Investing in Regenerative Agriculture and Food
Investing in Regenerative Agriculture and Food podcast features the pioneers in the regenerative food and agriculture space to learn more on how to put our money to work to regenerate soil, people, local communities and ecosystems while making an appropriate and fair return. Hosted by Koen van Seijen.
Investing in Regenerative Agriculture and Food
207 Brandon Welch and Phil Taylor – Updates with Mad Capital on how to enable billions to flow to regen organic farmers
A check-in conversation with Brandon Welch and Phil Taylor, founders of Mad Capital and Mad Agriculture, to talk about Perennial Fund 1 and 2, the lessons learned and building the vehicles to finance transition and funnel billions into the space.
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A long overdue update with Phil and Brandon, the founders of MAD Capital. We talk about Perennial Fund 1, which by now has put over 10 million skin-in-the-game transition finance to work. We capture their lessons learned, for instance, why revenue-based finance didn't work and how Perennial Fund 2 will look like. Plus how they're planning to push hundreds of millions into region organic farming through MAD Capital and help to speed up the markets for these crops through MAD Markets. So much to cover in so little time. Enjoy! This is the Investing in Regenerative Agriculture and Food podcast, investing as if the planet mattered, where we talk to the pioneers in the regenerative food and agriculture space to learn more on how to put our money to work to regenerate soil, people, local communities and ecosystems while making an appropriate and fair return. Why my focus on soil and regeneration? Because so many of the pressing issues we face today have their roots in how we treat our land and our sea, grow our food, what we eat, wear and consume. And it's that we as investors, big and small, and consumers start paying much more attention to the dirt slash soil underneath our feet. To make it easy for fans to support our work, we launched our membership community. And so many of you have joined us as a member. Thank you. If our work created value for you, and if you have the means, and only if you have the means, consider joining us. Find out more on gumroad.com slash investing in regen ag. That is gumroad.com slash investing in regen ag. Or find the link below. Welcome to another episode. Today, we have a check-in one with Brandon and Phil of MAD Agriculture, the Perennial Fund, and MAD Capital. That's a lot to unpack there, and I'm really looking forward. The last time was April 2021, so we're now at the end of 2022, and probably when you listen to this, early 2023. So it's a full year and a half plus, actually, a year and nine months. And in the history of MAD, a lot has happened, and in the history of the world as well. So I'm very happy to have both of them joining us again. Welcome, Brandon. Welcome, Phil.
SPEAKER_02:Thanks, Ken. Thank you. Thanks, John. Happy to be here. Yeah, a lot's happened last year and a half.
SPEAKER_00:And of course, welcome back. So let's start with the thing most people know you best for, which is the Perennial Fund One, which suggests there's a two and we'll get there. But the Perennial Fund One was and is actually a radical skin in the game approach to put about 10 million, I think, to work with farmers in the transition, part of their farm or their full farm or expansion or a lot of that was the idea. originally even revenue-based, but I think you let go of most of that. What's the current status of, I think you say, PF1, right, internally in MAD?
SPEAKER_02:Yeah, PF1. So last we spoke, April 2021, we were just rounding the corner on closing that fund. We closed it in February of 2021, started making our first loans. In April at that point, we had probably closed, call it four to six loans total. Since then, over the last 18 months roughly, We've now made 36 loans. We're working with 24 farmers in 13 states, primarily the upper Midwest. So think of it as kind of the corn and soybean country into the high plains where a lot of wheat and just broad acre grazing systems are. So the concentration of where most of our farms are kind of around the Minnesota zone into Iowa, Wisconsin and Illinois. But then we've got a farm in Vermont that we've started working with. one in Pennsylvania, Ohio. We have a cluster of growers up in Northern Montana and then another farm in Oregon as well. So we're working all across the U.S. We've deployed that full$10 million out of the fund. It's going really well. Collectively, those farms manage 44,020 acres and they're transitioning 6,920 acres to organic because of that financing. So we've been just really excited and And really grateful for all the, I think, just positive feedback that we've gotten from farmers, from the market, from investors. And it's going really well. And according to plan so far, I mean, so well that, you know, we've now launched Mad Capital and we're thinking about Perennial Fund too.
SPEAKER_00:And so what are the biggest lessons learned? Because 10 million sounds like a lot and nothing at the same time. And it was all raised from, and we get why, but all raised from impact investors and, of course, quite expensive capital. But still, you managed to to get it out of the door and work with farmers, even though in some cases they might have had access to cheaper capital. How did you get, like the 36 loans, did it finance what you were thinking at the beginning it would finance, or were there big surprises there, what you ended up financing actually with these farmers?
SPEAKER_02:Yeah, I think the biggest surprise for us was we ended up switching the model from revenue-based financing, where during the organic transition, we would take a portion of gross revenues during those transition years, which is 36 months from the last application of a prohibited substance. And then once a farm reaches certified organic, we would continue sharing in that revenue. So we'd be riding the revenue decrease during that organic transition. And then also on the other side, when it's higher kind of ROI per acre and per bushel that they're selling, we would then share in that upside with farmers. What we ended up learning was that- We can make cool looking graphs around it.
