Several years ago, Ben Gordon visited a friend’s father who farmed near where Gordon grew up in North Dakota.

“You see that field where you boys played and shot coyotes in?” the father asked as he pointed across the road.

“Yes,” Gordon replied.

“Well, did you know it was rented ground?” the farmer asked.

“No,” Gordon said.

“It actually was homesteaded ground that we lost in the 1980s,” the farmer said. “We had an opportunity to buy it back, but we only had two or three days to act, and we didn’t have the cash to do it.”

Familiar scenario

Gordon saw this scenario repeatedly play out among farmers. They can borrow from banks to fund land purchases. However, a sizable down payment often accompanies such loans that siphon working capital (short-term assets minus liabilities) farmers may need to deploy elsewhere, Gordon says.

There’s another way, he believes. Gordon and co-founders Brian Gundtner and Emma Fuller formed Fractal Agriculture to enable farmers to build working capital using their own land base.

Here’s how it works:

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Land changing hands

Farmers will face myriad farmland purchase decisions in the future. “We always talk about the average age of farmers, but what is even bigger is the average age of landowners and the separation of landowners from the next generation,” says Gordon, who is Fractal’s CEO.

“People aged 65-plus own 66% of Iowa farmland, based on our most recent data,” says Rabail Chandio, Iowa State University Extension agricultural economist.

When this land turns over from the current generation, some may surface on the open market. A share also will go to heirs, some of whom may sell it.

“You’re seeing more of these folks ask themselves if they want to be landlords or sell the land and do something else with the money,” Gordon says. “They don’t have an affinity for the land, that family connection.”

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This puts farmers seeking to grow their farms in a difficult spot.

“Even if you have a buffer of working capital, it’s a hard decision to reduce your cash position to buy a piece of prime Iowa farm ground for $16,000 per acre,” he says.

Under a Fractal agreement, the annual premium farmers pay is less expensive than paying interest on bank loan debt, Gordon says.

“Having an equity tool that gives you access to working capital when the opportunity arises is attractive,” adds Ben Blair, financial manager for Maxwell United in Maxwell, Iowa. “It’s a way to tap into your own equity without increasing your debt-to-asset ratio.”

The money doesn’t have to go to buy land, either. “Instead of going to a bank or dipping into our cash account to upgrade drainage, we partnered with them [on a Fractal minority stake agreement] to spend money on fields we already owned,” says John Maxwell, a Maxwell United partner. “This is technically a depreciable asset on the balance sheet, but it's also driving more return on investment.”

Maxwell United also receives premium discounts paid to Fractal through its soil health practices that include no-till and cover crops.

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“We don’t tell farmers how to farm, but we do reduce farmers’ cost of capital when they invest in soil health practices that can lead to better asset health and better yields,” Gordon says.

Farmer-led model

Traditional farmland investment models exist where private equity buys farmland and then rents it to farmers.

“This traditional model doesn’t solve the need for farmer ownership in that local community,” Gordon says. “These models also struggle to raise sufficient funds, as they don’t know local farmland markets.”

Other private equity models — such as those in mining and even those in livestock — often retain investment ownership and management. That wouldn’t work in crop production, Gordon says.

“One of my favorite sales questions [to investors] is to ask them an agronomic question,” he says. “They will look at me like I’m crazy. I’ll then tell them, ‘Well, the farmer knows that.’ We work with the best agronomic-minded farmers out there because we think they have a better chance to make more returns [for investors] than external centralized decision-making.”

Risks

Risk exists. Higher land values amid a stagnant farm economy and declining cash flow could financially squeeze a farmer.  Decreased cash flow also could deter conventional lenders from refinancing a Fractal investment.

“If that happens, there’s a chance the farmer would have to sell that piece of ground to meet the buyout agreement with Fractal,” Gordon says.

Conversely, however, Fractal farmers may have more working capital to buy out the contract because it is not tied up in land purchases, he adds.

For investors, any decreased government support for agriculture and technology or regulatory or societal changes that spur declining farmland values could adversely affect their investment. 

This doesn’t square with past history, however. The average annual return on Iowa farmland from 1991 to 2023 is 11.5%, according to analysis by the University of Illinois TIAA Center for Farmland Research. This exceeds the return on many other investments, such as the 7.9% that stocks in the Dow Jones index have returned during the same time frame. 

“If you look at long-term supply and demand of land, they're not making more of it,” Gordon says.

Change is coming

“With generational turnover, I think you’re going to see a lot of land changing hands,” Maxwell says. “We can’t buy every farm that comes up for sale. It’s just not realistic. But we can take steps to access capital to take advantage of opportunities when they come along.

“Folks are going to be forced to change, whether it’s forward or backwards. There's no neutral.”