00:00:00:11 – 00:00:16:06
Cascade Announcer
Welcome to Cascade Conversations. Join the team at Cascade Partners and their network of trusted advisers as they work to demystify details. Terminal and strategies in the world of acquisitions, divestitures and financings.

00:00:16:09 – 00:00:43:07
Jon Doehr – Cascade Managing Director
I’m John Dorr, managing director with Cascade Partners. I’d like to welcome you to another edition of Cascade Conversations. I’m here this afternoon with Tom Walker, a senior partner with Walker Insight Economics consulting firm focused on agriculture. We are here to talk about the global state of the agricultural industry and specifically how the world plans to feed 10 billion people by the year 2050.

00:00:43:08 – 00:00:44:17
Jon Doehr – Cascade Managing Director
Tom welcome!

00:00:44:19 – 00:01:11:10
Tom Walker – WalkerInsight Senior Partner
Thank you, John. Senior Partner Actually, the senior partner is Tom Walker, Senior who is in fact, yes my dad, he founded our firm in 1969. And involved us,say, I should say involved himself long before I was in law professional in the agricultural industry. I think he had judged it back in the seventies, at least 40% of business in our Federal Reserve district.

00:01:11:10 – 00:01:47:11
Tom Walker – WalkerInsight Senior Partner
And Federal Reserve community got hooked on it. It’s it’s fascinating that I’ve had and it has to a certain degree of homogeneity, which permits some pretty interesting data mining. So I came into the firm out of college, which is getting to be a long ago as well, is advantage seniors. That is. I do have someone who remembers the seventies and the end of agi crisis of gaze, which predates my own professional tenure and you’re right, ag been interesting since then.

00:01:47:11 – 00:01:57:21
Tom Walker – WalkerInsight Senior Partner
It’s essentially been up up without any really distinctive widespread crises almost to the current day.

00:01:57:23 – 00:02:25:14
Jon Doehr – Cascade Managing Director
Right. So. So as we look at the current state of in your your work is centered on both kind of data mining economics holistically and as it as it impacts the the farming industry. What are some of the key developments that you’ve seen in your recovery coming out of COVID? And of course, we’ve got significant inflation that impacts pricing the commodity cost for farmer, the were some of the key issues you’re looking at today.

00:02:25:16 – 00:02:59:21
Tom Walker – WalkerInsight Senior Partner
I guess. Yeah. So where do I start? I mean, I think a lot of the factors contributed to making agriculture here in 2022, and that’s nationally true. We focused mostly on that. So I can speak very specifically there of the most profit of all year on record since 2012, which itself was kind of on the heels of the ethanol boom where the mandates a few years prior created a major bull market in corn, and that ran ahead of the cost really to catch up.

00:02:59:21 – 00:03:23:26
Tom Walker – WalkerInsight Senior Partner
So we had some wonderful in that process in 2000, 12, 2000, 22 bested that number. And you have to go all of that basically into much all of the data sets to find the last ten years as it did is simply to see for us to see correlates to the 1970s which were very go possible.

00:03:23:29 – 00:03:47:24
Jon Doehr – Cascade Managing Director
Okay okay. And can you tell us a little bit about land prices, how they soared to their current levels, how that’s impacting the farmer and kind of how that’s going to impact the future of the industry as it relates to what is the best use of land. As we all know, labor is a big problem for all industries today is automation coming on to the farm.

00:03:48:01 – 00:03:54:19
Jon Doehr – Cascade Managing Director
And then as you look at the supply chain, how is technology impacting that? The whole the whole supply chain.

00:03:54:21 – 00:04:24:28
Tom Walker – WalkerInsight Senior Partner
Its interest big driver of farmland? Gosh, as recently as the 1970s. So it was about $1,000 an acre. And I think Minnesota’s it’s one of the not the major corporate properties but certainly a decent proxy for overall profit. In the US, farming was maybe 1300 acres recently. It’s seven seven depending on the rumor mill and what sales are there.

00:04:24:28 – 00:04:47:24
Tom Walker – WalkerInsight Senior Partner
And I am aware of an appraisal that was just conducted at least 40 farm with that ten, 12, $12,000 an acre sort of board of Regents is very, very high and it is still high in spite of the fact that since last year we’ve seen some real major interest rates. And I mean, you have a very powerful negative correlation.

00:04:47:24 – 00:05:33:24
Tom Walker – WalkerInsight Senior Partner
So you talk about farmland once done since the nineties, certainly interest rates until recently reversing the downward trajectory that tends to boost asset prices. Additionally, we’ve seen with technology in particular hybrids and also chemicals, chemicals, hybrids, pushing corn yields up really practical, and that’s less ethanol mandates and whatever else you want to throw in the mix, whether it’s sort of over Ukraine production or whether it’s just what the M2 did in the period in chasing after, well, commodities is going to services, which inevitably happens.