SPEAKER_01:And it's worked well across the world for a lot of kind of risk forward development projects where you look at like hydro or solar, like build and operate transfer revenue model finance has been a really powerful model. So we thought that we could have brought it over to this sector with relative ease, but I'll pitch it back to you to kind of talk about the problems we discovered.
SPEAKER_02:Yeah. And
SPEAKER_01:intellectually
SPEAKER_02:it made sense on paper, on the economic models, it made sense in field and talking with, farmers, we were receiving a ton of good feedback. Farmers were saying, this sounds great. We would love for you guys to be in the saddle with us, ride it through the transition and to the other side. And then when it came down to actually collecting farmers' balance sheets and income statements and building the financial model with them and starting to paper the loan, we started getting a lot of just hesitancy, a lot of just unexpected friction in many ways. People were slow rolling it. They farmers were unsure as to whether this was the right decision. I think what we ended up learning from that was that because it was so new and unconventional in many ways in ag finance, farmers felt like we were trying to dupe them or pull one over on them. And we weren't by any means. I mean, we were showing all of our cards. It was just so different than what you find from the conventional debt system that it was just shaking things up a little bit too much. So we ended up alternating the model and moving over to a standard interest rate where we ended up essentially getting at the same type of payment schedule that a farmer would have had with a revenue share. But instead of calling it a revenue share, we call it a bridge loan and we vary the principal payments during organic transition. So we just lower the amount of principal that they're paying to try to match the cash flow of the farm. And they're paying interest plus call it an where 30 to 50% of the principal balance of the loan during those transition years. And then once they hit certified organic, they can either continue with that note structure as we outlined, or we could restructure it, refinance the note, and then get them on payment terms that make more sense for their farm at that stage, because we'll have much more information once they're certified organic in terms of market price and how much land they're managing and how well they've been able to kind of operationalize the initial plan. So that was a big learning for us. I think just the difference between what people say and do, whether that's investors or farmers. It's really important to put an MVP out in the world and actually test real world action, real world results. And we went through it with a$10 million fund and 42 investors. And it was a lot of communication and making sure we had everybody on the same page as we were just pivoting in real time because we needed to deploy that capital. And there were a lot of farmers asking for it. And there was just a lot of sensing and learning in order to stitch that market together and to put it to work. And, you know, now it's gone very well over the last 18 months at the time. It was it felt like everything was transforming fairly rapidly. Looking back, you know, it's actually felt like a pretty timely deployment of the funds. And I think we acted accordingly. So that was that was one of the big lessons. Yeah. Do you
SPEAKER_01:have anything? I'm saying the same vein, just like lessons in product marketing. fit where I feel like when in an innovative company, you're constantly in this tension between offering what the world wants and what you want the world, what you think the world should want. And there's that tension. And so we thought the world should want a revenue based financing vehicle because of all of these sort of skin in the game ethics that we're driving that sort of model. And in the end, you know, I remember sitting under a gigantic oak tree with an old farmer who was 85 years old. And he just looked at Brandon and I with like such a surly look. He's like, you know, just basically it came down to like the guts of like a return cap. You know, if we're having like a percent revenue share, he's like, well, what if I do really well over the next two years and I owe you 20% of my revenues? He's like, my effective interest rate is going to be like 40%. And, you know, Brandon and I are both looking there without a great answer. And I remember that moment pretty clearly and it stuck with both of us. And so the art of kind of finding product market fit where you're sort of offering something that the world's willing to uptake and speaking that language while also calling something above and beyond, working at the margins of change where things need to happen is just such a delicate and artful process. And I would say that we learned a lot about that evolution and that tension in the in the early work of the perennial fund. I would also say what we learned in the perennial fund is that the entire perennial fund thesis was built around the idea that transition finance was a huge gap. Traditional bankers would laugh farmers out of their office because they would say, hey, I'm going to lose money for a few years, but if you can stay with me, it's going to be good. Bankers don't get that. They don't underwrite on future cash flows. And so You know, we learned though that that transition finance while an awesome kind of entry point in the market is definitely not enough. And this is kind of one of the big inspirations for Madcapitals that when you lift the hood on a farm and you look at the sort of blend and the portfolio of loans they have, you know, it's everything from traditional mortgages to term notes, equipment loans, you know, outside the farm gate value add infrastructure, there's all kinds of stuff going on. And so I would say the other big learning is, is that transition finance Is it enough? It's definitely an awesome entry point. It's something that's definitely kind of higher risk, mission driven, pre-commercial. Not many people are doing it. We're still some of the only people I know in the world that are actually doing transition finance. But what it's let us do is it's as we've gotten to know farms and really understood the financial position of farms and the financial health of farms, it's let us expand our kind of vision and scope of work into a kind of a suite of other financing options that we're developing for for our farmers so i would say that's another big learning
SPEAKER_02:yeah
SPEAKER_01:i would
SPEAKER_02:agree yeah it's not transition finance alone that's going to get us there it's transition finance in partnership with traditional finance and that's a lot of what has informed our thinking over the last you know year to now launching mad capital and starting to build a two-part capital stack of blending both traditional financing and transition financing because they can work together in their different parts of the risk curve in terms of different structure, different appetite for collateral, for debt service, how much of it is historical looking and looking at a five-year balance sheet trend versus forward looking in terms of what we think we can project on cash flow in the future. And there's kind of an artful balance that we're now starting to walk within by managing Perennial Fund 1, starting Perennial Fund 2, but then also starting to work with banking and non-bank partners who want to flow financing into this space they want to finance regenerative ag they want to finance organic ag but they don't know how and that's where we can step in and help move kind of these big coffers or pools of capital into farmers hands
SPEAKER_00:and so perennial fund one now is closed it's out of the door it will it is paying back and will continue to pay back for as long as the loans are running and then pf2 like what what um what is the next step in that like, let's say, lineage? Are you going just to add a zero, 10x, and let's get 100 million into the space? Is that what is missing? Like, we need a lot bigger? Or actually, it is a model that's working, and we just need to tweak it, and we do another 10 million? Like, what is the current thinking? I know you're not completely done in fundraising. I think you're doing some soft fundraising around, or some conversations, let's say, around PF2. But what's the current thinking? What that role will be? And then we get to Matt capital, obviously, which is sort of the umbrella over these different structures and much more.
