258 Emma Fuller - Making soulless capital who doesn’t care about regenerative agriculture invest in it

A conversation with Emma Fuller, co-founder of Fractal, about the transition to regenerative practices or outcomes of the millions of acres of broad-acre row cropping, corn, soy, and wheat in the US, Brazil, Argentina. Fractal provides farmers with equity financing by investing alongside them in their farmland to fund their growth.

We all know the amazing examples that are pushing the boundaries of agriculture: syntropic agroforestry, silvopasture, food forests, complex intercropping, very advanced CSA, no dig market garden, or even agroforestry at a relative scale. But what about the rest? What are we going to do with all those acres and how do we get regenerative practices, regenerative outcomes or outcomes we like and seek like soil health etc at scale? Is there a path to having hundreds of thousands of acres in transition? Can soulless investors and the least interested in soil health farmers get these outcomes? Is there strong consumer pressure?

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Chapters

• 3:24 Why are you doing what you are doing? Why Soil?
• 1:02:35 What would you do if you were in charge of a 1B investment portfolio tomorrow morning?
• 1:07:01 What should smart investors, who want to invest in reg ag and food look out for?
• 1:09:25 If you could wave a magic wand and change one thing overnight

Transcript

Speaker 1: 0:00

We all know the amazing examples which are pushing the boundaries of agriculture centropic agroforestry, silver pasture, food forest, complex intercropping, very advanced CSA, no-dig market gardens, or even agroforestry at relative scale, a few hundred or even a few thousand acres or hectares. But what about the rest, the millions of acres of broad acre row cropping, corn, soy wheat in the US, brazil, argentina, etc. What are we going to do with all those acres? And how do we get regentive practices? Correction, there are no regentive practices, regentive outcomes or outcomes we really like or seek, like soil health, etc. At scale. Is there a path to have hundreds of thousands of hectares in transition? Is there a strong enough consumer pressure? Not really. Most of this stuff is going into feed, ethanol, highly processed food, where the consumer is not willing to pay anything extra for environmental outcomes and the company is in the middle. Neither Is there a carbon play. Probably maybe. Yes, with super complex 10 year horizons with very inflexible structures. So is there another way, if you can, make the case that regentive practices positively influence the climate risk, aka reduce them and positively influence the farmland price? Ah, I can hear you think we're going to buy a lot of farmland, sort of kind of, but not really. We're going to explore a way where even the most soulless investor and the least interested in soil health farmer which, by the way, I still have to meet because almost all farmers I meet are interested in, under the right incentives, in their soil health, could get these outcomes. So join me for the ride, buckle up, get a cup of tea or coffee this isn't a short interview, well over an hour and enjoy.

Speaker 1: 1:47

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, where and consume, and it's time that we, as investors big and small and consumers, start paying much more attention to the dirt slash soil underneath our feet.

Speaker 1: 2:24

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 gumroadcom slash investing in Regenag. That is gumroadcom slash investing in Regenag, or find the link below. Welcome to another interview Today with the co-founder of Fractal. They believe that farmland investing can be a force for good by aligning farmers with capital. Welcome, emma.

Speaker 2: 3:08

Thanks, it's a pleasure to be here.

Speaker 1: 3:10

And to start with a personal question, because I know the relevance of your journey towards Fractal, so I really would love to double click on that and dive into that rabbit hole. How did you end up focusing on soil?

Speaker 2: 3:26

Good question. Well, it was a meandering path. I actually started studying commercial fisheries first, so I started in food systems generally as a grad student, mostly because I think food systems are this really compelling case that when we look at sort of linked economic and ecological systems where you need to manage both in order to have healthy outcomes, it's a really clear linkage. And I ended up in agriculture for two reasons. One, my husband started farming, and so that was like literally bringing it home for me and seeing the challenges of farming firsthand. And secondly, I got an opportunity to start as a data scientist at an ag tech startup called granular, and so for those two things coming together, when you think about conservation or managing natural resources, there's like a much longer answer than I meant to give you, but here we go. I feel like there's frankly actually a history of imperialism and colonialism, especially for white Americans to show up and say this is how we should manage natural resources soil, water, forests, you name it Seas, fisheries.

Speaker 2: 4:29

Seas fisheries like the list goes on right. So the opportunity to be like literally grounded in running my own business farming business while being able to think about a much larger scaled version of that, was an opportunity that I thought was pretty unparalleled. And then, when you think about ag, my sort of criteria had been and for soil in particular, I needed to matter in some material sense Any impact criteria you could think of, like agriculture plays a huge role. Anything from biodiversity to nutrition, to equity, to climate change, to water quality, like all of the things like political stability any dimension you could care about for making the world better, like has some major intersection with agriculture. So it was sort of a no brainer right. I think agriculture is one of the coolest sectors to be in, both intellectually, ethically and morally to be working on, so it's like a huge. I feel like hugely privileged that I found a way to contribute in this space and just to set the stage a bit.

Speaker 1: 5:26

what we're going to do is we're going to do a little bit of a speech, a bit what are you farming, or what is your husband farming?

Speaker 2: 5:32

now Just to have an understanding. And it's a team, yeah, a team now, when are you calling from?

Speaker 1: 5:36

let's say yeah, yeah.

Speaker 2: 5:38

So we are outside of Seattle Washington, on an island called Vashon Island. We have a 14 acre property. About one and a half to two acres is under cultivation. So we are what you would call for those of you in the know a market garden farm. So it's a 50 person CSA right now about diversified vegetables, etc. And we have two amazing farm managers that work with my husband, so it's a team of three that does it and we have two big draft forces because why not? We're draft powered at home, right. So super old school diversified crops, rotation, organic methods, direct consumer all of that good stuff, All of the things that a Portlandia for those familiar with the Portlandia show where everyone knows their chickens and loves them, like that, is totally the stereotype of a farm that we have here on the island.

Speaker 1: 6:24

And it works in a sense like it's not a hobby and just sometimes I hear this myth but it's cute and funny. But this is a company with two employees and like it's not a huge one but a serious company.

Speaker 2: 6:40

Yeah.

Speaker 1: 6:41

Yeah.

Speaker 2: 6:42

And it's a ton of food. And that also is a good wake up call of just how much, with multiple successions, dense plannings, you can do on a small per acre basis. But it also really helped me understand better one the constraints of adopting new practices. Thinking about my own farm right, we moldboard plow Like we like, use like dust bowl level tillage on our super organic, otherwise regenerative farm, in part because that's the equipment we have for the horses. That's how we know how to work with the horses. To prep the ground we use organic methods. We need to prep the seed bed.

Speaker 2: 7:14

Anyway, I can go on and on about why we moldboard plow. So anyway, I have some sympathy there. But then also on the business side, you can't bring anything to scale right, we're like physically limited by the acreage that we're on. And so, yes, I could, I make good margins, we make good margins on eggs. But to like make I don't know $40,000 in eggs, we'd have to have like 400 chickens and that's a super gross amount of chickens on the total. So it's like a really complicated business to grow and manage and you combine that and so then I totally have empathy and sort of sometimes jealousy of these big farms we work with that are like two crops, two planting dates, two harvest dates. They know their markets, they're done, Like I get it, Like that sounds really nice and a lot of times of the season one more like juggling 20 different things.

Speaker 1: 8:04

Does it give you like credit when you're talking to these type of farms, or do they consider you more like a garden with 1.4 acres?

Speaker 2: 8:14

I generally don't mention that I have a farm to these farms because they're really different types of operations.

Speaker 2: 8:19

The times though that I do that it has become relevant, it's mostly when I've been getting I've been heckled by some of the farms for the fact that I use tillage from some of the no-till farmers that are just like what are you doing? But I also have some sympathy then about like what terminating cover crops is like right in a wet season. Like that is a universal experience, regardless of how big you are. Where the ground was too wet, the cover crop got away from you. Now it's giant and the rye is super happy, great for soil health, super hard to kill and super hard to incorporate and break down so you can plant other seeds in that. So those sorts of experiences when I hear about that that's no longer an abstract like oh, it's tough to terminate your cover crop and I'm worried about that. Like no, I get how painful that is when your equipment no longer can break down that kind of plant matter. I mean, you're not ready for that.

