|Title||Mad Agriculture Perennial Fund|
|Size||$10 million (larger size to come)|
|Revenue Model||Management fee/interest on long term loans to farmers|
|Private Investment/Finance Structure||10-year fund|
|Public/Philanthropic Investment||Philanthropic funding and USDA Conservation Innovation Grant (CIG) upon inception|
|Env/Social Impact||Improved soil health, improved water quality, access to specialty markets for farmers.|
Financing a US regenerative farming movement
Regenerative farming practices have been gaining momentum in the US as the negative outcomes of intensive or industrial farming are increasingly recognised. In the US, it is estimated, for example, that soil erosion costs about $44.4 billion in productivity losses each year. Other negative impacts from intensive agriculture include the loss of local biodiversity, water quality and the oxidising of carbon back into the atmosphere from heavy tilling.
Mad Agriculture was founded in 2018 to help US farmers with the transition to regenerative farming. This includes organic farming (no use of chemicals or genetic engineering), but also practices such as minimal tilling, cover crops and multi-crop rotations. Mad Agriculture delivers this with three specific lines of activity:
- Business and farm planning – helping farmers develop a five- to 10-year plan of their farm, assisting with knowledge and resource gaps on regenerative practices
- Accessing new produce markets – brokering crops on behalf of farmers, finding specialty markets and buyers who want to work with farmers to produce food sustainably
- Accessing financial support – providing long term flexible loans tailored to an individual farmer’s needs
This last activity stems from the barriers presented by traditional finance options, which are largely only suitable for conventional farming techniques and require yearly returns.
In the transition to organic farming, it takes 36 months for farmers to become eligible for the USDA organic certification and access the new markets that certification affords. While net profits can be up to 2-3x higher, organic farming carries its own transition costs. Farmers may no longer rely on chemical inputs, but they may face additional costs such as labour and machinery, resulting in overall costs that are on par with conventional costs. Additionally, depending on the new crops introduced, the farmers can also face yield losses of up to 30%. This means that transitioning farmers may be in the red for up to three years.
Brandon Welch, Director of Radical Capital at Mad Agriculture, says this is challenging for traditional sources of finance: “Community banks typically provide operating loans on a year-to-year basis, leaving the farmer with little margin for error and no room to make an investment in their soil beyond a year-long time horizon.”
In response to this finance gap, Mad Agriculture launched the Perennial Fund, which provides long-term operating, term and equipment loans to farmers to support their transition to organic management. Mad Agriculture helps farmers to develop transition plans across a five- and 10-year horizon, and identifies the financing required, such as purchases of new machinery, process equipment and wages for more farm workers.
Mad Agriculture’s operating loan, which makes up the bulk of its exposure, works as a revolving facility, with interest payments starting in year one, but with the option for farmers to roll over the principal and reinvest in their farmland up to the eighth year. This creates free cash flow for the farmer to reinvest in their soil during the transition. These terms are determined by the farmer, financial and ecological profiles of the farms, and each loan has two built-in forbearance years to account for weather variability.
Welch says the Fund is selective about the farmers it lends to; “We work with high quality operators, 90% of them already have some regenerative acres that they know how to work and are looking to extend that to the rest of their farm… they get our mission and they like that we’ve got the same values”
Mad Agriculture had an original target of $5 million for the Perennial Fund, but investor interest was above expectation, and in February 2021 the Fund closed at $10 million with 42 investors, mostly US-based. These include high net worth individuals, family offices, foundations and corporate capital funds. The Fund is targeting returns of 6-9% per annum based on early farmer feedback and market research.
Confidence in debt repayments is driven by the increased prices that organic and regenerative farmers can command, in addition to Mag Agriculture’s close relationship with the farmers. The US organic food market has grown by 233% in the last 10 years, and organic premiums typically fall in the 100% to 200% range for most commodity grain crops compared to conventional prices. This is partially offset by reduced yields, with reductions up to 30% depending on the crop type. However, during times of extreme drought or heat, organic systems produce up to 40% higher yields than conventional systems due to improved soil health. This is important as climate change increases both the probability and severity of extreme weather events.
To ascertain the business case across different regenerative farming approaches, Mad Agriculture primarily runs a cost benefit analysis around yield grown per acre, costs per acre, and market price receive per unit, since these are the driving unit economics behind a farmer’s profitability. The team also collect wider studies on practices and profitability as part of their Organic Toolkit.
As of February 2022, the Perennial Fund has 12 loans with 10 farmers, mainly based in the US mid-west. Its portfolio of farmers has around 31,000 acres, which are predominantly used as cropland with minimal tillage (67%), but also cover crops (19%) and perennial crops (16%). Some of its farmers also have livestock, and around 25% of the total acreage uses an integrated crop-livestock approach, meaning that livestock are permitted to roam and graze on cropland. This is another regenerative agricultural practice that is said to offer both environmental and financial benefits.
Since starting, Welch says several adjustments have had to be made. For example, the Fund initially offered a revenue share repayment option of 10-50% revenues after the three-year period. The fund’s team predicted that this would appeal to farmers based on its risk-free component in the case of no returns. However, the farmers so far have all opted for fixed interest repayments. “Because of crop insurance, farmers are protected at about 85% revenue level on yield loss…they would rather have the certainty of paying that smaller gap in the downside scenario, over an uncertain amount of revenue in the upside scenario,” says Welch.
Another component originally offered was a per-acre transition plan instead of a whole-farm approach. However, in practice this was a laborious process for both the Fund and the farmer that did not necessarily lead to a better loan decisions. Welch says: “It complicated the financial agreements when the farmers had other financiers, leaving us to compete for who had first lien.” Instead, the Perennial Fund now takes a whole-farm approach on its lending, and conventional acres make up about 15% of its farm portfolio.
Data and measurement
The Perennial Fund tracks acreage use across its portfolio, and Welch acknowledges the need for a deeper level of data-driven evidence, in order to grow the movement and appeal to investors seeking environmental returns.
Across the Fund’s portfolio, Mad Agriculture is running a research project that tracks ecological outcomes, such as pollinators, soil health, crop and livestock quality, alongside traditional financial indicators such as whole farm performance and resilience, which the team hopes will prove the extent of the regenerative practices and draw in more investment.
Over 2022, the Mad Agriculture team is planning a second funding vehicle of $3-5 million that will use a different lending structure, set up as a management company that works with debt partners versus the fund structure used now. Welch is confident that the vehicle can generate the same level of investor interest, but is seeking to raise investment from strategic investors.
Over the next 10 to 12 years, Mad Agriculture has a longer-term funding target of $10 billion, and Welch points out that the Perennial Fund is something of a pilot compared to long-term ambitions. He says that, that ambition is unlikely to be met with a fund structure but rather, “a durable evergreen structure that can act dynamically to changing customer needs, staying right on the bleeding edge of new financial products that farmers need”.
- Interview with Brandon Welch, Director of Radical Capital at Mad Agriculture