SPEAKER_02:It's a good question. So I want to caveat before I overspeak that we're very much still in development phase and learning from farmers, learning from investors and trying to find that right fit as to how far we can push this in terms of a new innovative model that's solving real problems, but then also recognizing the needs of the market, especially as we enter just a more turbulent kind of macroeconomic environment. So we're very much trying to be cognizant of both of those factors because there's an inverse relationship between investors wanting the most liquid, highest paying asset and farmers wanting to pay the lowest interest rate and have absolute surety that they're going to have access to that capital. And those two are the tension that we're living between. What we're thinking about for perennial fund too. So this is all apt to change. We are likely to go to market with a$20 to$25 million fund focused around junior debt. The reason for that is what we've learned over the last couple of years is that there's a variety of different capital types. There's senior debt, there's junior debt, there's mezzanine debt, there's private equity, there's more risk on equity, there's venture capital, there's this whole spectrum of types of capital. And there's a different thinking around how much risk that capital is willing to take and how much it needs to be paid in return for taking that risk. What we were operating in with Perennial Fund One was with a senior debt facility. We have to take first lien and have real assets as collateral, typically land, crop receivables, crops in the ground, crops in the bin, equipment, other types of fixtures, could be mobile infrastructure, but we're collateralizing and trying to hit a loan to value of 60% to 70%. In that first fund, we've hit a 59% LTV across all of those assets that we've been able to create. But what we've been learning is that farmers who are transitioning to organic or transitioning to regenerative organic, they may not always have a very large pool of equity kind of sitting on the side, whether that's a large land base that they own that they're ready to leverage up. They might not have the precedent for producing positive cash flows for the past decade. They might only have three or four years of experience. So So now that we've had more exposure and we're learning more about what capital markets would want to see, we're thinking that moving a little further out on the risk curve. So moving from senior debt to junior debt, meaning that we would be taking second position behind whoever the senior debt holder is, which in this case will likely be us as well through different facilities we're setting up. We can take a little more risk with the farmer in order to push the loan to value ratio higher than what you would find. at a traditional financing institution. So in the Midwest, call it Illinois, most community bankers will get up anywhere to a 60 to a 70% loan to value ratio. So if you've got a million dollar property you wanna buy, they will lend you anywhere from 600,000 to$700,000 on a first lien mortgage on that property. But the farmer is left to come up with the other 300,000 to$400,000 in cash, which is an enormous amount of cash to just have lying around So junior debt can fit within that myriad, that spectrum where you've got cash, which is just pure equity. It's liquid. It's ready to move. You've got senior debt, which needs to take first lean and take priority over that cash. Junior debt can be a sliver that can fit between those two. And how it can fit between those two is just in this example, you could have a$600,000 senior debt loan. You could have a$200,000 junior debt loan. facility come in. And then that farmer only needs to come up with$200,000 in cash because they've now utilized more creative financial structuring to enable them to purchase that property, to start building equity, to start transitioning the farm to a form that's more resilient and has higher ROI on the other side. And that's where Perennial Fund 2, our thinking is really around trying to create capital that's between what we see as this enormous gap between senior debt and funds and different financiers who want to hold all the collateral and assets and equity, because there needs to be some sort of a bridge between those two worlds, because there is that bridge in many other financial realms, whether it's I mean, clean energy, you know, being a perfect example, you could be building a solar field in Illinois, and there is probably going to be anywhere from a four to a six part capital stack that comes together there with senior debt, junior mezz, equity, There's the operating company that might have some sort of a kicker. And we think we need to take a lot of these learnings from other industries and bring them to agriculture and to regenerative ag to help facilitate that transition. So to sum it up, thinking about a$20 to$25 million fund to focused on junior debt, it'll be higher cost because of that, but it will enable the transition of more farmland for farmers who don't have as big of an equity base or the historical cash flow. And we believe that based on what we've been learning from farmers, from the market, and by actually testing this, we've been validating this verbally and through different financial models, through some of the farms we're already working with in Perennial Fund 1, there's been a lot of receptivity because it'll specifically help with land access in particular.