Speaker 1: 9:06

And so now shifting gears to like your other hats or your other hat. How did that lead you to Fracto? You mentioned the startup, which I know was sold, and you stayed actually for a while, like what the myondering path led you to Covent Fracto with Ben.

Speaker 2: 9:24

Yeah, so when I started at granular, I started, you know, I had finished my PhD in ecology and so I was very. I had a lot of data background, a lot of hardcore science background, and I sort of thought I'll join this AgTech startup that was focused on digitizing farmers data sets right, helping them make better and more profitable decisions. I'm a consumer that will pay some premium for sustainably labeled food. I'm going to make the best sustainability label possible. A granular, which is where I was, and that was a huge opportunity for me to learn from a science perspective. Where we often think data is lacking, science is limiting, there's too much uncertainty to actually drive these outcomes. So then I was like, okay, well, I'll solve that, try to solve it and realize that it wasn't a science problem at all. It was a business problem.

Speaker 1: 10:11

I was a willingness to pay problem and so that opportunity to continue work From us as consumer, or from somewhere in the middle one, both, I think my yeah, my perspective is both right.

Speaker 2: 10:21

I think at the end, a consumer is not willing to spend enough to have the value go back. But then also the structure of our supply chains and commodity Ag, which has the biggest footprint rate of land use. So if we're trying to affect millions of acres, you have to talk about big commodities. Those supply chains have so many nodes in them and are so consolidated that in order to get a value I mean, you know this, but in order to get value all the way back that the consumer willingness to pay has to be extremely high. And I'm just not seeing that from most of our packaged consumer packaged goods whether it's cereal or it's mac and cheese or whatever these sorts of things that like to tell us these stories that consumer premium is like a couple of cents maybe. So that was not at that time. This was 2016. So a little more than five years ago, I was not seeing that as a big enough economic engine to pull.

Speaker 1: 11:09

Seven, yeah, yeah, seven, yeah, right time flies. You're going fast, yeah, Depending when you listen to this. But how disappointing or disillusioned or how much of a wake-up call or how much of a shock was that to realize? Was it over time, or was it really at some point Like this is just not strong enough to pull to.

Speaker 2: 11:28

It was pretty sudden. It was after several conversations with big folks in the middle of those supply chains and them just being fundamentally unwilling to pay pretty much anything to the farmers for change. And so then it was just like this oh, this is not a science problem, this is like, of course, a farm would not take on all this risk, take on all these costs, make all these changes and get literally nothing in return. And so that was just sort of a frustration of like all of these conversations about regenerative ag that we're having sort of at scale, etc. The reason we're all wringing our hands is because we are unwilling to pay. We are asking for transformative change for free, and that was and we're sort of hiding some.

Speaker 2: 12:07

Yes, science can improve and yes, there are uncertainties. I don't want to say that science is perfect, but I was sort of frustrated, like it's sort of disillusioned as a scientist to be like I'm going to be a hero, I'm going to help solve this problem with science, and then to show up to the party and realize that was just a convenient excuse to say, oh, we'll do a little bit of uncertainty here, like, oh, we can't do anything when fundamentally it was not. So that was sort of a Feels a bit fossil fuel industry.

Speaker 1: 12:31

Yeah Saying oh, if we just do, it's not completely clear yet. Let's do a bit more research.

Speaker 2: 12:36

Let's just wait.

Speaker 1: 12:37

Let's just do a bit more. Let's take a few variables here and there and then just complete unwillingness to transform, pay and be comfortable with delay. Yeah, Because at the end they didn't see the huge pool from end consumers If they were knocking on the door 10 times, with people at the time in your supermarket asking for stuff, of course something changes, but that's just not happening.

Speaker 2: 12:57

Just not happening. Yeah, so from their perspective it's a lot of risk, even at those company levels for a certain gain. It's sort of the same equation that farmers are facing and no one is willing yet to stand up and truly lead in that space. These are big companies that are not used to or not willing to stand up really aggressively and be those leaders. So I just wasn't seeing that change at the scale. And the other thing is just a sense of urgency. This is not a 10-year problem. There's not something that we have 10 years or 15 years to think about how we can. It's just like it's now, Like how do we make change today and in the next three years? Like next five years maybe, but my gosh and a lot of acreage.

Speaker 2: 13:39

And a lot of acreage.

Speaker 1: 13:40

Amazing what you do at 1.4 acres, which is great Piece of paradise, although you're plowing. But we'll fix that and but yeah, that's because you could have also said that like, okay, I'm frustrated with this massive corporation, with the transformation of change that is not happening because it's just not in their system. I will be one of the employees with my husband and I will be fine, and who cares what happens? Who cares what happens off the island? But you didn't. And I mean I think I know why. But why not just pulling back to the island and say, okay, there's just too much space out there.

Speaker 2: 14:16

Right, this is this. This also I'm not seeing. I'm sort of looking outside as I say this. This is also not scalable right in the next five years and you know, I've been part of what has been so wonderful at working at a small scale has been being literally in the puzzle of, like, what would I change, even at my island level or my regional level, to help make this go faster? And I don't know. And so I saw I didn't see a path, and there are folks that are working on this and doing transformative work, so I don't want to say that it's unsolvable.

Speaker 2: 14:46

There are several and many folks that you have on this podcast are doing amazing work in this space, but I also think that there's just a when we look at the scope of solutions, there are so few people that are passionate about impact and change but that are also willing to grapple with the system as it is today, and that leaves a big gap for sort of you know we talk about there are no silver bullets, like.

Speaker 2: 15:08

I appreciate that that's now becoming sort of a more standard line for us all to say If there are no silver bullets, what means do we need to be working on all parts of the system and I'm just seeing a lot of focus on the small transformative, 10-year transform the food system spectrum and I was not seeing much focus on the big-scaled, fast change in the system as it is today.

Speaker 2: 15:28

So that's sort of where I felt like, okay, this is where I can be even more helpful than being one more voice in that sort of transformative change to really drive change that is complementary. That sort of sets the stage for some of these more transformative, small, regional-scale food chuds, more diversified planning, more focus on soil health. So that was sort of what got me excited about thinking about big scale that and just the scale of the problems, right, and it's hard to read the newspaper and then be like, wow, like there's so such big problems, and then just come home and just be like, well, I'm just going to think about 1.4 acres Also felt not, you know not destroyed.

Speaker 1: 16:05

You're a great line in your. You just put an article just depending on when you listen to this, we're now October 2023 on the theory of change of fractal on LinkedIn and like talking about pushing the, the ceiling, which is these super transformative, often smaller scale, really pushing the boundaries of what's possible, but not enough. People are talking about what's happening to the floor, like how do we raise the floor and how do we make sure the massive amounts and millions of acres or hectares, whatever you measure, start to make some change soon, like tomorrow, preferably like next season? Let's talk next season. So I think that's one of the reasons fractal was born. And how do you describe fractal? Now let's, let's introduce fractal to to the community, to the listeners. What is fractal and why are you so excited about it?

Speaker 2: 16:55

Yeah, so we. Fractal is a minority equity investment platform in farmland, so what does that mean for those?

Speaker 1: 17:02

There we have the impact, yeah, several, several clicks in.

Speaker 2: 17:05

That means that we buy a minority share of a piece of farmland, so we invest in farmland. So a farmer can approach us and say I'd like to sort of tap 20% of this piece of ground to get that, that capital out. We make that equity investment in that farmland and then they can use that to invest in their own business. This is equity financing is something that most companies have access to right. You can raise money through equity right through sharing, selling literally equity in your company, through debt financing, which is typical, or through cash flows through saving In farm businesses. You have debt financing, you can mortgage fields etc and you have cash flows, and that's pretty much it. So there's a missing gap for financing.

Speaker 2: 17:46

That's a great question. I think one of the things this, this model, came around was sort of inspired by what we were seeing in the residential market. Right, there had been a lot of focus on really big corporations to be able to do the diligence on these equity, to understand the equity value. And I think now, with the ability to do so much more analysis digitally, right at scale, you can now like really downscale the cost of being able to diligence every single piece of ground and this was like a huge opportunity that hadn't been exploited yet. So we thought we can use those tools. We can deliver really low cost because that was the barrier to.

