Category: Investor Articles

Investor Articles

The Law of Declining Marginal Returns

The Law of Declining Marginal Returns applies to all aspects of life. If you follow this thread, the law actually determines life itself. Declining returns cause markets to implode, governments to fall, environments to collapse causing civilizations to fail. Here we are today, sitting on that edge.

The Problem

Archeo-anthropologist Joseph Tainter defines “declining marginal returns” laying the cause at the feet of energy and agriculture. When societies reach their peak, they find themselves at a tipping point where the energy and food needed surpasses their environment’s ability to provide. Yet mankind is very adept at ignoring these threats having developed in our DNA “laissez les bon temps rouler” … translated “let the good times roll on”. With this mindset, we turn to technology as our crutch to prevail. It isn’t for mankind’s lack of “ingenuity” to survive but our lack of “understanding” how.

Agriculture is an example of “ingenuity” versus “understanding”. In the mid-1970’s the US Department of Agriculture under Nixon set out to change U.S. agriculture with the goal to lower the cost of food. Their slogan, “Get big or get out”. The unintended consequences of relying on GMO and chemical-based technology has devastated the economies of rural communities, caused massive erosion of precious soil, tainted our water supply and fouled our air, but food prices did come down. The new motto of the agriculture industries that adapted to “get big or get out”, now defend the need to continue this course in order to better “feed the world” … which actually has yet to be proven.

The Solution

In contrast, there is a growing cadre of farmers who “understand” that sustainable farming practices don’t have to rely on technology alone to better meet our need for an increased food supply. Groups like Practical Farmers of Iowa have promoted many alternative farming practices. Among these is the practice of using cover crops. Cover crops do just that, they cover the ground to prevent erosion by keeping rainfall in place and add biomass to soil improving soil vitality. Cover crops also offer the opportunity to add an additional crop to a growing season. The result makes our declining farmland more resistant to the ravages of an erratic climate.

In 1990 a unified Congress passed the National Organic Program signing into law strict farming standards for growing certified organic food. Since then, organic food consumption has grown from a one-billion-dollar market in 1990 to over $50-bilion today. Consumer demand for healthy and environmentally responsible food is the fastest growing segment in the grocery store aisles.

Our Role

To help meet this demand, Sustainable Farm Partners’ organic investment program is doing its part to advance the “understanding” of regenerative organic farming to rural communities across the Midwest, one farm at a time.

In his book “Collapse”, Jared Diamond so clearly states, “societies choose to fail or survive.”

CEO, Director of Farm Management & General Partner

Sustainable Farm Partners, LLP
www.SustainableFarmPartners.com
Emmetsburg IA – Santa Fe NM

W: (505) 663-6034
C: (650) 804-0198

When a flower doesn’t bloom, you fix the environment in which it grows, not the flower. – Alexander Den Heijer

Invest in a Business and Not Just Markets

As I prepared for this article I realized that there are so many myths about investing. One myth is the concept of a balanced portfolio. A balanced portfolio are how stocks and bonds are supposed to offset each other. So I can properly explain why these myths are giving us a false sense of security I thought I would start with a quick definition of the two markets and the concept of a balanced portfolio.

What is the Bond Market?

The bond market, also called the debt market or credit market, is a financial market in which the investors are provided with the issuance and trading of debt securities. The bond market primarily includes government-issued securities and corporate debt securities, facilitating the transfer of capital from savers to the issuers or organizations requiring capital for government projects, business expansions, and ongoing operations. Definition courtesy of Investopedia.

What is the Stock Market?