00:05:33:26 – 00:05:49:03
Tom Walker – WalkerInsight Senior Partner
Inflation is the first effect on farmers who do benefit. And I think that’s really driven. I totally hold speculative price. I could go on a lot about that for a second. See, we’ll see where we want.

00:05:49:03 – 00:06:16:16
Jon Doehr – Cascade Managing Director
To take, Right. So so as we look at we’ve all experienced when we go to the grocery store, right. And the prices have gone up and our egg price and saw and then they have come down wheat prices, as you mentioned, because of the war, there was a serious concern globally about being able to see that people, particularly in areas where it’s going to be tough to get the grain out of the Ukraine into those countries.

00:06:16:19 – 00:06:27:29
Jon Doehr – Cascade Managing Director
So look soon. So things have stabilized somewhat. Is that correct? And if so, how does that impact kind of the next couple of years as we look at just looking at food production in the ability to feed the world?

00:06:28:04 – 00:07:15:26
Tom Walker – WalkerInsight Senior Partner
Sure, it’s always speculative, but looking at the sectors and how they sit together, actually more like how they sell it together, It’s hard not to predict some kind of a reset as a valuations. They would, but also equipment that spills over into rents. But what the timing is, I mean, right now the average farm is very liquid. They had a very large profit here and based on my analysis of 2023, they will have a hard time being as profitable this year as last last year at a almost improbable combination of very high yields, well above trend in this area and the prices that basically rewarded farmers for speculative production.

00:07:15:26 – 00:07:31:20
Tom Walker – WalkerInsight Senior Partner
But if they didn’t hedge before harvest too, and very atypically prices rose all the way to harvest and beyond, they are telling us now studio happens and there’s a strong negative correlation between interest rates.

00:07:31:23 – 00:07:55:25
Jon Doehr – Cascade Managing Director
Well that’s great. So as we look at how do we create a resilient food production going forward, there’s a lot of new technologies. A lot of money has come in to what they’re calling the agro food tech space. I think it’s over $200 billion in the last since 2012 and $30 billion in 2022 alone. All of that, that was down from 2021.

00:07:56:00 – 00:08:20:26
Jon Doehr – Cascade Managing Director
As you look at concerns over supply, of course, ESG, climate, carbon and then new technologies, Internet of Things, precision AG, how do how do all those factors influence what a farmer is thinking about in terms of how what is best for their business, and then how the consumers should be thinking about where they should go buy their products?

00:08:20:29 – 00:08:50:28
Tom Walker – WalkerInsight Senior Partner
Yeah, it’s I mean, the large steel firms, it’s obviously a very full time job just to keep up with with technological advancement. And it it results in a really high capital spend. And just to keep up is interesting. I find that that farming is there. Yeah. Backs essentially accounts for every single dollar free cash flow that comes in every year, which is always is a bit disturbing.

00:08:50:29 – 00:08:54:03
Tom Walker – WalkerInsight Senior Partner
You’d like to see a little bit of payback right over.

00:08:54:05 – 00:08:55:08
Jon Doehr – Cascade Managing Director
It was very capital intensive.

00:08:55:12 – 00:09:19:26
Tom Walker – WalkerInsight Senior Partner
It is exceedingly rare. And keep in mind in terms of land ownership, farmers own perhaps a quarter of the land, but it’s under management. So there will be an interesting shift that maybe didn’t steal from you. But in terms of where the capital resides, as the population ages out, that involves farmers retiring, landholders, passing other land holdings over the next generation.

00:09:19:28 – 00:09:42:02
Tom Walker – WalkerInsight Senior Partner
Sometimes the next generation does not want to be in that situation. And so they would consider professional third party management or they’re looking to sell it now. So that whole landlord and farmer relationship is probably going to evolve next ten years. In fact, if you can guess, to be more, more professional for.

00:09:42:05 – 00:10:09:17
Jon Doehr – Cascade Managing Director
Okay, so that’s interesting. Interesting Segway, One of the new issues that have come, it’s coming to agriculture is advanced technology greenhouses or a controlled environment, situations where you’re growing product indoors. Correct. And we’ve seen a lot of money in the venture capital space going to these vertical farms, which seem to have had mixed success in the last year.

00:10:09:17 – 00:10:27:21
Jon Doehr – Cascade Managing Director
Some are still growing, but others have certainly failed. What what is the situation where the farmer has to decide, you know, I can keep doing this outdoors, but I have these environmental considerations I’m having. I have concerns with the weather versus potentially going to an indoor environment.