Speaker 1: 18:21

If I, as a farmer, knocked on your door before, before you existed, and said, okay, I run, I don't know, 10,000 acres and of this, 2000,. 10% of that or 20%, I would like to have an equity partner. Normally we'd say that's just way too small, like we would never be able, like with, I cannot get in my truck and visit. Go, do that and visit and take swell samples.

Speaker 2: 18:43

I don't have the expertise to do that. You know there's, there are, but we do see this, you know, on ones and twosies, right. So a specific, so often like very large farm, will have a high net worth friend, right, and so it'll be a more personal relationship in which they can tap that. But often when we hear about those examples, that often involves a significant loss of control for the farmer, right. So they right, if you go up toe to toe with an investor, you can bet that their legal department is way better than the farms, right, who's doing commodity trading and growing of food and all that sort of good stuff. So that was the other thing that we wanted to solve in this product was a really productized way that would really keep a farmer in control of their operation while at the same time being able to access that equity to grow the business, while also balancing out with the investor, helping them reduce the amount of diligence that they needed to do. Right, that we could do that transparently and with extremely high rigor to be able to help them be able to invest and get access. Because when we think about farmland as an asset, right, this is not even this is just the model of fractal separate from talking about the impact implications.

Speaker 2: 19:45

When we think about, you know, us farmland, for example, there's often a term thrown around like corporate farming. Right, that corporate farming or industrial farming. And and there are definitely sets of practices, right, the high input practices. Conventional farming is sometimes how it's called. That you can sort of group there, but sometimes it bleeds into what we assume about ownership structure. It's corporate farming, right.

Speaker 1: 20:08

Has nothing to do with ownership.

Speaker 2: 20:09

Right, has nothing to do with ownership, but a lot of people assume that big companies are running these farms. If you're not even that, you're sort of intimately connected with ag, whereas often you know a big farm, right, let's talk about. You know anything above 1000 acres, 3000 acres like these are big, big operations, even 10,000 acres. That's like a parent and two kids and a cousin right, it's a family farm and it's 3000 acres, it's 10,000 acres.

Speaker 1: 20:34

So I think that's also a really important aspect, the same about people as you 1.4 acres, right yeah?

Speaker 2: 20:39

Yeah, exactly. Yeah, it's pretty great, like it's pretty insane when you think about what our system are like. Just to come back to an earlier thread, right, what we pay for in our ag system day is yield and convenience and just high amounts of yield and what we get is that like it's an amazing system when you just think about the goals that were set out to deliver, it has delivered that. It's just that we're asking so much more of that system than we are actually paying for today, and that's where the frustration, I think, comes in from everyone, both farmers, investors, consumers, etc.

Speaker 1: 21:09

And so now, with the new wave of technology and data sets and smart crunching, you're able to bring that down to a much lower level. So how small can you get Like what's an ideal customer or an ideal farmer and it's an ideal company you want to invest in. What size, do you say? Actually, from that on, we can. Usually we can figure it out without getting the truck and do soil analysis.

Speaker 2: 21:35

Yeah, so right now we are working in row crops in the US, so we are keeping right. The other thing about agriculture is that it's hugely diverse, right. It can be anything from what you call specialty crops, like, say, tomatoes or berries in California all the way to corn in Iowa. So that's a huge spectrum too. So within that we're thinking about row crops, us row crops. From that we typically see deals that are roughly on the size of about $300,000 per deal. So we're dealing with typically pretty large row crop operations. So we can't right now we're sort of keeping that as a focus because the diligence basically can get productized, but it gets productized by farm type, right. So we roll out the row crop sort of template for that of like how we can diligence that really quickly, and then we can sort of expand our buy box. So first, we're still an early company, right. We launched, I think, last year the dates are all very fuzzy now but we're sort of delivering and sort of proving this out in the row crop geography before we expand.

Speaker 2: 22:37

Corn, soy, wheat, sugarbeets, potatoes, anything that you like. That is a sort of a broad acre crop that you harvest with machinery is sort of a good way to think about it.

Speaker 1: 22:47

And how many acres typical like if you do 300,000, what's the total farm then like?

Speaker 2: 22:53

Yeah, I'm going to have to do some math so 300,000. So if you estimate that the farmland is worth about $10,000 an acre, right, so that's about a 30 acre chunk, right, and so often these fields are for, you know, can be anywhere from, I don't know. We can do 140 acres or 160 acres, or we do see smaller ones, right, so we can. We have dealt with farms that actually want to go smaller 20 acre parcel. We always make sure, though, that whenever we invest that one, we take a minority stake, like literally minority, so we'll never take more than 49% equity, regardless of what the farmer is asking us to do, because it's really important for us to maintain the farmer's ownership of that asset.

Speaker 1: 23:31

And then we also make sure that they're on the field level, on the field, yeah.

Speaker 2: 23:35

And so we're not actually investing in their farm business. We're investing in the real asset, the farmland itself. Though we do financial diligence on the entire farm operation to make sure that they're in good standing and can handle that equity debt load, yeah, and then we make sure there's a buffer of equity even within that field. So it's sort of dependent on the farmer's leveraged position on their own field. That sort of determines, along with that ceiling of 49%.

Speaker 1: 24:01

And then, what do farmers typically do, what it enables them to do, compared to getting quote unquote, another loan? Yeah, now that that's easy or convenient. But what does this? Why did it come to you, instead of going to their local bank?

Speaker 2: 24:20

We see a range of demand for where this comes from. I think some of the biggest ones often come from they have financing debt financing at a pretty low rate logged in previously and debt financing now like was it 2% or something like that, and debt financing now much higher than that, depending on when you listen to that, this podcast, but I think it's currently somewhere around 6% or 7%, so that it can be a way to not have to refinance any debt financing. We also see that actually with FSA new farmer loans some farms are qualifying for, if you're not familiar with that, that's an extremely low interest loan from the federal government for farms that qualify as new farmers, so they can extend sort of what they can do with that by raising more. And then others are the USDA farmer. Mac has pretty conservative debt asset ratio requirements for farmers, so often they'll have hit that ratio and are still looking to be able to invest their business a bit more, and some of the use cases that we often find, for example, are an unexpected land sale.

Speaker 2: 25:26

So the other thing if you're not super familiar with US row crops, many of these farms most of these farms are renting about two thirds of their ground, so they farm without 3,000 acres 1,000 they own and 2,000 they rent and often those are very long-term relationship-based rentals. That's changing. They're technically annual, often handshakes, but as we're going through this demographic transition when many of those landowners are dying and it's passing on to their kids, if the kids can't agree, that can mean that it goes to a sale really fast and somewhat unexpectedly and so farms that have had land in their land base and they're in their business for decades they need to cash to buy.

Speaker 2: 26:03

Yeah, they need to cash to buy and so it's technically expansion, but it's really just providing security for their conservation, for their business.

Speaker 1: 26:13

And how then does it work In Kota Kota Normal Company? At some point I might want to buy the equity investor out, or how does the investor exit, or how does Factor exit?

Speaker 2: 26:26

Yeah, so we do two things. One, it's a 10-year term, so the investor has bought in and commits for 10 years, and that's to give stability to farmers, so the farm knows that the investor can't come and yank capital at any time and gives them their ability to plan At the end of 10 years. Our ideal is that we can roll that over if the farmer wants it, not unlike a mortgage being rolled over if you've ever had that experience that we can buy out the current investor and bring in new investors that want to invest. Obviously we can't promise what will happen in 10 years, so that's certainly what our attention is, but at that time a farmer could refinance and buy us out and buy back that equity.

Speaker 1: 27:01

The other part of this. What kind of return or what kind of? How does that get calculated?

Speaker 2: 27:08

Yeah. So what we're doing is we get then a share of the appreciation on that asset so that we as farmland changes in value, we'll see that change in value. The other thing that happens here is that actually a farmer on the flip side can buy us out at any time after two years. So the farmer has control based on their own business, which we think is pretty unique that they can have that liquidity control. That said, we need to compensate the investor for the farmer having that kind of control.

Speaker 2: 27:37

So for that the farmer does two things. One, they pay a liquidity premium on that, so there's a baked-in return to an investor if a farmer exits early. And the second is that a farmer is also paying an annual payment on that piece of equity, that piece of ground that we have invested in. So a farmer, the investor, gets that essentially a coupon, that payment back every year and that's sort of comparable a little bit above what rent is, because we're filling that farmer need. And so that's what the investor return is comprised of both the sort of appreciation of the asset at 10 years, but then also this yearly payment that is indexed to land prices, so as the land-based increases, that percentage payment will also move with that.