The stock market refers to the collection of markets and exchanges where the issuing and trading of equities (stocks of publicly held companies), bonds and other sorts of securities takes place, either through formal exchanges or over-the-counter markets. Also known as the equity market, the stock market is one of the most vital components of a free-market economy, as it provides companies with access to capital in exchange for giving investors a slice of ownership. Definition courtesy of Investopedia

A Balanced Portfolio

Bonds in the past have been a way to balance your investment portfolio. The traditional approach used by many financial planners or advisors is 60% stocks or equities and 40% bonds. The theory is when stocks are up, bonds are down and when bonds are up, then stocks are down. Below is a 222-year chart that shows the balance between the S&P 500 and Interest rates (bond prices are reflected by interest rate change). Interest rates actually slowly went down as the S&P 500 slowly went up in value except for the depression of 1920-1921. That’s where interest rates jumped to 6% only to drop to 3.5% by 1926. Also during that time, we had the roaring twenties. We had the most stock growth ever at that time only to see it all go away in 1929 with the start of the Great Depression.

222 year bonds vs stocks

Then it changed

After World War 2 we enter a period of tremendous growth and accelerating inflation like we had never seen before. This was one of those times that you made money no matter what you invested in. Bond yields kept going up and stock prices did the same. If you were a financial planner your balanced portfolio just made money.

Debt and Baby Boomers

Now as we head into the bull market of 2017 and 2018 we are now starting to see, after a decade of the lowest interest rates in US history, that interest rates are going up. In normal times that would be a good thing but we have two major issues that are going to keep both the bond market and stock market volatile. The two are 20 trillion in national debt and 10,000 baby boomers retiring every day.

baby boomers

The first issue is debt. If interest rates go up then debt interest goes up. With a national debt of $20 trillion all we need is for interest rates to go up 1% then “we the people” will have to pay $200 billion more per year in interest. To truly understand the effect on our economy, we just passed a tax cut bill that saves in taxes, $1.5 trillion over 10 years or $150 billion a year. So if interest rates go up 1% it will more than wipe out the full benefit of the tax cuts. I am no economist but the US cannot afford to raise interest rates until the debt is addressed and I do not believe that is going to happen anytime soon. Get used to continuing low-interest rates.

So why are low-interest rates so bad?

Well, 10,000 baby boomers are retiring a day. They need income and as long as interest rates stay low they are not going to have low-risk investments like CDs or money market. Also, the bond market will still be producing low yields. That means these investors are going to be forced into much higher risk investments. Meaning the current stock market is going to stay extremely volatile. We also have another twenty years before we see the end of the baby boomer bubble and the high demand for income.

So what is the answer?

Stop investing in markets and start investing in business opportunities that are not affected by the markets. There was a time when you would follow a company that was doing well and when they went public you would invest in them. The problem today is when these companies go public the investment bankers make millions and the average stockholder gets stuck with a manipulated stock price. Also, the only way that investors can get income is through a dividend-paying stock or bond fund. The sectors that pay the highest yield are listed below.The Financial sector is the highest paying and it averages 3.72%. Remember when the bank paid you 5% on your savings?

dividends by sector

Dividends

Besides stocks and bonds, there are still other investments out there. What if you could invest in a business as a limited partner and that business bought farmland and then converted it to organic. What if after the conversion the farm could produce 2.5 times more profits than the non-converted farmland. That 80% of the profit would be paid to the limited partners and that would be equivalent to at least an 8% return on their investment and could be higher.

Appreciation

Then after 10 years, the investment is liquidated and the limited partners receive 80% of the profits from the sale of the land that would be equivalent to getting back double the amount they initially invested. In addition, you have a team of people to not only overlook your investment but would also be available to answer any of your questions. And last what if this investment actually helped local farmers succeed while giving consumers healthier farmlands and more nutritious grains.

If this interests you please contact us at Sustainable Farm Partners (SFP) or go to our website, www.sustainablefarmpartners.com. If you qualify we can send you out a Private Placement Memorandum (PPM). A PPM is the document that discloses everything the investor needs to know to make an informed investment decision prior to investing in a Regulation D Offering. Unlike a Business Plan, the PPM details the investment opportunity disclaims legal liabilities and explains the risk of losses.

