Opportunity Zone Pitch Day - March 23rd
Livestock Investment Strategies, With Chris Rawley
Cattle and livestock represent an attractive investment opportunity within agriculture. In particular, grass-fed cattle are a premium product that give producers pricing power, as well as resilience to inflation and supply chain disruptions.
Chris Rawley, the CEO of Harvest Returns, joins the show to discuss various livestock investment strategies that High Net Worth investors and their advisors should consider right now.
Click the play button above to listen to the conversation.
- The “big thesis” behind investing in livestock, and cattle in particular.
- The impact of high inflation and supply chain shortages on the US livestock industry.
- Why investors should be discerning of potential misinformation which has been spread by meat-substitute manufacturers.
- Tax mitigation strategies that High Net Worth investors can enjoy when investing in livestock.
- Information on private placement offerings which are available on the Harvest Returns platform.
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Headquartered in Fort Worth, Texas, Harvest Returns connects farmers in need of capital and investors looking to diversify and grow their portfolio via the crowdfunding process.
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About The Alternative Investment Podcast
The Alternative Investment Podcast covers new trends in the alternate investment landscape. Hosts Jimmy Atkinson and Andy Hagans discuss tax-advantaged investment strategies to help you grow your wealth.
Andy: Welcome to The Alternative Investment Podcast. I’m Andy Hagans.
Jimmy: And I’m Jimmy Atkinson. Joining us today is Chris Rawley, CEO of Harvest Returns. And we’re going to discuss investment in livestock. Chris, welcome to the show.
Chris: Hey, thanks a lot for having me, guys.
Jimmy: Absolutely, Chris, pleasure to be with you today. So we’re going to dive into the specifics of livestock investing throughout the course of today’s show, but to start us off just at a high level, Chris, why are high net worth accredited investors interested in investing in livestock right now?
Chris: So, I’d back it up a little bit and talk agriculture, and then protein, and then dive down to livestock. So, agriculture is pretty hot right now, commodities in general because the prices are going up, whether we’re talking about soy corn, wheat, and cattle for that matter. It’s all been driving up and that’s been driving up farmland prices.
And there’s a number of reasons for that, supply chain shortages, inflation in general, agriculture tends to be correlated positively with inflation, negatively correlated with the stock, and in fixed income markets. But we like…the other piece of that is protein, and protein in general.
So when you look at agriculture, it’s a pretty wide-ranging type of asset or asset class, and there’s lots of different flavors to it, but you hear a lot about protein these days, and specifically, from…on the investment side, especially on the institutional investment side everybody’s seen the headlights on alternative protein. So there’s Beyond Meat and Impossible Burger, and all of those sorts of things.
And they had a big ride two or three years ago, and now they’ve kind of leveled off. Once the companies producing sort of realized that, from my perspective, it was more of a novelty people tried them, and there’s a certain percentage of population that likes those alternative meats. But for the vast majority of people, especially in the U.S., they like meat, real meat, not culture meat, not alternative meats, but meat as their primary source of protein.
So whether we’re talking about poultry, or hogs, or cattle, or even farm fish, it’s a pretty wide sector of agriculture from an investment standpoint, it’s fairly ignored though. It’s not well known and there’s not a lot of places you can access it. And Harbor Returns is one of those places where you can actually invest in livestock.
Andy: So, Chris, I want to talk about Harvest Returns a little bit, especially against this current macroeconomic backdrop. So, you alluded to inflation and right now, in April 2022, I mean, I’m looking at three really important factors.
Number one, we have the supply chain issues, some of those possibly, you know, self-inflicted, and of course, politically in Washington, they’re trying to deal with them. But really it feels like we’ve seen some pretty limp policy responses. It kind of feels like we’re bringing a squirt gun to a gunfight. But then now we have the war in Ukraine, and I’ve also seen in China, the Chinese Communist Party not even letting farmers alone out in the fields to farm even when…
there’s just really crazy stuff going on in China. So you put all of these factors together and it’s like a perfect storm, right? So the CPI has hit 81.5%. I know the PPI is even higher, and it looks to me like this is not transitory. If anything, we could see inflation going even higher.
And so, given what you said about this interest in agriculture, in livestock, investing, and that being part of its appeal, right? Is like well, what happens in this inflationary environment? Well, you know, you’d be pretty well off if you owned agricultural assets and farmland. Have you seen this higher inflation translate into more interest in Harvest Returns and more interest just in this space that you operate in general?
Chris: Yeah. I think we’re starting to see a shift in that direction, it’s a double-edged sword obviously, inflation, where if you own assets, that inflate, that appreciate, you’re well off. However, that same inflation drives some issues in input cost for farmers. So fertilizer costs have skyrocketed.