Speaker 1: 28:48

And so where do regenerative practices come in?

Speaker 2: 28:52

Yeah, yeah. And why is this even an impact play this?

Speaker 1: 28:55

is just a financial play. Why are we talking about this? On this podcast.

Speaker 2: 28:59

Yeah, and this is part of what got me so excited about starting fractal with Ben and Brian is, fundamentally, the structure is answering two problems that are not explicitly impact focused. One is a farmer need for equity financing and I'm going to talk about regenerative insect Need for farmer financing, and the other is an investor desire to have more exposure to farmland as an asset class. Right, so it's like meeting the needs. That's always exciting when you can start to build businesses that bridge that. But as part of that, farmland valuation and farming generally is hugely exposed to climate, both the good and the bad.

Speaker 2: 29:34

So baking in climate risk into these valuations, thinking carefully about how we value land in relation to extreme weather events, changing growing degree days, extreme precipitation events on that side but then also thinking about the investments in soil health that can change the actual revenue potential of this field, being able to bake that into the valuation and into the cost of capital means that this is both a good business decision.

Speaker 2: 29:58

This is just actually improving the value of the asset and the income generation potential of the asset while at the same time meeting needs of farmers and investors. So it doesn't actually have to be an impact play. That's what's so exciting about fractals, embedding some of these positive externalities that have been totally ignored by the current valuation process and land market more explicitly in the beginning, as an engine. So then, regenerative practices. How that fits in is right now we are giving discounts for cost of in the cost of capital, those annual payments based on the breadth and depth of the regenerative practices that a farm does. So the more that they invest in soil health on the field, the less that annual payment ends up being for them.

Speaker 1: 30:38

Specifically on the piece that you own or, of course, you don't have any control over the rest.

Speaker 2: 30:45

Yeah, so it's on the piece that we own, but most of these practices are field wide so it already leverages itself. So you're only paying on that 30% but you're actually getting regenerative practices on the full field. So if you're 20 acres of a 100 acre field, that 100 acre field is unlikely that they will put cover crops on just the 20% that we own.

Speaker 1: 31:08

And how are farmers responding to that? Is it feel like, how significant is the discount? Or are we too early to say but how significant is the discount? Or discounts because they get more if they do more practices, and also more if they do it multiple years, because some practices of course sort of compound over time like interest, Like how eager are the first ones you're working with to get out of the gate and do a lot of these things they maybe want to do, or maybe we're already doing, but will anyway get them a discount?

Speaker 2: 31:41

Yeah, we've seen huge appreciation for the way that we structured this from farmers specifically for two reasons. One, we're able to think about soil health and the agronomic performance on the valuation. So we're starting to be able to give, looking at performance, historical performance and adverse conditions. So we do both an income generation approach for evaluation and a market approach. So when we look at sort of the revenue and the revenue really comes down in row crops to yield we look at yield outcomes historically because we're on the same side of the table as a farmer early on.

Speaker 2: 32:10

They're sharing a lot of their both financial and agronomic performance on the field, on the asset that we're actually investing in, because we're again on the same side of the table with them. We're not counterparty trying to negotiate a price here. So we have to see a lot of that performance and so we can then look at that performance and benchmark it to surrounding areas and comparable soil quality, same crops, same weather conditions and look at how that field has performed across time. So it actually is somewhat practice agnostic but often we see like there's a great deal that we're with a farmer that we're working with, where they have class C ground and they have class A yields and performance, productivity benchmarking, and that comes, it's not as a scientist, I can't say it's caused by, but like they've been doing, cover crops, no till, diverse planting rotations, compost, like they're sort of like a textbook example of what you would hope for most regenerative row crop farms to be doing and you see the outcomes.

Speaker 2: 33:04

And so we were able to offer evaluation that was much higher than the surrounding class C ground that was selling on the market, because we could see that sustained performance improvement year over year and that kind of ability gets farmers who have invested in their soil so excited because they've been still off of it, because it's not only rewarding, like in carbon, the ones that start now, it's rewarding backwards and like, are you saying?

Speaker 1: 33:29

I think the answer to yesterday, which is explicitly ask it here are you saying that in most markets, like land markets, the soil health or the soil health may be partially, yes, but I think also mostly. If that is not measured and the soil potential is not taken into consideration, like with this, practices X and Y could happen. It just you'd look at what surrounds more or less the same soil, what's being sold and that's sort of the price.

Speaker 2: 33:55

Yeah, this is sort of where the diligence and the expensive diligence comes. In Farmland, people are familiar with looking at soil indices, right Like what is it a class C ground? What is it a class B ground? That really comes down to soil. But those are static indices that are not updated, so that was maybe a index that was applied 30 years ago, 40 years ago, and we know that even on a decadal time scale, management can have a huge impact.

Speaker 1: 34:16

So you're missing. So it could be way worse, way worse, and often there's some.

Speaker 2: 34:21

I'll send you some links. But there's a great PNAS paper looking at topsoil loss compared to what the USDA estimates through it estimates through sort of like standard wind and water erosion coefficients and when you look at satellite imagery you can see just the horizon A, the top chunk of the soil. It's just like down the hill right and it's like three times or something crazy much more erosion than what we have in our formal estimates. So, anyway, landscapes can change in a big way on a decadal time scale, which is kind of hard for humans to wrap their heads around, right? Tech-a-headle is kind of too long to be able to sort of remember what it was 10 years ago exactly. Anyway. So the framework of the opportunity is there.

Speaker 1: 34:58

The opportunity is there and seeing it with those yields from this farm you mentioned. They shouldn't be doing those yields on that farm. Basically, that's what you're saying.

Speaker 2: 35:07

Yeah, but so we see that we see a huge appreciation from farmers there who have invested in the soil health right, that they can actually now be evaluated. They feel more fairly rather than just sort of these static indices. And then on the flip side, when we offer discounts to capital, it's about 20 basis points off per practice. We thought that per practice was important because it's multiple practices, that sort of form, a regenerative operation, right, it's not a single practice, it's not just cover crop. We know cover crop plus no till does so much more than just cover crop or no till alone. We know cover crop, no till and diverse plantings does even more.

Speaker 2: 35:38

So it's this, every single practice of this list of practices that we offer you can get additional 20 basis points off, because what we want is we want you actually to be maxing this out, because then you're doing amazing things for your soil, so that we get all sorts of folks from folks that are excited to all of a sudden have another reason to sort of take the stab at cover crops this year and adopt it.

Speaker 2: 35:59

We also see folks that have already done cover crop and no till and are like, right, well, maybe I'll add another third crop into my crop rotation. So we see a really a wide spectrum of folks coming to this or folks that are deeply regenerative and are saying this is great, Like I appreciate that you understand that I'm also investing in my soil by doing these practices and we are excited from the sort of indirect theory of change there that we're investing in an operation that is deeply regenerative to help them grow and have a successful business to operate and manage more land. So there's a number of different ways that this can actually manifest itself on the landscape from new acres coming into new practices or farmers being able to grow their businesses and move their practices to more acres to sort of drive that change.

Speaker 1: 36:39

What are you most excited about? The first one, like new, like farmers for the first time trying things, or the really experienced ones, managing more acres.

Speaker 2: 36:51

I'm going to cheat and say that I'm excited that we have a program that can serve both.

Speaker 1: 36:56

Right, I was so frustrated with carbon.

Speaker 2: 36:59

So I built a carbon program at Corteva previously and that was also part of my manning journey. That felt like I'm much more.

Speaker 1: 37:05

Corteva is ex-duper and bought granular to start with your work.

Speaker 2: 37:09

Yeah, so dowdy-pump merged, spun, Corteva was formed, Corteva grabbed granular. So I joined that really big corporate farming for a while to see how that worked and build a carbon program in there, and that was hugely exciting, because in talk about theory of change you are paying money for environmental services, like for ecosystem services. There's nothing better than literally paying for what you're asking for. But the frustrating part was how narrow of a slice of farms we could ultimately work with, because it had to be farms that were doing it for just the very first time. They couldn't have even tried it one time three years ago on the field and gotten dispirited and wanted to try it again. I didn't count. So that was usually frustrating in terms of having this tool that almost worked, along with some other things. Having to commit for 10 years is exactly what was going to happen on that field very tough to do. So this was an opportunity to build a program that I felt was going to be deeply impactful but also be able to hit the scale that we needed in a real way to be able to move, like we said, move that floor up.

