration (for instance, by planting forests, reducing tillage, or implementing crop rotation) are awarded carbon credits. In this way, businesses are penalized for increasing emissions and profit from reducing emissions.

Currently, participation in the carbon market is voluntary.  Committed to achieving net-zero emissions, numerous corporations—including IBM and JPMorgan Chase—are purchasing carbon credits through Indigo Ag’s carbon marketplace. Indigo not only advises farmers as they implement carbon sequestration but also verifies the efficacy of these methods by analyzing agricultural data and soil samples. Successful sequestration produces verified agricultural carbon credits. When eco-conscious companies purchase credits through Indigo’s marketplace, farmers profit. Other groups at the forefront of the carbon offset initiative include Nori, a carbon marketplace similar to Indigo, and Verra, which develops standards for awarding carbon credits.

Iowa farmer sequesters CO2 for cash through Nori

Many climate activists envision a compulsory carbon market, known as a compliance market. In this scenario, the government mandates and regulates the carbon market in a cap-and-trade system. Government officials allocate carbon credits, oversee their trade and creation, and certify that businesses comply with emissions requirements. Select jurisdictions, including California and Europe, have already implemented partial compliance markets for certain companies or industries.

Controversies and Concerns

Like the problem it proposes to solve, the carbon market is controversial. Most obvious are the logistical issues: in a compliance market, how will carbon credits be allocated? Will individuals or only companies be compelled to participate in the market? How will carbon pollution be measured? Must every pollution-producing activity, no matter how minuscule, be reported to government regulators? How will startups be treated? Will carbon credits cripple innovation? Cheating is also a concern. Selling phony carbon credits, underreporting carbon emissions, and double-counting carbon sequestration practices are just some of the many opportunities for dishonesty.

Additionally, some environmentalists argue that carbon credits will actually harm the environment by taking the onus off of major polluters. Rather than compelling large corporations to reduce their personal carbon emissions, the carbon market allows them to take credit for the carbon reduction of others. Why should companies change their reliably profitable practices when carbon credits allow them to keep polluting for a small fee?

Furthermore, is agricultural carbon sequestration actually effective? Studies measuring CO2 levels only in the soil’s upper inches produce optimistic findings; when scientists dig deeper, however, the results are less encouraging. Several comprehensive studies show that no-till methods merely change the distribution of CO2 in the soil—more CO2 is stored in the upper layers than the lower layers—rather than sequester more total carbon. Other scientists are skeptical of the benefits of cover crops, which may actually induce microbes to release carbon from the soil into the atmosphere.

Although their prudence and efficacy remain uncertain, carbon credits are indicative of the larger ESG investing trend. Eco-conscious companies, policymakers, and investors are turning to markets to encourage responsible business practices and forge a sustainable future. To learn more about investing with purpose in ESG, contact Servant Financial today.

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