00:10:27:23 – 00:10:57:01
Tom Walker – WalkerInsight Senior Partner
Yeah, it’s I mean, obviously animal husbandry, it’s moved a lot of it inside anyway, right? Yeah, right. Got production exclusively inside dairy the actual the actually more of I mean so much of agriculture is still producing very commodity level one undifferentiated product. Number two, yellow USDA, yellow corn soybeans a lot of it’s going into seed oils, some of it’s going into biofuels.

00:10:57:01 – 00:11:23:17
Tom Walker – WalkerInsight Senior Partner
A lot of corn goes there. So in terms of the higher quality food question versus where most of our efforts are being devoted, it’s trying to see where that’s going to evolve. I by most measures, which I don’t want to get into, ethanol is not an efficient means of survival environmentally, economically. I do not predict that it’s going away.

00:11:23:17 – 00:11:56:23
Tom Walker – WalkerInsight Senior Partner
Subsidies don’t tend to do that. Right. But it does mean that there are probably better sources. So what we’re guys really the ag boom and the ethanol boom, the cheap money boom have tended to drive disguised undifferentiated production and and growth. Okay. So some of the more interesting, more direct direct to consumer food items, honestly, I, I sort of hypothesize have been pushed aside a little bit.

00:11:56:25 – 00:11:58:10
Tom Walker – WalkerInsight Senior Partner
So it’s longish.

00:11:58:13 – 00:12:51:06
Jon Doehr – Cascade Managing Director
Assets. Right. Right, right. Which you’re still still trying to get to that low cost of production. Like I know it’s a little different space, but in we’ve done a fair amount of work in the horticulture space where they’re not growing food so much as as plants and trees and shrubs move know in that sector of the H-2A program, which is a program where workers are brought up from Mexico in a very organized system, has been a great way for some of those companies to increase productivity and efficiencies in their in their various sectors, which is important as as pricing has has been under pressure with with COVID and consumer demand has has kind of waffled

00:12:51:06 – 00:12:58:02
Jon Doehr – Cascade Managing Director
a little bit. So it’s still about being that low cost producer in the farming sector, in agriculture in general, correct?

00:12:58:05 – 00:13:30:04
Tom Walker – WalkerInsight Senior Partner
Yeah, That’s not a question. I mean, if you can maintain quality and cut cost and that is a bit of a trick because people are cutting costs, I think sometimes bit knee jerk in the end they end up undermining of quality and there is a profile in a long term, but that’s definitely there is a regard if they don’t see enough of it, primary opportunity, whether you’re in the crops or apples, is definitely organics.

00:13:30:07 – 00:13:43:06
Tom Walker – WalkerInsight Senior Partner
Just because it’s more distinctively, you know, it’s it’s differentiated, it’s consumer driven, it’s not dependent subsidy or other forms of economic management that you’re going to get.

00:13:43:09 – 00:14:03:19
Jon Doehr – Cascade Managing Director
Right. Okay. And what are you we haven’t seen but I know it’s it’s critical in what you do. It’s important in a lot of different industries that we see. And it’s becoming more and more important every day. Are data analytics. Can you talk a little bit about how you mined data and how you use that with your clients to help them improve their operations?

00:14:03:21 – 00:14:36:18
Tom Walker – WalkerInsight Senior Partner
Oh, agriculture is really data rich. I don’t know who is that anymore, but that’s because the government involvement, there’s no data set, so you really get a good sense of what the economic reality is. So I’m trying to understand how you’re performing. We all want some basis comparison and so I’m able to access that data and get my clients see insight, basically looking over their neighbors shoulder now, which is kind of a kind of big brother, I guess.

00:14:36:18 – 00:14:58:23
Tom Walker – WalkerInsight Senior Partner
But I mean, anyone can do it if they want to. And the perception and reality are kind of divergent there. What people sort of assume the nature of reality and just driving around, look at what is going on in agriculture ends up being very different if you get behind the numbers. It’s a challenging industry on margins are razor thin.

00:14:58:25 – 00:15:30:19
Tom Walker – WalkerInsight Senior Partner
Capital costs have been low, but that’s driven prices up very high and offering to a transition where from a cap asset prices to a loss of capital cost price, it’s always the people of this is the big standard that’s using the data is what’s the nature of that tradition that that transition don’t get cut out. I mean, to do that, the stupid example, the executive people are doing it don’t buy $12,000 an acre of land in Minnesota that presumes that you’re getting 20 bushels of corn at $7.