Speaker 2: 38:06

All these farms can move along the adoption spectrum, no matter where they start. So this has a the first time. Who should be over here the first time that they've ever thought about cover crops? We have farms like that in our portfolio. We're starting to think about it for the very first time and are saying this is really a dollars and cents question for me, and so now I'm seeing some real dollars on the table, I think I'll adopt and qualify for this discount. And then we're also seeing the folks that are doing seven out of our seven practices and are saying, great, I'm going to use this and buy out the landowner and be able to make a lot of these changes that I didn't have the ownership security to do, so I'm going to deepen my practices on this new field, but I'm going to be able to now own based on that. So that's what's hugely exciting is actually seeing that start to play out, even at our small portfolio size in the last six months.

Speaker 1: 38:53

And how do you monitor the practices? Yeah, how do you make sure? They happen or continue to happen.

Speaker 2: 39:02

This also speaks very true to me as a scientist who wanted to see all the data and know all the precision about the metrics. One of the nice things about a lot of the regenerative practices diverse crop rotation, cover crop, no chill so that's observable from remote sensing. So we have pretty high standards for how high quality the remote sensing needs to be. But a lot of this can be remotely sensed. So we try to keep this as low touch as possible, because the other thing that carbon programs have the experience with is extremely high data collection burden. So we keep it pretty low touch. But we also do field visits once a year and we'll target those to key times of the season so that we can see cover crops German dating, for example or we can see whether or not what the fall seedbed actually looked like, depending on what the practices are the farmer states that they do. Then we also make use of existing documentation. So a lot of farms are involved in a USDA equit program or a carbon program. We look at those for whether or not those are very high quality programs and if they meet our bar for high quality then we can also use that additional reporting.

Speaker 2: 40:05

And then all of this is to say we also really thoroughly believe in third party verification.

Speaker 2: 40:10

So I'm passionate about this, ben and Brian are passionate about this, the whole team is passionate about this. But ultimately I want to build a business in which you don't have to rely on the founder's passion and sort of motivation for this, and so we are working with a third party NGO, for example, to be able to audit and review our full verification process so that we have another entity that's got a reputational standing, that wouldn't want to be affiliated with greenwashing to make sure and looking over our shoulder to make sure that we were doing this right, and that also sort of reduces the need for the investors to be as concerned to know that there's someone looking at additional diligence on our end. So a combination that's a long way of saying extremely low touch, and in places where we can't see from remote sensing or other existing, we often ask for sort of third party generated reporting. So it's like crop insurance or machine data or things like that that come from third parties rather than the farmer self reporting.

Speaker 1: 41:02

And do farmers, especially the first one, like the ones that for the first time think on or start to act on cover crops hopefully they didn't think about it for the first time, but do they ask for more than money, in a sense help as well, like where to start? How do I get in touch with one of the ones that is at, let's say, practice seven? Is that? Do you see that in the first six months as well, like more than like OK, now how do I actually get started? And actually want to do two and three as well, but I don't know where to start with compost.

Speaker 2: 41:30

Yeah, so far we have mostly seen farms that already have a good sense of where they'd go for agronomic advice on those things. Most farms this row crop ag often farm as a team, so they have their agronomists and their advisors that they work with and, because of a lot of the amazing work that we've seen in this space, many more of those agronomy advisors now have resources for how to help support a farm and adopting cover crop for the first time or adopting changing their tillage practices. That said, we've had a few that are saying, look, I'd be interested in doing this but I don't. So maybe, like edge of field, edge of field would be a good example, so I'm going to take this sort of low lying part of the ground out of production. I don't know the right wildflower mix or the right habitat species mix to sort of plant there. And those are folks that we connect to, sort of a set of partners that we've worked with both in our world in Corteva and Carbon that we've seen do really high quality work, and say look, if you are looking for some other options, we have a set of folks that we like to work with. It's your choice if you want to reach out. So we do have some of those resources also for those farms that don't feel like their needs are being met in their current.

Speaker 2: 42:33

The other thing that's really nice about this is these are typically we're expecting 10 year relationships with these farms, which we would be checking in with them or more ideally and so this gives us an opportunity to have that conversation year over year, to say you did great with Hovercraft, but no till. Are you thinking about other practices and what sort of barriers that are looking at you or the obstacles in that, and think creatively. Because the other thing we didn't mention in this is we have at the fund level right, so we're investing in farmland. We have, at the fund level, impact commitments for the amount of regenerative practices we want to see adopted across our entire portfolio. That's how we keep ourselves honest while giving flexibility to the farmers.

Speaker 2: 43:09

So some folks say you're not forcing them to adopt Hovercraft, you're not requiring them as a sort of condition on entry, and the way that we balance that is one we think farmers are the best managers of their own land. They're going to know that land way better than us and we're going to have a huge footprint if we're going to hit that scale. So rather than having that centralized advisor that is required to sort of go out and walk the field, where these are extremely local decisions, we maintain that we want at least 70% of acres to be in regenerative practices on average every year. So that can fluctuate a little bit, right, but on average we want it to be, on the whole, majority, regenerative. Because of our unbeliefs and sort, of class One or more practices?

Speaker 2: 43:50

Yeah, one or more practices, yep, and that also leaves that space for that 30% of those new adopters. We want to be able to bring new adopters into this, expose them to this, have those conversations year over year and say what are the barriers, how can we move you along that spectrum? And if you sort of gait that at the beginning, that sort of prevents that conversation even from starting but we lose 50% of our carry if we don't hit this target. That keeps us honest with not letting too many of those sorts of acres in without real plans for how to move them along that regenerative practice adoption spectrum.

Speaker 1: 44:44

And so many other questions. Let's see where to go. Do you see farmers? Then also like how many fields? As a farmer, a very practical question how many fields could I participate? Do you see multiple, or is it I'm a farmer with 5,000 acres and a few fields with you, or how does that work? Could there be multiple? Do you see multiple relationships with the same farmer? Actually, because you're not investing in a farm business or you're investing on a farm land level which could have very different practices actually on them. What's possible there?

Speaker 2: 45:16

Yeah, what we're really constrained by is portfolio diversification. We don't want to be overly invested in a single farm. That's just not a good from an investor perspective. So we have roughly around like 5%. I think we'd have to actually look for any investors that are interested. We have that in our various fund docs, but we can't overly invest in any single farm.

Speaker 2: 45:35

That said, we can do multiple deals with a single farm. That's actually when we think about the economics of Fractal. Which is exciting, right Is that the margin for acquiring new investment opportunities is way lower because we're able to do in-logo growth like that, whatever. This is a scientist saying fancy sales jargon, so working on it, that's pretty exciting. So we're ultimately limited by that.

Speaker 2: 45:56

But Fractal's vision is not to be a fund manager. In the long term we're going to be the actor that can both connect farmers with sources of capital. So we may be able to only do two deals in this current fund, but we're doing an SPV with another capital provider and we can do another deal with that same farm that we know really well in the next fund. So we're that connective tissue to do these deals, to connect capital to farmer need. So yeah, it's mostly about portfolio construction but yes, we already are seeing most farms that are approaching us want to do multiple deals, that are saying that this is going to be a part of their capital stack and tool set to help continue to invest in their business across their business.

Speaker 1: 46:36

And from a return perspective for investors, how much are the discounts hurting the return or how does it compensate with potential value appreciation and risk? What do you tell investors when they say, yeah, it's all great and nice that you compensate farmers for the practices they do, but what does it mean for my annual coupon?

Speaker 2: 46:57

Yeah, so right now the discounts are about 20 basis points per practice, so I think that in total I think it can add up to about I'm trying so we have seven different practices, so 1.4% total discount on the coupon, and so we typically find that the investors that are looking to invest now are pretty excited about that impact play right and are willing, sort of on the face value, to take that percentage discount because they believe in the thesis that we also believe in.