SPEAKER_00:And you see that there's, contrary to what you believed before, that there are enough local banks or local capital providers that want to take that senior debt and are looking like that kind of deals are there where you can plug in or you're doing that yourself as you just mentioned because you need at least one potentially two other parties if you have the equity party as well to be ready for you to put in the 200,000 or whatever the amount is to make this deal happen so these kind of deals are there or are quote unquote easy to initiate or to start or what have you seen like this I want to buy my neighbor and I need a million and okay how do I actually do that but I don't have all the experience or older that traditional finance is asking to easily put that together. Those kind of deals, there are enough of those to fill a 25 million fund, basically. That's what you're thinking now, or that's what your models tell you.
SPEAKER_02:Oh, certainly, especially since the focus is on real assets, primarily land, but the other piece would be infrastructure and kind of post-Farmgate real assets like a dry bean processing facility or a small-scale meat processing facility. These are things that can also enable enable more decentralized food system, but then also could increase margin to the farms that we're likely financing on the front end that are feeding into that facility as well. So we're thinking mostly real assets because in order to build confidence around the collateral base without discounting it too heavily, we need to know that there's a high degree of certainty in the appraisal value or the value of the borrowing base that's underpinning that. Because for us and for almost any debt shop, we're going to value real estate at a higher degree than something like a, you know, field of corn that's currently being grown. There's a higher amount of risk, whether, you know, a drought comes in or, you know, a hailstorm could destroy that or the operator could pass away. And who's going to come in and harvest that corn and harvest the collateral to then pay back the loan that we had initially made. So being focused more on, on the real asset side. So to answer your question about senior debt partner, we, At Madcap, we have a two-part capital strategy, starting funds to solve niche problems that farmers are experiencing, and then working with these banking partners, community banks, large multinational-type names, and then also non-bank specialty finance companies. These are middle-market lenders who have familiarity with ag and don't have a way to deploy their capital. What we're doing and what we've just done is we've just set up two of these relationships that'll be ready to fund.
SPEAKER_00:And why do they struggle to put money? If they have familiarity with ag, I mean, what's the need for you to be the middleman or to be that funnel builder, basically?
SPEAKER_02:Yeah, we found that because we are very focused, we're really niche in who we finance and who we serve, which is regenerative organic farmers or farmers transitioning to. We have built kind of this natural flywheel or gravitational force where when a farmer wants to transition more land organic or they're already organic and want to expand their acres, they'd rather work with a virtual line partner that's responsive, that understands their needs, that understands...
SPEAKER_00:Picks up the phone, understands what you're actually doing on the field.
SPEAKER_02:Yeah. Yeah, we get it.
SPEAKER_01:There's also this heterogeneity between the community banks and the farmers that they hope to serve. So you might have a community bank that really understands understands organic in Pennsylvania, they have a national charter and they have the ability to lend across the country. However, they don't have a line of sight on farmers in Montana that need that money. And the community banks in Montana, for sake of example, might not really like organic farmers. So there's this sort of mismatch and heterogeneity and spatial disjointing between the capital that wants and is able to flow into the kinds of farms that we lend to and where those farms actually are. The other side of it is that a lot of these specialty finance companies that we're working with don't have ag experience. They might have a mission-driven sort of orientation to their finance and their banking, but they don't have an ag lending arm and they would love to have exposure to agriculture.
SPEAKER_00:As they may be also already doing renewable energy and it's much easier, as you just described, like you have, I don't know how many people to work with and I don't know how many types of money you want to put to work and how many zeros that's I wouldn't say taken care of but the sector seems to be able to absorb in ag if you want anything sustainable let alone regen organic there's nowhere to go basically unless you buy your own farm and do it more or less
SPEAKER_01:yeah yeah I would say those are biggest kind of biggest sources of capital and that's how we're making we're connecting the dots and there's an enormous amount of energy you know at a high level we see it as a kind of a two-sided marketplace where you have you have farmers that need this kind of capital to make the transition and thrive and regenerate organic ag. And then you have financiers that would love to fund it. And oftentimes they don't know how to interact, find each other, speak the right language, you know, whether it's understanding probability of default and underwriting or, you know, credit analysis or whether it's simply just finding them and knowing them. And so a lot of what Mad Capital does is we're kind of an hourglass between that two-sided marketplace. And to do that, that hourglass has to send It's the relationships with our credit facilities, you know, which are for more standard and good credits, but it can do a lot of volume at low cost, which we can talk about. And then we have, you know, our strategic funds, as Brandon was mentioning, which are really for those like higher risk mission driven pre-commercial products. And, you know, the more that we use like perennial fund one, we use perennial fund two, you know, to sort of proof out the economic viability of things like transition finance. Those things will become more readily financeable in the market. marketplace right now, traditional credit doesn't know how to deal with that. Um, but I guarantee you 10 years from now, once we finance, you know, 40 to 50 more farmers, well, we'll be funding a lot more than that. Maybe a couple of zeros. Yeah. I was thinking specifically around the transition finance. Yeah. Sorry. Um, but, um, you know, people are paying attention already and, um, and it's not going to take long, I think for that to, to find purchase in the marketplace.