So if you’re growing wheat or corn-soy, some of those row crops, you are facing higher input cost, even though the end result might be more significant, but you’re also seeing the supply chain disruption. So, whether it’s wheat from Ukraine, and that, again, if you’re talking about certain types of livestock, those are feeds, so feed prices are going up.
If you’re a rancher, you may not be doing well unless you’re…you may be getting a premium on your cattle, but you may also be spitting more money to raise them out to finishing size, to sell them. So it depends on what type of ranching you’re doing and what type of products you’re selling.
Andy: I see. Yeah. And I mean, that makes sense, it’s a double-edged sword, because if you’re feeding your cattle, then obviously your input costs are higher. Well, let’s talk about the different ways to invest in livestock, right? Obviously, you have futures and different contracts. You have operating businesses, and I know, you know, in terms of beef, one of my favorite topics, I mean, I’m a big beef fan.
My family eats a lot of beef, and actually, we’ve gotten into the grass-fed beef, you know, a little bit more of a premium product. My kind of personal thought is, I might eat a little less, but eat better beef. So what are the different segments? What are the different ways, you know, that an investor, specifically an accredited investor, their advisor can invest in livestock?
Chris: Yeah. Just like any sort of investment, there’s many different structures. Generally, we’re dealing with private placements, private offerings. I’m sure there’s some publicly traded companies. You could probably get some access, some of the processing firms, some of the big companies like that, where you probably get some access to the asset class, but on the private side and specifically dealing with accredited investors, people that want to invest in a private placement, we’ve seen, and we’ve done at Harvest Returns, both debt and equity.
We’ve invested in some agribusinesses, some ranches that are growing grass-fed cattle. Last year we closed a pretty nice offering with a Dorper Lamb company in Texas here, but they produce lamb all over Texas and the Southwest, and sell it in places like Whole Foods and Amazon, and direct to consumer or retail.
And then we’ve done collateralized debt notes with cattle, which are pretty popular with our investors where you’re essentially giving a loan to a farmer or a rancher, and he or she is going out and buying so many herds of cattle, raising them, and then paying off the interest rate on the loan. And some of that cost goes to buy the cattle, some goes to feed and take care of the cattle, and bring them to processing.
So we like…specifically, we like grass-fed, but there’s other cattle companies that we’ve invested in. We’ve even done cow-tech. So we’ve done some AgTech companies that are focused on the cattle industry. They’re definitely a higher-risk sort of endeavor, but they’re serving this industry with tools that automate some of the feeding processes.
And we’ve done some biotech-related to that. So it’s a pretty big industry and there’s a number of ways to invest. And it’s one of our verticals on a platform. So we try to give our investors as many ways as possible to invest in the livestock and cattle industry that they may not have access to otherwise.
Andy: So, yeah, Chris, you mentioned grass-fed and, again, just as a consumer, I love grass-fed. I think the first time I tasted it, it just took a little getting used to, and now it’s almost like all I like, I prefer the taste, and also just I think there’s a trend of more conscious consumption, and I like to buy local meat when I can, humanely raised and all that sort of thing.
So can you talk about, I guess from the investment standpoint, at Harvest Returns, why do you like grass-fed as a segment?
Chris: Yeah. For many of the reasons you mentioned, there are studies that say it’s healthier, lower in the bad flavors of types of cholesterol than grain-finish. So, first before maybe we get too far, we probably should define it a little bit. So every cow kind of goes through three stages or every cattle raised for slaughter goes through three stages of its life.
The first thing, all cows, they drink milk, they’re drinking milk from their mom. Then after several weeks, they get weaned off the milk, and pretty much every cow is grass-fed at some point or another in its life. They’re out in a field foraging. Some operations, during that stage, will…this is kind of the stocker phase or where they’re taking a calf and turn it in something that you can market.
They’re feeding them supplemental grains and things like that. Some are purely grass-raised. And you mentioned humanely raised and we’ve done… you know, there’s a standard called the GAP standard that will help investors kind of know which are producing livestock humanely, which companies are and which aren’t, and how they’re rated.
But then there’s the finishing stage and so that’s getting the kind of the livestock fattened up for processing or for slaughter. And most of that is done in Midwest feed yards, essentially people seen them, a bunch of cows standing around, you’re basically pouring feed on them, and that’s where the bulk of the U.S. beef is produced. But then there’s also this smaller segment called the grass-finished.