Speaker 2: 47:25

We also have a lot of. I would say that there's a lot of good research at sort of broad scales that will see land appreciation across time in this and we'll see additional returns. We don't bake that in to any of our modeling or thinking about what will happen to the farmland asset class, but we think that there's basically an unpriced upside here in appreciation of this farmland asset and that's some of the big feces that need to be proven out over the next five to 10 years to really document that and be able to bake that in front of front end to be able to make more concise.

Speaker 1: 47:53

I mean, you could sort of already see it with the yields you get from a sea soil and delivering outcomes.

Speaker 1: 48:02

And we don't even talk about quality here and that's a whole other discussion. So it's odd that it's not built into the farmland price yet, and you're not the only one looking at that Like people are going to wake up to, just like in real estate, it really, of course, locations very important, but if your foundation is rotten, like everybody knows, if you buy a house, that that's going to be a seriously, very expensive problem, and so if it's well maintained, there's a different of course. It's a very different asset. Don't start emailing. I know farmland improves over time with the right practices and that's no other asset can do that. That would be bad. No other physical structure that's not part of nature can do. And then with the more extreme, like the seven practices, how extreme do you go in terms of I'm looking at a tree here aqua, forestry stuff and the more?

Speaker 1: 48:47

market like how far can we go? Can we go?

Speaker 2: 48:53

Yeah. So what I love about this is that we are not a carbon program, so we can just actually use common sense rather than having to worry about these third party verification or like these certification bodies for carbon. So we start with the seven practices, because we know that the seven practices is cover crop no till, diverse rotations in season, nitrogen, edge of field, continuous cover crop continuous no till, and actually we also allow knowledge sharing. So the so if a farm is engaged in sharing, as an early adopter, their own experience, that also qualifies, because we think that's really catalytic to the entire ecosystem. So all of those are ones that we would feel excited about any farm adopting, again appropriate for their geography North Dakota, it's pretty tough to do winter cover crops, for example, right.

Speaker 2: 49:37

So that's sort of the limitations. But any farm can bring to us their own what they believe to be soil health practices and we can consider it. It extends the diligence process a little bit. Right, we don't have as much baked science and diligence already pre done for some of these new practices, but a great example is compost right and manure application.

Speaker 1: 49:54

This is, again, not like super transformative, but just that's one that, if you do it right, but zero scale, right, and it is super transformative at that scale because most of it is at your farm scale and not like and I think many people have difficulties wrapping their head around how to do compost at hundreds, let alone 1000 acres or hectares. That's yeah, go and do that and report back, because it's not easy and it's absolutely possible and we need it at that scale. But it's a whole different ball game because stability making it yourself, buying it, how long can you keep it? How do you actually get into the ground? Suddenly you cannot drive anymore because of weather and your compost tea extract was only fine for a week and now you have a problem.

Speaker 2: 50:39

The logistics are challenging.

Speaker 1: 50:40

The logistics are insane. So yeah, and so that's an example. It's not part of that seven. But people can come to you and say, look, this is the level of compost I'm doing. Can I get at this kind?

Speaker 2: 50:51

Yep, and there's water quality issues, right, also, like where do you source the manure, and things like that. There are ways that you can do it in a way that doesn't actually net add, and some people don't actually compost and are just putting straight manure on the field, which can also, depending on how you do it, be appropriate. Those are all sorts of ones where the nuance really matters, so folks can bring those more regionally appropriate ones or operation specific ones to us. We haven't had anyone approach us yet with agroforestry as like one of their practices or silver pastures.

Speaker 1: 51:17

I'm using horses, I'm only using horses, I'm only using horses, I'm using all my direct seeder.

Speaker 2: 51:22

Yeah, exactly, Currently my farm is not quite big enough. It doesn't have an equity need right now.

Speaker 1: 51:27

The fracture would be very small. The nice thing about fractal is that in general fractions are they work on any scale, On any scale.

Speaker 2: 51:37

Yep. So I find that some of the really big farms may already have these relationships themselves, especially folks that have an investment background. We're finding a really nice fit, actually, with the smaller row crop farms. Smaller, I say hesitantly, because to many of your readers we'll think about my farm as a small farm, but I'm talking about 1,000 acres when we see a lot of more medium to big size at 3,000 acres and above in the US. Those folks that are really good economically, really focused on their crops, have not had the time or interest in developing investor relations. Who wants to do that? Only a very small slice of them, let alone structure it.

Speaker 2: 52:19

That's the sort of fit that we are really seeing with these farms that we can really help to be able to provide that service for them.

Speaker 1: 52:30

Coming back to the scale piece, because this would only be interesting if its scales really fast. How do you see that playing out to tens and hundreds of thousands of acres? What's the growth plan here? Because, as you said rightfully at the beginning, unless we make significant changes in the next three to five years, the rest is irrelevant.

Speaker 2: 52:55

This comes down to being able for us to be able to compellingly match this to investors, to say that this is a way to get access and prove out this new novel financing tool to give them exposure to farmland, at this ability to do deals in a way that they have not been able to before. What we see in farmland investing. On the investing side, it's only like maybe it's under 5%. I'm pretty sure that we have institutional ownership, that's, big corporate entities investing directly in farmland.

Speaker 1: 53:22

All of these articles, you see, of big institutional investors taking over American farmland, it's true, but very small.

Speaker 2: 53:28

Very small. That's not to say that in those geographies it's not hugely impactful, that's true. But when we think about oh my gosh, they own 60% of the land. No, they own less than five totally. That's in part because one farmland comes to sale so slowly.

Speaker 2: 53:43

Investors that are out there that are excited about the direct ownership mandate that they can own the land, they can control how it's managed, really lock in their impact. That way I'll find the article for you and you can put it in the notes. But it's something like in central Iowa in Illinois, which has a lot of corporate land ownership which, relative to other places in the Midwest, I think the turnover was still between 1% and 2% annually of farmland. You can just think about how long that's going to take if you're trying to buy farmland incrementally as it comes to market, let alone the diligence cost, let alone the fact that you need really relatively large deals to offset the diligence costs. We think that this scale we have a much larger investable universe, which is really where that scale comes from. Now, instead of just the farmland that comes to sale, we can invest in any owned farmland in the US. That's a huge acreage base now to work with. The limitations really become the capital that wants to invest in and do diligence and us building those investments.

Speaker 1: 54:39

How do investors respond to that? How have investors responded until now? Because you've wrote this series of change, peace, not in defense of, but also people. I think from a lot of conversations were challenging you on the impact thesis or challenging you on raising the floor and not focusing too much on the ceiling. How have investors responded over the last year plus six months, if you've been raising basically?

Speaker 2: 55:06

Yeah, we've been out, I would say maybe in the last three months pretty seriously having these conversations. It's still a pretty new fund we raised for the company and that went. Actually, we raised it not a great time in the market. We had a lot of really transformative folks that could see the impact thesis right away Trailhead, for example, and Sarah Ventures who led our round.

Speaker 1: 55:26

They got it In the last three months I've already interviewed with Trailhead Detroit. Fox a very small investor in the fund full disclosure very small. Don't email me on that. We have done quite a few interviews with Detroit Fox.

Speaker 2: 55:42

I will look them in the yeah, this is a good one Our first and actually we had a catalytic investment from a group called Builders Vision into the fund. They are, I think, also. I think maybe you'll have Sarah on the podcast.

Speaker 1: 55:54

Sarah will be on soon, yeah.

Speaker 2: 55:55

Yeah, she's amazing. Depending on when you order these podcasts she's amazing. Builders Vision is amazing. They also got it. This was a scalable impact play to raise the floor, but as I've gone more broadly to investors, I tend to find what exactly what you're saying. This part of what was the genesis of that article was okay. So are you requiring everyone to be organic? Are you forcing them all to do cover crops? Are you requiring agroforestry? All of these amazing things that need to happen in our food system, but we're missing the point that this was a scaled thing, that all of a sudden, we could invest in 100 million acres if we had the capital to deploy in the next year. We can just deploy so much capital to drive so much change so fast in a way that so many of these other sort of racist stealing things are required, and 100 million acres would that be.

Speaker 1: 56:46

you invest in, which means it's another five times, or would it be? I was in the other way that we would yeah like 20% of that 100 million. You would influence 100 million.

Speaker 2: 56:55

Yeah, we'd be able to influence. It's a better way to say it yeah, be able to influence 100 million.