SPEAKER_00:Yeah. And then what's your business model as, as Madcap? Are you becoming then, I don't know, a consultant for these larger capital houses for a better word, or is there, because these are large amounts of money, but of course lower capital costs, hopefully for the farmers, because that's what you, one of the lessons of perennial fund one, it's quite expensive and very good for our transition and for, for the riskier things, but not necessarily for everything. So is there enough space for you? Like where, where do you fit in as, as Madcap though, which is definitely a company, which fully disclosure, we're a very, very small investor. Yes.
SPEAKER_02:And thank you for that. Very excited to have you. The business model. So I just want to make sure we hit on, but I'll circle back to your other question about the senior debt partners and the different community debt partners as to how they could enable junior debt. But our business model is essentially like most financial institutions. We collect an origination fee at the front end and we collect a servicing spread. So by creating pipeline and by creating a place for these capital actors on the other side of our business to have a spot to place low-risk capital into regenerative organic farmers to meet their ESG mandates, to be able to have a spot to move into that asset class, we are able to collect a portion of that value that we're generating via servicing spread and then an origination fee. So these are low single-digit businesses. This type of business is isn't an Amazon-type margin business or some sort of a B2B SaaS company. I mean, we have to move millions
SPEAKER_00:and millions of
SPEAKER_02:dollars through the funnel in order to capitalize our business and build a resilient team that's able to positively cash flow. So for us, we just went through a fundraising round. We just raised$4 million and closed that up a couple of weeks ago from folks like Trailhead Capital, who led the round, Homecoming, Bonaventure, Lace Spark, your syndicate was a part of that, which is great. And, you know, we're using that capital as the runway in order to kind of build our pipeline and build our loan financing machine of mad capital in order to hit the type of loan volume on a monthly and yearly basis to then be able
SPEAKER_00:to- Just to get an idea, like, do you need that? Like, is that 50 million a year, hundreds, billions? Like what kind of zeros in a book you need to- to have a comfortable, let's say, machine or a comfortable flow? What are we talking about in terms of volume? If you say we need large volumes to make this work?
SPEAKER_02:Yeah, we could make it work on a fairly lean budget at around$50 million a year if we were doing$50 million a year in loan volume. Our goals are much bigger than that. We're more ambitious than trying to finance$50 million a year because if you look at farmland in Iowa or Illinois that's selling for$15,000 or$20,000 an acre, that money doesn't go as far from an impact perspective as we'd like to see. So we, you know, have ambitions of trying to originate roughly 75 to 80 million in new money next year. And then beyond that, double year over year for the next, call it three years. At that point, you know, growth may start tapering down unless we find additional kind of distribution channels, channel partners, and moving into other geographies. But, you know, back to the initial conversation around product market fit, we have a lot to learn and we're just we're getting out there. So we're really confident with the pipeline that we have that we're going to be able to hit positive cash flow, targeting to do that into next year. And it could take into early 2024 because, you know, interest rates are rising. People are tightening up as we, I think, just recalibrate to the type of environment that we're in right now. But I just wanted to circle back to your point about the junior senior debt that we are gonna be the senior debt holder for the junior debt slug coming out of perennial fund two. And that's largely a product of just risk management in order to properly make sure that those assets that are being held by the senior debt partner being us are being managed properly. And we have some form of recourse if a farmer does not pay or we're not able to restructure the junior debt facility in order for that farm to cash flow, we need the flexibility and have essentially the stick in order to get creative with how we could restructure the note to have the farmer on a payment schedule that they could adhere to or to use that collateral as a second form of repayment if necessary. That's obviously the last option and we never want to go there or have to pursue that. But we do have to think in that way because debt is all about mitigating downside, not maximizing upside, where Junior debt is kind of in that middle zone where we need to mitigate downside, but we can also realize a reasonable upside. And then as we go further out on the spectrum, as we maybe have our own pools of equity in the future, that will be about maximizing upside. And you still need to manage downside, but it's less of a concern or focal zone because the returns are so much higher. So we're starting to calibrate as an organization our different needs. means of managing risk as we move further out on that curve and into different pools or segments of capital.
SPEAKER_00:And you alluded a few times to we're living in interesting times, let's say. What does that mean for you in general, perennial fund one and two, like interest rates are rising, input costs are going through the roof. We're definitely still in a war and it's very different than April 2021 when we talked last time or even a year ago. What does it mean for Matt? Apart from that, of course, the mission is stronger or as strong as ever. But what does it mean practically if you're financing these farms? What opportunities are there of certain things and definitely what challenges are there as well?