Director of Investor Relations & General Partner

Sustainable Farm Partners, LLP
www.SustainableFarmPartners.com
Emmetsburg IA – Santa Fe NM

W: (505) 663-6034
C: (505) 231-4965

When a flower doesn’t bloom, you fix the environment in which it grows, not the flower. – Alexander Den Heijer

How Soil Health Impacts All Wealth

In today’s complex economy how do we progress financially from where we are today and the life of abundance we seek? This is the first question a financial advisor will ask us. It is seldom an easy question to answer because the quality of our life isn’t measured purely in financial terms. There are multiple factors including our work, our family and, fundamentally, our values. How does our quest for financial wealth balance with the people and planet upon whom we depend? Surprisingly, it all begins with the soil.

First, let’s step back and look at where wealth comes from. The Wealth Pyramid describes the three different levels at which wealth is created. By investing in each of these levels we can achieve a balance in our portfolio that reflects all our goals and values. We’ll also learn how soil health impacts all wealth.

Primary Wealth – is land ownership.
Ask yourself, “Where does everything we need in order to live come from?” You are standing on the answer – the earth. The earth, the soil and all that resides above, within and below its surface are the source of all that we need to survive and thrive. All wealth, therefore, must derive from this.

Throughout history, from the earliest civilizations to kingdoms to the nation-state, wealth has been measured by land owned or controlled. All needs were met from the land. Land ownership was held within the castle walls. The serfs outside the walls paid the king a handsome portion of the bounty that came from the crops they grew and the products they made from the king’s land. If a serf’s crops failed he lost his wealth and labour. The King only lost some income but still owned the land – his true wealth. Land ownership is an expression of Primary Wealth and the foundation of the Wealth Pyramid.

Secondary Wealth – is what we make from Primary Wealth.
When energy, in the form of coal and oil, was discovered beneath the soil, its abundance caused an explosion in Secondary Wealth creating the Industrial Revolution. Primary Wealth beneath the soil gives us ore, which becomes steel to build infrastructure. Soil begets food to feed us, trees turn into lumber to build homes. But it was the discovery of hydrocarbons to create energy that enabled labour to be replaced and goods to be made at a rate like never before. This led to the greatest economic expansion in human history. In societal terms, it is secondary wealth that made the middle class and created new fortunes for the multitudes. But it all came from the abundance of the earth. Secondary Wealth leverages Primary Wealth to create more wealth.

Tertiary Wealth – is a “claim” on Primary and Secondary Wealth.
About the time Secondary Wealth began to kick in, so did Tertiary Wealth. It rests at the top of the Wealth Pyramid and creates its value through investing in the companies that have business interests in Primary and Secondary Wealth. Compared to Primary and Secondary Wealth, Tertiary Wealth is held in pieces of paper (actual or digital) represented by stock certificates, promissory notes, etc. These wealth instruments all point back to Secondary and Primary Wealth. This third level of wealth is a “claim” on the sources of wealth below it. Tertiary Wealth leverages Primary & Secondary Wealth into investment instruments.

Balance – There is wealth to be created at all three levels of the Wealth Pyramid, which takes us back to “balance”. How do we balance our treasure between these three that carry different risks and opportunities? One answer is to include sustainable organic farmland in our portfolio because, as Primary Wealth, it is the foundation for all wealth and the most sustainable and healthy of all farming practice. Farming isn’t always the highest flyer in the Wealth Pyramid but it is a hard asset that produces something we all need …food. It won’t depreciate to zero and if we take care of this farmland it will continue to take care of us.

Healthy Soil Keeps the Wealth Pyramid Healthy

Our economy stands on the shoulders of our soil and Primary Wealth. Just as there is a need for balance in the Wealth Pyramid, so too is there a need for balance in our soil. Balance is something nature will achieve on its own with minimal human interference. Soil health and balance are the crux of organic agriculture. And there’s a lot to balance. If you think a lot of life is going on above ground, it pales in comparison to the balance of life in the soil. According to Kathy Merrifield, a retired nematologist at Oregon State University, one teaspoon of soil
can hold up to one billion bacteria, several yards of fungal filaments, several thousand protozoa and scores of nematodes. That is if they’re allowed to live together in balance through healthy soil stewardship.