00:15:30:21 – 00:15:54:28
Tom Walker – WalkerInsight Senior Partner
Right. And 3% of customers. Right. Right. Have they up and yet they just do, right? Yes. Are they persistent, rather down. Okay. And looking at history. So what’s to what extent is history controlling when you find the numbers for these prices to remain? One of the things have to be true. And we think those assumptions are usually from the answer is no.

00:15:55:05 – 00:16:09:23
Tom Walker – WalkerInsight Senior Partner
We have to assume or at least be prepared in the financial arrangements that corn is going to be cheaper. When I was going to get to bushels, interest rates in fact are 78%, which if you take a broad sweep of history, it’s a middle of the road.

00:16:09:29 – 00:16:10:27
Jon Doehr – Cascade Managing Director
Okay.

00:16:10:29 – 00:16:14:18
Tom Walker – WalkerInsight Senior Partner
So that yeah, the short term regret.

00:16:14:20 – 00:16:51:11
Jon Doehr – Cascade Managing Director
I think, you know, for our last topic of today’s conversation, we’re investors, right? We obviously do a lot of work in mergers and acquisitions. You’ve alluded a little bit to consolidation in the sector with the big corporate farms that have come in and acquired a lot of the land. And I know that we’re expecting a lot of M&A with the rise and fall of capital funding in the agrifood tech sector, particularly around, as I mentioned earlier, some of the technologies and the vertical farm that is going to be some winners and losers and an M&A is going to be a part of that.

00:16:51:13 – 00:17:09:14
Jon Doehr – Cascade Managing Director
How can you just kind of speak to consolidation in general in the sector as it’s a finite pie? It’s not really growing. I think it was Mark Twain that said biomass, and they’re not making any more of it. How do you how do you see M&A consolidation playing a role the next few years?

00:17:09:16 – 00:17:55:19
Tom Walker – WalkerInsight Senior Partner
It’s a lot of losers. There’s a lot of sectors. I think that crop farming tradition is is has been untamable. It’s very decentralized, and maximum efficiency tends to be around 5 to 10000 acres. And I’m working for Minnesota assumptions to different after we’ve seen the most consolidation definitely within you know, animals that are bees definitely especially hogs, poultry dairy and I’m not sure what to make of some of that because that’s all a still doing a it’s very undifferentiated, not quality driven necessarily in consumer driven product.

00:17:55:22 – 00:18:26:26
Tom Walker – WalkerInsight Senior Partner
There’s likely to be opportunities in land acquisition, land holdings and actually to be such an open source serving work with, I think what we see expectation of ownership and management there. But I don’t think that $10,000 an acre is a good play based on the current crop mix. So someone figured out how to grow actually really good cabernet grapes in Minnesota.

00:18:26:26 – 00:18:58:19
Tom Walker – WalkerInsight Senior Partner
I think that you’d be happy for 10,000, although I was I was at another event. I was talking to a vintner from Central Coast and Unplanted, a suitable ground for the wine production of those 25,000 acre Wow. Planted, but then fully planted and ready to produce this maybe 4050, which you think about the value of production there and you think about how that compares to 10,000 for the Minnesota number to your corn.

00:18:58:22 – 00:19:21:15
Tom Walker – WalkerInsight Senior Partner
Right. Are number some kind of crazy. So I, I wouldn’t tell everyone to rush out and buy land and not make more of it. And there’s something important you shared with me talked about with your own supply. I think your total production right. And we’ve gotten very productive. There’s a lot of land that can become more productive. There was a theory that was advanced a few years ago.

00:19:21:15 – 00:19:32:04
Tom Walker – WalkerInsight Senior Partner
I sympathetic or curious about it was pig farm where you see land and pull out production because the efficiency of production so great. Okay, so if you’re going to buy it.

00:19:32:04 – 00:19:55:18
Jon Doehr – Cascade Managing Director
Make sure that could. Right. Right. Well, I think what I think what I hear you saying and what we’ve seen as well is that it’s it’s been a it’s a highly competitive sector, whether it’s agricultural, horticulture, there’s a finite pie. You have to be very efficient in your in your means of production. And as a result, there’s consolidation because economies of scale just lead you to more profits.

00:19:55:25 – 00:20:20:03
Jon Doehr – Cascade Managing Director
And so it only makes sense that some groups are getting out of or they need to be four out of beasts and into other areas. And I know in horticulture it’s the same where it’s just more efficient to have larger operations where you can you can generate economies of scale and increase your bottom line. So Tom, we should talk about input costs.

00:20:20:05 – 00:20:44:11
Jon Doehr – Cascade Managing Director
Energy costs are obviously going up. Water is becoming more scarce, fertilizer, fertilizer costs undulates. And I know earlier you were telling me a story as far back as the eighties about the hydroponic facility that had been impacted by every cost. So can you tell us a little bit more about that and how input costs are impacting business that.