SPEAKER_02:Yeah. Just to hit it on the head, higher interest rates are going to put pressure on the market for people to borrow less. Our business is selling money. And if we're selling more expensive money, it's going to be harder to sell that money. So we're very aware of that and finding different ways to mitigate and kind of skirt around that by also offering solutions to problems that other banking partners are not offering. By coming out with Perennial Fund One by going to market with Perennial Fund 2. We're thinking through different ways of how we can move off of kind of that more traditional senior debt and then incorporate more niche solutions. So that's an attractor that we find for many farmers because we're offering more flexible structures that they can't get at their community bank. So I think that these higher interest rate markets are going to put some pressure on the market as we recalibrate and reset towards what is the new normal. Unfortunately, I think the The new normal is going to be rates around what we're seeing today. The Fed is likely to hike again in December before maybe start tapering and call it mid-2023. It's hard to know where this will ultimately go. But this is the new environment that we're in until inflation really starts getting suppressed and starts hitting lower to mid-digits. Once we're in the 4%, 5%, 6% zone and not printing 8% CPIs, we're going to be in a different higher interest rate environment. And the reality is that farmers need capital to operate effectively. And especially in an organic system, if you can borrow at 7%, 8%, or 9%, you can take that cash and you can produce return on your invested capital of maybe 20% to 25%. It's still a good economic decision in order to do that. So we're seeing that organic itself is slightly insulated compared to conventional systems, which operate on on super tight margins. You're talking 1%, 2%, 3%. It's just hyper-commodified, protected by insurance. They don't have many decision points in order to increase their margin and profitability. So that does make us a little nervous, but then we always go back to that. That's the really high macro, but then just going back to the fact that we only have to be working with, call it 75 to 100 new farmers next year in order to hit our numbers. And we know in are in conversations with at least that many farmers. And that's before even kind of turning on the, you know, sales and marketing engine, which we're pretty excited to do into 2023. We have some great partnerships that are coming. So I think it'll put pressure on the market at the top level. But with us at the size that we are today, we are still going to be able to find good farmers and good deals in spots to place this capital in a, you you know, I think a really high quality sense. We're going to be able to find the debt service and the LTVs that we need in order to put it to work.
SPEAKER_01:I would also add to the likes, you know, 7, 8% interest seems crazy, but historically it's not at all like coming out of a 3% interest rate environment, which we just came was like historically extremely low. And so I think that, you know, we tune ourselves so quickly to cost the capital and anytime it creeps up, we scream and flail. And that's not to say that we don't have tons of indicators saying we're going to a recession, there's going to be other problems. At the same time, our farmers can bear 7%, 8%, 9%. Their yield on regenerative organic production can outperform that. Even though that cost of capital is higher than what we'd like, it doesn't have to be that burdensome in the way that most people might expect it to be.
SPEAKER_00:On the market side, do you see that? The premiums are still there and put potentially lower inputs obviously helps or lower inputs or being much more resilient. Do you see the business case getting better or at least holding up for farmers out of the transition or beyond the transition?
SPEAKER_02:Yeah, we found that the business case has held up. Organic premiums above conventional are still roughly 2x. They've maintained themselves over the last decade with, I think, just periods of kind of contraction and expansion. But there's a lot of of uncertainty in the world right now, whether it's, you know, geopolitical issues with Russia, Ukraine, or, you know, interest rates and just kind of macro issues. And I think because of that, people are also starting to look domestically towards creating more food sovereignty for the United States and more, just a higher degree of, you know, defense around like, can we grow food here? And can we get by if we need to? And with import markets, just, you know, I think being in the potential scope of being disrupted, we've seen that demand here in the U.S. for U.S. grown organic crops continues to grow. And those premiums continue to maintain themselves. We believe that that'll continue for the next decade unless suddenly, you know, mad capital is so successful that we start transitioning millions of acres faster than we thought. And we start suppressing, you know, the price, they're increasing supply of those products. But that's pretty... It's a long way off. It's the best scenario. It's the best scenario that's pretty unlikely. But I would love to see organics on price parity with conventional food. I would love for people to be able to walk into the grocery store and to be able to make a decision to buy chemical-free food and not have it cost 30%, 40%, 50% more than the conventional counterpart. But we're still in that world. And for farmers, it's great. For general society, it puts pressure... on just most people who can't afford that food. The bottom 50% of Americans are generally not buying organic because it is expensive. It's more expensive than what you can find instead of buying conventional Cheerios or Frosted Flakes or something like that.
SPEAKER_00:And in the general world of MAD Ag, what is happening there, Phil, on the market side? I mean, the umbrella of MAD is wider than MAD Capital, PF1, PF2. What has happened over the last year and nine months or 10 months or so?