And most of the grass-finished, I think, is still well over 90%, most of the grass-finished beef we eat in the United States is imported from places like Australia and New Zealand. So, think of there’s a premium on it because one that the price’s a premium you’re having to either import it all the way across the ocean, these cattle, or the carcasses, or you’re having to take a longer amount of time, generally more land than you would to finish a cattle on a feedlot.
So, premium product that many people like is going to confer a premium price. And from an investment standpoint, there’s some positives to it as well because when the grain prices shoot up and you’re grass finisher, you don’t care, you don’t worry that the price of corn and feed is skyrocketing.
So I haven’t seen it yet, but at some point, we might see an inversion where the price of grain finish shoots up above grass finish and that will probably drive some changes in the industry. Maybe people trying to do more grass finishing, but there are some limitations, you got to have land. The other aspect I would say that our investors like when we’re dealing with livestock, and it doesn’t matter if we’re talking about cows, or goats, or sheep, or lamb, or whatever, is the regenerative aspect of some operations.
So you’ll hear of this regenerative agriculture more frequently. And a big piece of that regenerative agriculture is the livestock raising. There’s a lot of myths and I’d call it misinformation. And I think a lot of it’s being put out by some of the alternative protein companies that livestock is so bad for the environment.
Well, you know, without getting into too many of the details, there was bison roaming, millions of bison roaming North America, way before we had millions of cattle roaming North America. So, what’s really the difference in the impact in the environment? Now, there are some differences between the way bison graze, their hooves are a little sharper. They tend to roam around more when they eat and they’re not like cows where they just stay and…or I’m sorry, cattles tend to roam around more.
Bison tend to finish off the grass and move on in an area. And so, but there’s ways that ranchers can mimic sort of that natural, intensive grazing. And we’re working with some of the farmers. In fact, we’ve got a company we raised money for out west where they’re basically taking land that is kind of underwater, doesn’t get a lot of rain, and helping to regenerate the native grasses because of their intense grazing processes with cattle.
And the type of cattle breeds they choose, and those sorts of things can make a big difference. So there’s sort of that ESG piece that a lot of investors are looking for as well as the profitability piece.
Jimmy: Yeah. Wow. There’s a lot to digest there. Some, pun intended, really interesting points. I hadn’t really considered that the grass-fed livestock would be much more resilient, I guess, in a period of higher inflation. At least until maybe they can figure out a way to attack sunlight or grass seed or something. But that’s a really interesting angle.
And I think, again, from that consumer angle, once you’ve established it as a more of a premium product, there’s a little bit less price sensitivity. And so I think it makes that segment very resilient. And from the perspective of, like, angel investing or venture capital, a little bit more brand-ability or that operating business competitive edge, where having that premium brand name actually becomes worth something.
Because I think a lot of consumers are interested in supporting American farmers. Obviously, they’re price sensitive, they want a good product at a good price point. And I think, frankly, your platform at Harvest Returns is helping get a lot of these things financed. So your company’s just a great part of that ecosystem. So I wanted to talk briefly about the…I know there’s a lot of private placement offerings at Harvest Returns.
Typically, those are only open to accredited investors. So speaking now to our accredited investor listeners, as well as their financial advisors and all the RIAs who listen to the show, could you talk a little bit about potential tax benefits to a livestock investment? I know they can change depending on the structure, but just sort of some big, broad ways that investors could use livestock investing as a way to also, you know, get some of those tax benefits.
Chris: Sure. Yeah. So, we do Reg D offerings. So Reg D is primarily for our credit investors, but we also do the BE Exemption, which allows up to 35 sophisticated non-accredited investors, just for everyone’s information. From a tax standpoint, it depends on the structure of the deal, but some of our equity deals, livestock is a depreciable asset. So just like you buy a building and it’s going to depreciate, of course, a cattle depreciates a lot quicker than an apartment building.
But especially when you’re going to eat it after a year or two. But there is that for some of the equity side. We allow investments in self-directed IRAs. So for people looking to defer, probably better for equity yields, I’m not a tax professional, so consult your tax professional, but there are different structures that would be more interesting for that person using a self-directed IRA.
Jimmy: Good. Well, Chris, it was great talking with you today. That’s about all the time we have. Where can our listeners go to learn more about Harvest Returns?
Chris: Yeah. Best place, Jimmy, is our website harvestreturns.com. We’ve got social media. We’ve got a bunch of blogs about this very subject. So take some time to do some research before you invest.
Jimmy: Terrific. And for our listeners out there, if you want links to all of the resources we discussed on today’s episode, you can access the show notes at altsdb.com/podcast. And be sure to subscribe to the show on YouTube, and on your favorite podcasting platform, so you’ll be sure to receive new episodes as we release them.