00:20:44:14 – 00:21:15:10
Tom Walker – WalkerInsight Senior Partner
Yeah. And so that’s from a time my time senior was associated with a startup. The guy I worked out how to grow hydroponic tomatoes, very high quality and it was something of a breakthrough that but recalling the story as he told it, what ended up seeking the deal was just to finish the physical was energy costs, which remains a big deal in farming right in Minnesota, we don’t tend to have water issues.

00:21:15:13 – 00:21:47:07
Tom Walker – WalkerInsight Senior Partner
Some crops are producing pivots, but even there tends to be I sometimes think of the required inputs seed, fertilizer, chemical fuel, our whole way up, rents are way up. But again, I’m talking about farmers are renting maybe three quarts of the ground that’s under their management, right. Those are so high that it’s really if we start to look at maybe a retracement of corn prices to, let’s say $4, which is not very far from the USDA, is what are your projections?

00:21:47:09 – 00:22:10:02
Tom Walker – WalkerInsight Senior Partner
As I recall, it’s hard. Costs are going to have to reset very heavily in order to put them back into profitable territory, even break even. You know, as I mentioned, the front of the the margins of rates still return on assets in the farm in firms from the mid nineties to today. It’s just the tip over cost of funds.

00:22:10:02 – 00:22:24:03
Tom Walker – WalkerInsight Senior Partner
So economically speaking, they’re really a bit of a break even. So it’s hard to see what that’s where that’s going to go, except for some of the inputs are going to be forced or because at some point the food has to be grown.

00:22:24:06 – 00:22:53:25
Jon Doehr – Cascade Managing Director
Right? And and as we’ve seen, cost of funds is going up, which is exerting pressure on companies across the agricultural spectrum, going through plants, flowers, what have you. And I think that’s that certainly is what part of what’s driving this, this movement to indoor farming where hopefully it’s more ESG friendly and better use of of of water and your and your carbon control, climate control, etc..

00:22:53:27 – 00:23:10:26
Tom Walker – WalkerInsight Senior Partner
Yeah, I’m presumably indoor and I have less direct experience with it as you’re talking about much higher value. Our problem than cattle feed or sleep or ethanol. Right. Like you know agriculture correct. People raising whatever. So our basal.

00:23:10:26 – 00:23:12:27
Jon Doehr – Cascade Managing Director
Rail Railtrack.

00:23:13:00 – 00:23:23:26
Tom Walker – WalkerInsight Senior Partner
And I think the math is from from exposure still dodgy. It’s still a very expensive proposition. It gets to be mostly about capital costs and energy.

00:23:24:00 – 00:23:51:29
Jon Doehr – Cascade Managing Director
Right. Right. So I think we are hearing about some facilities that are trying to be located near water sources or where they can take advantage of of natural resources to bring those costs of production down. Yeah, Yeah. We are just about at the end of our conversation. I think it’s been we want to thank Tom Walker of Walker INSIGHT for his his deep experience in the agricultural space.

00:23:51:29 – 00:24:11:23
Jon Doehr – Cascade Managing Director
I think what we’ve heard today and I’ll let Tom wrap up as well but it’s a interesting time in the agricultural space. Our food tech has received a lot of capital will continue to receive capital, but there’s going to be winners and losers and it’s going to take a lot of insight and hard work to find those sectors that are going to pay off.

00:24:11:24 – 00:24:14:24
Jon Doehr – Cascade Managing Director
Tom, any concluding thoughts about things?

00:24:14:26 – 00:24:42:02
Tom Walker – WalkerInsight Senior Partner
That is a Chinese curse? Isn’t that maybe this in interesting times and these times are interesting, but in terms of consolidation, I think I could close off looking at the nature of crop farming in that sort of most of us, you might say that the minimal side is for efficiency of the crop. About 60,000 acres of government, a single person management, that average farm size in Minnesota is considerably less.

00:24:42:02 – 00:25:07:24
Tom Walker – WalkerInsight Senior Partner
It’s less than a thousand acres under management. So we’re seeing a lot of competition to grow, just to become even minimally profitable. And that sort of stuff leaves a lot of people out there. There will be lots of exits. But in the meantime, you know, farming is a rich, multigenerational generational capital base. And so unfortunately, it’s a little bit of a war of attrition that we’ll see in the coming year.

00:25:08:00 – 00:25:15:16
Jon Doehr – Cascade Managing Director
Okay, great. Excellent. Okay. Thanks for being here, Tom. Appreciate it. And thank you for joining us for another episode of Cascade Conversations.