Koen van Seijen: I’m here today with Paul McMahon, co-founder and managing partner of SLM Partners, an asset manager that acquires and manages rural land on behalf of institutional investors to scale up regenerative ecological farming and forestry systems. He’s also the writer of a white paper called The Investment Case for Ecological Farming.
Paul McMahon: I think that we see land at the center of a number of overlapping and increasingly important environmental issues. You know, for example, climate change, you know, land is going to have a huge role as a carbon sink as we try and get greenhouse gas emissions out of the atmosphere, whether it’s in soil or in trees or biomass on the land. But trees and carbon, we think, is going to be the future of next 50, 100 years.
Paul McMahon: We think those systems are proven on a small scale some fantastic cases studies out there, often driven just by innovative farmers. Not necessarily coming out of academia or research institutes, but by really innovative farmers trying out new ideas and sort of creating from the ground up. They’ve proved that at a small scale, but they need to be scaled up and thus we think investment capital can play a role.
Paul McMahon: I think two things are changing at the moment: externalities, with which people got away with for free, are increasing being price regulated. And so actually farmers, land managers that are being forced by policy regulation to actually take into account the impacts they are having on carbon, on water, on soils and biodiversity.
Paul McMahon: I think a second or maybe even a more powerful driver and more immediate driver is a shifting in consumer demands and consumer trends.
Paul McMahon: Farming is the ultimate biological business, the fundamental business of farming with taking sunlight, energy and combining them with water and the properties of minerals of the soil to grow things.
Paul McMahon: Organic cropping systems are able to outproduce in terms of yield conventional cropping systems during droughts. (There are a) number of cases in 2012 in the US where that was the case for corn production.
Paul McMahon: There’s also diversity. You find that those more ecological farms tend to be growing a broader mix of crops or raising a broader mix of animals. So you’re getting similar resilience just in diversity, which really reflects and mimics nature.
Paul McMahon: We funded SLM Partners in 2009, and our vision is building an asset management firm wholly focuses on sustainable regenerative agriculture and forestry. So we take a real assets approach to where in most cases looking to acquire land or invest in land as the primary asset and then look to really accelerate the shift in management from, let’s say, a more conventional unsustainable practices to more sustainable regenerative practices.
Paul McMahon: What we’ve done so far, we’ve raised Australian Beef capital fund. In 2012, we have about 100 million Australian dollars in equity and debt in that structure in Australia.
Paul McMahon: We’re raising Irish Forestry Fund at the moment. The idea is to acquire existing mid rotation commercial forest in Ireland, all we want to transform where possible to a more sustainable type of forest management called Continuous Cover Forestry, where you never you never clear the forest, you maintain forest cover, you selectively harvest, you get a more natural, diverse forest.
Paul McMahon: I mean, that’s the other key thing. You know, there’s lots of people running around former bankers with presentations and spreadsheets. And that’s kind of easy to do. But the hard part is actually making it happen on the ground. And for that, you need great technical people, great operational managers, people who’ve got dirt on the fingernails and really have done this before.
Paul McMahon: A huge amount education has to be done. Just get people comfortable with the dynamic of the sector.
Paul McMahon: But actually a third thing is happening in the investment side is if you look at where money flowed in agriculture over the last 10 years. It mostly went into quite passive buying lease strategies.
Paul McMahon: But that started to run out of steam because land prices were actually coming down, correcting cash rents are coming down. It’s a pretty tough time actually. Conventional agriculture isn’t making any money.
Paul McMahon: And at the same time you look at what happened, your organic space in these more, let’s say, consumer friendly markets, that’s where all the growth is, that’s where premiums are available, that’s where people still making good money.
Koen van Seijen: What for you is the number one overlooked risk there?
Paul McMahon: Well, I think it depends from time to time. I think if you look over a very long time frame, I think the degradation of natural assets in particular soil degradation is a huge issue for humankind over the next century. It’s one of these slow run problems that you can ignore, especially if you’re in a very fertile area with very deep topsoils. But eventually it will come back to bite you,
Paul McMahon: I think though that in the immediate term the bigger risk of the more conventional systems is the changing consumer. Whether you agree or disagree, he wants something different from what conventional ag is selling.
Koen van Seijen: What are the two most important barriers you see for the sector to reach its potential?
Paul McMahon: So I think that for me the biggest challenge is still to be able to show evidence and data that this can be done at a scale.
Paul McMahon: I think the second is, was just a more general one for the sector and that just agriculture of any type is still an unfamiliar territory for most investors. It tends to be capital intensive. The returns are lower. You’re not going to get your V.C. private equity. You know, 20, 25 percent net IRR is it’s just not possible. But at the same time you have a lot of downside protection because you have real assets, you have land, you have biological assets.
Koen van Seijen: When you look at the barrier of scaling the few pioneers or the pioneers with a few hundred or few thousand hectares to a fund like SLM you’re managing now, how did you overcome that barrier to investors?
Paul McMahon: We took investors to farms in Australia using the same ideas. Having done it with great success as they could to see with their own eyes. Yeah. You know, this is being done on, let’s say, you know, 10000, 20000 acres. Well, there’s no reason, it can’t be done on a hundred thousand or five hundred thousand acres.
Paul McMahon: You know, if you look at our kind of philosophy is around rural land and, you know, harnessing sunlight, water and soils to grow things.
Paul McMahon: And you know it is interesting that the financial investors like you think in asset classes, but nature doesn’t think that way. You know, the boundary, the fluid and everything is interlinked.
Paul McMahon: So we actually we can see a time in the future where we may even try and combine some agriculture and forestry strategies together.
Koen van Seijen: If you could give advice to smart investors that want to get into the regenerative agriculture space. What would be your number one advice?
Paul McMahon: Only invest with teams who have real farmers on board. It’s too easy to come up and sell a concept. But the farming is actually really hard and it is actually hard to manage a fund for example. So unless you got people, you know, on a team, you’ve done this and have made mistakes and have the scars to show it, then I’ll be a little bit wary.