SPEAKER_01:Yeah, I mean, tons of stuff. I mean, the successful fledge of MAD Capital out of the nonprofit. The nonprofit is where we incubated the Perennial Fund One. And now everything we were just talking about is really in MAD Capital PBC public benefit corp. And so, you know, we're tied together by kind of mission, vision, a charter of virtues, and basically we share the same brand. But beyond that, now Mad Capital has really the independence and freedom. It has a separate board. It has a separate governance. It has the independence to find product market fit and capitalize in the way it needs to capitalize. And so that transition has been a really big shift, a really exciting one for us that, you It took us a while to pencil out. It's pretty unconventional to sort of hybrid, not hybridize is the wrong word. I would say it's unconventional to play in the landscape of four nonprofits while remaining toward the same kind of North Star. And so that process has only been done by a few other people that I know about. And so that's been really good. We're through that, which feels nice. And the other realms of Mad Ag are mad markets team is following very much the same trajectory as MAD Capital. We have been working really hard in MAD Markets to connect our farmers to values-aligned buyers. Those include, in many ways, CPG brands to get started. CPG brands often sort of drive with the most overt mission. My vision for the future of food is not necessarily a bunch of packaged goods on Whole Foods shelves, but it is a nice start It's where you find a lot of mission alignment. And so we've been working with a lot of CPG companies, I think over 25, really helping them discover, design and implement their regenerative sourcing and climate action goals. And the way that we've been doing that is helping them kind of plug into our network of farmers to their procurement and supply. And so that's all going really, really well. You know, there's basically we've evolved mad markets into kind of three core value offerings. One is that kind of consulting arm where we help lift the hood on brands and help them figure out that strategy for regenerative supply. On the other end of the spectrum, we help farmers basically broker their crops into those markets. So we basically take a whole portfolio of crops and match make them with folks. I can't tell you all the names, but basically a lot of really awesome And then in the middle of that, we are now starting to move and look more closely to actually acquiring assets, infrastructure. What we found is that most of the work happens where you aggregate, process, clean, bag, tag, and deliver wholesale ingredients. Without really moving into that space, we are really limited to do some of the more creative things that we do. regenerative revolution needs, things like, you know, tying impact to crops or reimagining how we contract or rebalancing, you know, the power in sort of price negotiations between, you know, what the buyer and the farmer gets. There's all of this innovation that happens basically in the middle of the country where infrastructure exists. And so we're taking a really close look at actually moving into owner operator of strategic assets across the country. And we're well on our way of making the first acquisition probably, you know, come Q1 of next year, which I can't say anything about yet, but we're super excited about.
SPEAKER_00:It's going to be exciting. But so did I miss it? But Matt, market is going to spin out as well. You're going to repeat the process you did with Madcap and it's going to be a for-profit under the bigger Matt umbrella.
SPEAKER_01:Yep.
SPEAKER_00:Very cool. And are you then looking as well or pushing these partners on like recipe changes or like You cannot just buy one cash crop. You really need to go for rotations. Like the big food redesign that the report of the Ellen MacArthur, that we cannot just focus on one cash crop and let the rest of the rotation being taken care of by the farmer. Like we need to imagine, what is it, the rotation risotto that Dan Barber always talks about. Is that something that's literally on the plate?
SPEAKER_01:Literally on the plate. Yeah, we're doing a lot of kind of multis crop rotational selling. This is part of the power of our brokerage program where, you know, when we have the whole crop portfolio on the farm and we're matchmaking that against various buyers, we can then stitch together a variety of crops and kind of think about whole rotations in a new way that, you know, most folks can't do. The other thing that we're doing a lot of, which I can speak to, is our Mad Markets team is basically the marketing arm of the Perennial Promise Grower Co-op. Those farmers are, I think, 39 farmers in mostly Minnesota, Wisconsin, Dakotas, and they're responsible for something like 80% of the Kernza production in the world. And Kernza is the perennial wheatgrass that was developed originally by Rodale, but really kind of taken to market at the Land Institute. It's one of the first forays into perennial staple crop production. And we see that is a really powerful force in agriculture to re-perennialize staple crop production. And so we are currently brokering an enormous amount of Kernza to all of the usual suspects to really drive that ingredient in the marketplace. So when we have the power to say, hey, when we have the power of being able to have those market connections and create the offtake, it gives us an enormous amount of ability to go to new farms and say, hey, have you thought about this crop? Have you thought about diversifying? Have you thought about perenniality? And for myself, when I think about all of the regenerative practices of the world, the two most powerful ones that I always go back to are basically diversification of your crops and creating more diversity. And the second is perennializing. Those two, above all, have the most power to heal the land and create economic resilience for the farmer, as well as ecological resilience for the farm. And so Kernza is one of those kind of hero ingredient, holy grail transformations. And while it still is expensive to buy and there isn't a lot of acres in the world yet, I think it is kind of a front runner in what we're going to see and just sort of the diversification of our food system. So that's what we're shooting for. And that's kind of how we're involved on the market side.
SPEAKER_00:And without good market access and good offtake, as we saw in the transition finance for farmers series, transition finance doesn't make a lot of sense unless you have a market. Obviously, I mean, the business of the farm needs to make sense. Anything else before we wrap up? Things you want to share? Things you're looking for? Ways people can get involved? Help? What would you like to share with the podcast audience in this check-in?
SPEAKER_02:Yeah, one thing that's come into my mind is that we've become much more focused over the last 12 months on how we build regenerative agriculture as an asset class. And in order to do that, we need to work on bringing more commercial structures to the industry and not just having all of these kind of one-off cutesy deals here and there. We need to make sure that we're building something with sophisticated structure that the markets can understand and interact with. So we're Is
SPEAKER_00:it difficult? Because it might be less mad than sometimes, like letting go of the revenue share, revenue growth. I see Phil laughing and Brendan as well. I mean, I just literally had this morning conversation about it, like how edgy do you want to be? Do you want to plant a new tree or work on the branches and grow a new branch into an existing one? And how, I mean, this is a whole other repertoire I was trying to wrap up and it's not going to work. But how difficult is that for both of you? I would like both answers. who takes it first is up to you.