Conventional GM Farming

Unfortunately, modern conventional farming practices tend to create soil imbalance. They are also dependent to a large degree on a farming model that exists around genetically modified (GM) seeds. Conventional GM farming often uses minimal crop rotations, growing the same single crop year after year on the same land. This practice, known as mono-cropping causes the depletion of nutrients and minerals, essentially ‘mining’ them out of the soil. In order to continue growing crops in this depleted soil, these nutrients and minerals must be added back in the form of hydrocarbon-based fertilizers and mined minerals such as phosphate. Conventional GM farming is dependant on earth-based, non-renewable resources that are decreasing in supply, and increasing in cost.

Monocultures and the resulting poor soil health open the way for infestations of insects, diseases, and weeds. Healthy bio-diverse soil keeps these infestations in check. The lack of biodiversity requires synthetic pesticides and herbicides to be used, destroying the natural soil biology still further in an endless destructive downward cycle that turns healthy soil into dirt, hence the farmer becomes ‘dirt poor’.

Organic Farming

Organic farming eschews the use of GM seeds and all synthetic inputs. This allows nature to do what it does best, balancing the billions of life forms that thrive in the soil. The symbiotic relationship between healthy soil and plants is a marvel whereby one supports the other. Healthy soil creates healthy plants and together they provide abundance. It’s that simple. By building healthy soil the farmer becomes “soil rich”. This is the difference between soil and dirt.

If we allow our soil to become dirt then Primary Wealth, the foundation of all wealth, causes suffering for Secondary and Tertiary Wealth. Soil health and wealth in all its forms are co-dependent.

How Organic Farmland Can Balance Your Portfolio

Between October 2007 and October 2008 the Dow Jones Industrial Average declined 54% from
13,842 to 6,370. It took the next five years to recover its previous highs. During the same period, Iowa farmland grew 36% in value. This represents how farmland (Primary Wealth) can help balance investments in Secondary and Tertiary wealth.

Using data from Iowa State University’s Ag Extension Service we can compare average Iowa farmland values versus the Dow Jones (DJIA) from 1994 to 2014. In 1994 the Dow averaged around 3,827 while Iowa farmland values averaged $1,356 per acre. As of September 30, 2015, the Dow closed at 16,272 while the average price per acre in Iowa is at $7,943. How does this compare?

The Dow is up approximately 425%; Iowa farmland average price per acre is up approximately 585%
Yet this comparison is not the whole story. In addition to appreciation, farms also produce income that adds to the value equation. This is where what you farm, where you farm and how you farm really counts. As of the spring 2015, conventional GM corn was selling for around $3.50 per bushel, close to or below the cost of production. In contrast organic corn was selling for over $12 per bushel. At the same time organic row-crop farming can cost as much as 40% less to produce than conventional GM farming while meeting or exceeding conventional crop yields.

Why is organic corn more expensive? Because the demand is so high and the supply so low. In 2014 this imbalance was shown in the fact that for every dollar of organics exported by the US, it imported $8. When you consider your risk tolerance and values, you may want to consider investing a portion of your portfolio in the world of Primary Wealth, soil and organic farmland. It’s a triple bottom line investment. And like the life in our soil, it’s all about balance.

Bottom line, organic farming creates greater wealth, provides healthier food while repairing our ecosystem. Not a bad return for turning dirt back into soil.

CEO, Director of Farm Management & General Partner

Sustainable Farm Partners, LLP
www.SustainableFarmPartners.com
Emmetsburg IA – Santa Fe NM

W: (505) 663-6034
C: (650) 804-0198

When a flower doesn’t bloom, you fix the environment in which it grows, not the flower. – Alexander Den Heijer