Speaker 1: 56:58

Still invest in it, but yeah, just in a different field, but still massive.

Speaker 2: 57:05

That's massive right, and but what I'm realizing is that as I talk to folks, especially folks that have done a lot of really impressive work doing impact investing, many of them are actually looking for almost philanthropic levels of impact alongside their investment right. So they acknowledge that the scale may not be there and that it may be difficult, right, there's a lot of risk in that actually growing to be the majority outcome, and so we sort of fit in this intermediate place where we're like the goal of us, like with fractal, is successful. We won't have impact investing, fueling this regenerative agriculture right, if we're successful, this is just meeting a need of farmers and investors and it's just baking in regenerative as part of the cash flow investment right that this reduces variability, cash flow, improves land valuation. This is just a good business decision and that's actually like our sort of non-romantic goal is to make soulless capital, who doesn't care about regenerative agriculture, invest in regenerative agriculture. And that thesis, which is giving the title.

Speaker 2: 57:58

Yeah, yeah. But where we talk to impact investors and they really want that sort of raising the ceiling, this transformative work and this sort of incremental but scaled, massively scaled solution doesn't quite fit their mental framework. So that's been a really interesting set of conversations and that's part of why I put out that article right.

Speaker 1: 58:52

Part of this also I love why you say, interesting set of conversations, very frustrating I think.

Speaker 2: 58:57

You said it, not me, but it's good to be pushed right.

Speaker 1: 59:00

I can say whatever I want.

Speaker 2: 59:01

It's good to be challenged is the other thing, right?

Speaker 1: 59:03

No, but it's still you need the money in the fund, otherwise it's great, then this whole theory doesn't work. Yeah, but maybe the soulless side is less Well, they need to see track record fairly right.

Speaker 2: 59:12

So it's a new financial tool and we're sort of a new team of know. We've worked together for a long time so we need track record and I think that's sort of the key role that these impact. I think there's like the first of a kind funding sort of language that's rolling around and that's exactly what this is. This is a new model that needs to have a track record at a reasonable scale so that we can leapfrog into that more institutional level of capital and be able to roll and get the flywheel going at that scale.

Speaker 1: 59:38

Yeah, that's, and that would be a massive impact and extremely additional, and you influence a lot of other acres and hectares and maybe a lot of soulless capital, which is whatever the impact investor wants. But it's difficult to get over that. I want more trees or I want more specific practices. And I think I was too far down the rabbit hole.

Speaker 2: 59:58

Right? Well, I, you know, I, I, what I, what I find compelling right is is along this line of there's no silver bullets. You want a portfolio approach to your impact, right? I hope that many of these investors are thinking about a diversified set of solutions that they're trying to press against, right? So, rather than focusing entirely on that, race the ceiling sector to start diversifying. Obviously, that would benefit fractals, so you can keep me honest here. But, right, any solution that raises the floor alongside pushes that ceiling. Because I think if we're only focused on pushing the ceiling up, we're just going to, we're going to wait too long and we're putting all of our eggs in one basket without sort of addressing the underlying sort of infrastructure of the system for how to help move it and make that that reach not quite so high. So I think it actually indirectly supports many of these raising the ceiling solutions by continuing to move the entire system along that direction.

Speaker 1: 1:00:50

Yeah, but there is a counter argument there. I think what we've seen in nature, but also often, like it's sometimes or you see, it's better to concentrate, like you shouldn't spread out too thin, in a sense of like. There is a question if only no tail, is that good enough? In like even, is that good enough from a risk perspective, from a SOHA perspective, from just a very cynical investor perspective? We've seen David Montgomery keep saying like, unless you do all three, like no dig and no tail and cover crop and mixing it, just not going to unlock that SOHA benefits, you might be investing in the field and maybe the farmer is not being pushed enough and is abandoning it at some point and doesn't care about the discount because it's just not getting the results.

Speaker 1: 1:01:35

Because there is some kind of network effect. There is this multiple. Of course you get multiple discounts if you do three, but it's also very scary to do three or four or five. So there is that like if we spread out too thin, we're just not getting. Like compostee, you're just not getting the effect you want. Yeah.

Speaker 2: 1:01:49

I would. I think that's a good as a fair point, I would say that you would want to organize based on the sorts of impact you'd want to have, right. So if you are focused on soil, health and climate, like delivering soil as a climate solution, I would be focused on all solutions that work on US, for example, I'm obviously US centric right now. If you that, you know and this is a look, this is all in base that can deliver 100 million metric tons of carbon sequestration if delivered at scale. Right, and I can drop that paper into. But like this is something when we think about climate solutions can deliver the scale that we're looking at.

Speaker 1: 1:02:21

We need a lot of food for us.

Speaker 2: 1:02:23

Yeah. So if you're, if you're thinking about soil health as a climate solution, I would be investing in not only silvopasture agroforestry right that delivers it on that. I would also be investing in things like fractal that are delivering soil health incentives.

Speaker 1: 1:02:36

You're asking my $1 billion question. Yeah, let's go.

Speaker 2: 1:02:40

Well, if I had a billion dollars, I'd probably invest it in fractals fund to prove out the theory of change, so we could move on and collect our returns.

Speaker 1: 1:02:46

And if fractals didn't exist, then you weren't starting fractal, because that's a bit of an open door. Let's say what would you do?

Speaker 2: 1:02:53

If I couldn't invest in fractal, I would take this portfolio effect right and I would probably I mean, I sort of already said it I would probably choose soil health right as this lever and I would then focus on all sorts of problems, all sorts of solutions that deliver and better price in the externalities, the positive externalities of soil. So whether that's through increased nutrition or increased climate, reduced volatility in yields, all of those things. I would keep that as a central organizing focus and then be spreading that capital, both in that sort of pushing up the ceiling to help farmers with new business models and market infrastructure to deliver new actual food production approaches and these like floor approaches, whether it's through improving crop insurance offerings, that sort of incorporate soil health, land valuation that incorporates soil health and climate risk. All of that, I think, is sort of the bucket of work that will deliver one solution right and that's the focus you were talking about right, so it can be diversified across solution mechanisms, but all focused on the same problem and the same types of outcomes.

Speaker 1: 1:03:55

And how does it because you mentioned food a lot of these farms, I think, get smashed for not actually growing food, but a lot of feed and other things. How is this a transition to start, even if there are seven practices in or on the journey to, is there a pathway to actually deliver more food? Of course, at that scale, you cannot go to a farmer's market so you grow 10,000 pumpkins and you're going to sell like how does the food and local food web fit into this? Or just not at all. That's just two ambitions.

Speaker 2: 1:04:26

So we and this is what is so great about being back working directly with farmers is you actually see a lot of that diversification happening at a farm by farm level. With many of these really progressive, very business-minded farms, they're accessing new, smaller markets that are much higher value, right? So you think about, like in Montana right, in Montana is known for this, but, like you know, some of the chickpea and the lentils that are being able to be grown there and things like that that it's just like again, yeah, when you think about Big Ag, it gets all swept under the rug because everyone just thinks of continuous corn, but there's quite a lot of that. But I actually think that that sort of crop diversification, that's really a market, really a market pull problem, much more than a financing pull. So farmers will respond when there are markets, right.

Speaker 2: 1:05:11

So, like you know, a sort of quote, like a bigger example, was Oatly right, trying to increase the organic oats that they could source domestically in the US. That has a ton of soil health benefits, right, because oats are much smaller sort of season crops so you can get cover crops in them much earlier as opposed to corn. So there's other additional soil health benefits, but that sort of diversification. I also see that it's from food companies that are trying to do allergen-free consumer packaged goods. So, like a shout out to Partake, for example, who I know, denise, from various things that they are going to source sorghum, they're going to source all sorts of things right, that are small grains that are going to help diversify crop rotations, and they're not even thinking about the soil health and regenerative ag perspective of what they're bringing to market.

Speaker 1: 1:05:54

It's just a perfect crop.

Speaker 2: 1:05:56

It's a part, right, yeah, and so all of a sudden you have those demands, but I think that really has to come from a diversification of our food system. But this is the other thing is like and you rightly said, 50% of our corn goes to ethanol. Something like 30 to 40% in the US of corn goes to cattle feed. So just focusing on food is also not going to hit these acres, right. There's just so many acres that still need a lever for change, and that's why I think financing actually ends up being a really compelling tool to address ethanol acres, to address livestock acres that are not going to get polls. I mean, actually I'll take that back. Some of the developments in what's happening with ethanol, with carbon intensity, is great from a soil health perspective, but I think the livestock feed is going to be a much slower burn for getting carbon intensity passed through that mechanism, and so you still need a way to address those acres, for trying to make change.