SPEAKER_02:It's challenging. It's challenging because we went out the gates with some of the most radical types of financing that were available to farmers. And we were truly probably a little out over our skis with the model that we were offering in the market. And we've learned a lot over the last couple of years. Both of us still have a natural inclination to take risk, go for it, Thank you so much. over the next five to 10 years in order to build the kind of momentum that this industry needs and to build the type of, I think, just sophisticated thinking that this type of this industry needs in order to truly thrive and gain the type of scale that we want to see over the next couple of decades. And so because of that, I think maybe one way we've started internalizing that is both the realities, but also just the personal it's interesting to me to have this two-part capital stack where we have permission to innovate, to try new things, to solve problems that are currently not being solved by farmers, but then also being able to tap into the Black Rocks and the JP Morgans and these big institutional players who want to move money into this space through our traditional financing arm in that side of the business. So we're able to learn what is happening on the bleeding edge, what are we seeing in field, and how do we create financial structures that are pre-commercial and mission-driven, as Phil was saying. And then how do we balance that with your traditional 30-year fixed mortgage that's kind of the backbone of this industry? So we're just dipping our toes into that sandbox in many different ways. And I think it's what's necessary in order for us to ultimately bring billions and then trillions of dollars to this space to provide the capital backbone that it's going to need. Otherwise, it's just going to be these niche$10 million,$50 million,$100 million dollar funds, which is not even close to the amount of scale that we need to see in order to unlock massive amounts of capital flows into regenerative organic ag. So we're starting to build the team and build actually our theory of change around that. And we're going to start working on a thought piece around that type of work so that we can release it publicly and hopefully maybe put out a call to action to other folks who have been on a similar journey to us over the last few years and ultimately rally support from these large capital markets so that we can help more of our farms transition to regenerative organic
SPEAKER_01:ag. Yeah, I don't see a direct trade-off between being commercially robust and viable and being radical. I mean, at the end of the day, if the land is being healed and the farmers are experiencing the full vitality of life on that land as stewards, then that's a good thing. And so So I think that what we have to bring to that ambition and that vision of transformation is a ton of stuff. And, you know, for us to be able to be above board and be legitimate and attract a Goldman Sachs, I'm totally fine with that. Money, I used to be scared of money. I used to feel like, you know, coming from a fairly leftist sort of economic ideology, I used to be really scared of sort of the power of money, but I really come to to see it as, as just like water, you know, it's got to flow into the right places. And, and if we can do our job to flow it and the people that we are flowing into are benefiting disproportionately, then why not let it ride and, and, and have a lot of fun. You know, it's, it's, I've learned that there are good people everywhere. When we think about Goldman Sachs or JP Morgan, it's not like these people are nefarious, right? Like there's very few nefarious people in the world. And most of the times when you get to know folks across all of these institutions that we label as bad, you end up finding really awesome aligned virtues. The question becomes how, right? It's like, how do we do it? And we get stuck there big time. And I think that mad capital is living in that really kind of that really dangerous margin, you know, between like being really radical and a traditional sense of like lots of risk taking and creating new things. I mean, creating something utterly new in the world for it to work is a very risky thing and it's a recipe for total burnout. To learn how to take what has worked and shape it toward a more virtuous future is something that I think we're all about. And, you know, as Brandon said, we have this kind of cocktail of different capital strategies, which I think we're really excited about that range from very traditional to sort of avant-garde and on the margin. And so I think we're going to try to hold it all, to be honest. And while also surviving financially and keeping our employees happy. And I mean, now we have eight people on the team, you know, and those people have spouses and kids and like, you know, what we were doing three years ago, you know, on very little money and really going for it. I mean, we've got to be thoughtful. And that doesn't mean we're not going to do what's right. I mean, I want to be very clear about that. You know, we're really, really charging hard with the utmost integrity. At the same time, you know, I think we are probably just a little more cautious in the amount of risk we're taking because, you know, we have now, you know, an enormous number of investors that are involved and those investors are our friends. And, you know, we have an enormous number of farmers involved and those farmers are our friends. And the more risk we take, you know, threatens all of that. And, you know, You know, the thing that I come back to at the end of the day, you know, despite all of these philosophical wonderings and challenges and how do you reshape the economy in the world and blah, blah, blah, blah, blah, right? Like you can get lost in that. At the end of the day, the farmers that we work with and work for and serve are universally happier and better off because of the work that we're doing with them. And I would give you the cell phone number of any of them and I know they would sing our praises. And for me at the end of the day, we can sort of get lost in all of, are we doing enough? Are we going big? Are we taking enough risk? At the end of the day, the land is happier, the farms are happier, and that makes me sleep well.
SPEAKER_00:I think it's a perfect ending to this check-in interview. Thank you so much for coming back on the podcast, for taking time out of a very busy schedule, fundraising, building, getting money out of the door, monitoring and selling. A lot of current is not an easy feat. So thank you so much for taking that time for the work you do. And of course, coming here to share about the journey. Thanks, Ken. We appreciate it.
SPEAKER_01:Yeah, this is fun. Super fun. Great to talk always. Appreciate the invite. And I
SPEAKER_00:look forward to the next time.