Speaker 1: 1:06:46

And so you're listening sometimes to the podcast. You know this question is coming. Also, we sent out the questions before. But if we would do this interview, this conversation let's say RFCI in Denver and we were on stage and the room in that case is mostly filled with investors, but let's say it's completely full with investors and if you want them to not even remember factory ownership or all of that, if there's one thing you want them to remember from the conversation, apart from the fact that they learned a lot and they see a whole new opportunity set, what would be the one thing you want them to take away?

Speaker 2: 1:07:23

What's tough, because if they're already in the room of RFCI they already are sort of bought in agriculture.

Speaker 1: 1:07:27

But I think it's okay, let's change the room. Let's go to where? New York? Where, in a nice theater, but still only Wall Street types. I don't know how Wall Street types look, but those types, those types. They have really nice ties to me yeah nice ties, nice jackets, nice suits, but what do you want them to remember?

Speaker 2: 1:07:47

I think it's that agriculture is one of those few places where you have those win-wins between profit and impact. Like you said, there's not many other assets that can actually improve over time. Agriculture you could do both of both, delivering profit and delivering impact.

Speaker 1: 1:08:04

Just I'm stopping you there. You're planning to prove that over time, but you're saying this with a lot of confidence now, which means you have proof of that or you're seeing examples of that. That. Those two are connected.

Speaker 2: 1:08:18

Yeah, I mean you see it in the soil health thesis just fundamentally, the improvement in organic matter concentration in the soil that's carbon sequestration, that's impact right Improves water holding capacity, which helps with yield production. In adverse conditions, whether it's too wet or it's too dry, that soil works as a better sponge. Right there, that fundamental biology of the system supports everything else. And that all of a sudden you get better yield outcomes, you get better revenue outcomes and you also get more below ground biodiversity. You get soil carbon sequestration, you get improved water quality.

Speaker 2: 1:08:49

All of those sorts of additional co-benefits come from investing in the medium in which you are growing literally your money, your revenue, and it's hard to think of another system that works like that at its most fundamental, how that actually manifests how you can build a business model on top of that, how you can monetize it, how you can sort of deliver those returns. I think it's the challenge that we're all engaged in in a variety of different ways, but that system at its core. You don't have to change anything about the system, you don't have to like bend the system. Just the way that it's built has those two things right at the very beginning.

Speaker 1: 1:09:22

Okay, so Wall Street types remember that. And now switching gears. If you had a magic wand and you could change one thing overnight, what would you do?

Speaker 2: 1:09:33

I'm sure this answer has come up before in this podcast, but I would price climate risk and health risk into our food system. I would put those prices. I think the capitalist system is great at responding to price signals. What's the problem right now is that we don't have the right price signals.

Speaker 1: 1:09:50

Big climate. Would you take carbon? What would you do that?

Speaker 2: 1:09:54

You guys can be operationalized. This, I thought I just got to wave a magic wand. Someone else is going to figure out the problem.

Speaker 1: 1:09:59

That's true. What do you do about health?

Speaker 2: 1:10:02

That's the other thing. I think health is intertwined.

Speaker 1: 1:10:06

You worked a lot on carbon, so that's why I'm banned.

Speaker 2: 1:10:10

On the health side, when we talk about consumers, I'm most bullish on health actually being the lever that pulls consumers to pay the premium. You see this in the US environmental history with the clean water acts, clean air acts. That all came because of concern about poisons entering our bodies and our children's bodies. All of a sudden that became extremely personal. All of a sudden there was huge amounts of political motivation to change how we managed pollution.

Speaker 1: 1:10:34

Are we there with health and food connection?

Speaker 2: 1:10:37

I mean, this is the scientist. I actually do think this is actually a little bit of a research challenge. It's connecting health outcomes. How do you define health first of all, Just like soil health, there's work to be done there. What are the biomarkers Then? How do you connect that to what's actually coming out of the food, the crops that you're growing? And then how is that connected to management? There's like a causal chain here. That's challenging. There are folks now, I think and you've had them on this podcast that are actively working on that. I'm most bullish on that as a mechanism to unlock consumer demand, as long as you can actually prove soil health connections to nutrition, which we think is there. I hope is there for my own farm, because I think we are serving amazingly nutritional food and I'm super excited to charge even more premiums to wealthy city folk for our crops.

Speaker 1: 1:11:28

But until that's there In some papers. We've seen those connections Actually not that far from you, David and Anne, David, Montgomery and Bigley have shown up Very small sample size, but still it showed a very clear connection to practices and beyond. Now it's up to us to repeat that a million times and show and keep repeating this apple is not this apple, this tomato is not this tomato, this kale, this corn it really depends.

Speaker 2: 1:11:59

The time window is also really surprising to me how fast those effects can degrade. So if you're looking, even though the storage shelf life of a carrot may be six months, the differences vanish much faster than six months. That is like a anyway, just as a sort of nerdy science, I remember correct Schumacher.

Speaker 1: 1:12:16

The company didn't make it, I think of I don't remember how it was called. Anyway, we had them on a few times and on a story of organic strawberries that off-field, like immediately if you measure them, had a completely different nutrient density compared to non-organic, and then once they got to the shelf, it was completely Something happened. Maybe we're slower, they were whatever, but like you could physically see the difference once you measure at the field level and in the shop it was just gone and that, yeah, freshness, and we've no idea, like processing freshness, all of that is going to change and yeah, it's really at the beginning, like what does it mean? We should eat everything fresh at the plant? Of course that's not going to happen. So what does it mean for processing, for fast-moving consumer goods, for packaged goods, for what does processing even mean? So everything has to be fermented to be better when it came to the farm in terms of kale and krautie or like how.

Speaker 2: 1:13:10

Or flash-frozen even, I mean there are all sorts of different ways to achieve this sort of thing.

Speaker 1: 1:13:14

What is processing, actually mean in this new in the dual world, but that's a whole different podcast. And then what would you do on like the climate risk?

Speaker 2: 1:13:20

I mean we don't pay the full cost of production for the crops and again, you've had folks that have articulated this really nicely in this podcast but we don't pay the full cost for the crops that we grow today, right, Depending on how, just like we don't pay the full cost of energy, we don't pay the full cost of so many things. So when we think about water quality as a great example, right, the huge dead zone that is in the Gulf of Mexico it's completely unpriced, basically for fertilizer risk, right. So farmers are absolutely being rational on how they apply fertilizer. It's a risk mitigation scheme for them, right that it's an insurance mechanism that they don't want their crops to run out of nutrients throughout the year. They don't pay the cost downstream.

Speaker 2: 1:13:54

I'm not necessarily arguing that those specific farmers should be paying the cost, but the system is set up such that it is sort of like a no-brainer that that cost comes back. So at least having some sort of connective tissue and I think so it's thinking like that. It's also things like investments in soil health. Right, when you are a lower risk applicant to crop insurance because you have invested in the ecological safety net of your farm, you should pay lower premiums. Right, You're a lower risk operation. So I think those sorts of things need to be baked into the price signals if we're going to continue to have a very price signal driven food system that we expect to somehow deliver the impact outcomes that we want to see.

Speaker 1: 1:14:35

It somehow comes back to fisheries, in this case in a dead zone, so not too much fish, but it does circle nicely back and I want to use that opportunity to wrap it up and thank you so much for your time. We're one hour 10 in. We could have done another hour, I think plus, but it would be great to check in over time and see how this scale is being built or not, and what are the roadblocks, challenges, opportunities and all of that. So I want to thank you so much for the work you do, for coming on here and, of course, hope to follow your time.

Speaker 2: 1:15:05

Thanks so much for the time. This was a wonderful conversation.

Speaker 1: 1:15:13

Thank you so much for listening all the way to the end. For the show notes and links we discussed in this episode, check out our website investing in regender agriculturecom forward slash posts. If you like this episode, why not share it with a friend? Or give us a rating on Apple podcast? That really helps. Thanks again and see you next time.