Passive Investments In Agribusiness, With Harvest Returns

Harvest Returns was a presenting partner at Alts Expo 2022, a one-day virtual event hosted by AltsDb on December 8, 2022. In this webinar, Chris Rawley presents the opportunity to use the Harvest Returns platform to make private investments in agribusiness.

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Click here to visit Harvest Return’s website to learn more about the company’s offerings.

Webinar Presenters

Webinar Highlights

  • How consumer preferences and increasingly fragmented diets are driving changes in the agriculture industry in recent years.
  • How the food sector is being impacted by inflationary trends, and what rising prices mean for the agriculture industry.
  • The investment thesis for agriculture, including demographic growth and the potential for non-correlated returns.
  • Discussion of the recent downturn in demand for meat alternatives, and the potential next steps in consumer preferences.
  • Live Q&A with webinar attendees.

Connect With Harvest Returns

Webinar Transcript

Jimmy: There he is. Chris, how are you?

Chris: Hey, Jimmy. I’m doing well. How are you?

Jimmy: Excellent.

Chris: Awesome. Well, Jimmy, Andy, thanks for putting us on again. Glad to be back to continue our relationship with your organization. Today I’m gonna talk a little bit about our company. I’m gonna talk a little bit about agriculture, why we think it’s a compelling investment, and a little bit about the specific verticals that we offer at Harvest Returns.

So, we were established in 2016 here in Fort Worth, Texas. My background, I’m a 30-year retired Navy officer, my co-founder, Austin Manis, is an Army combat veteran. The rest of my team… I’ve got experience in commercial real estate, technology. The rest of my team has private equity, background, agriculture, of course, accounting, a pretty experienced team. And essentially what we do is provide a platform for people to invest in private placement agriculture offerings.

We do Regulation D 506 (c) and (b). So, as Jimmy hinted earlier, this is primarily for accredited investors, but we also have room for limited amounts of unaccredited investors in certain offerings. We like to keep our offering minimums fairly low. We know that a lot of people haven’t ever invested in agriculture before. This is a new asset class, so that gives them the opportunity to kind of test the waters and then diversify their portfolio with several smaller investments rather than a single large one.

You know, our sort of track record is we’ve funded about 45 companies since we started, raised about $30 million, and we’ve had several exits and distributed over $6 million both in distributions and in exits from deals. Talking about agriculture and how it’s changing, well, the main thing that’s driving changes in agriculture today are consumer preferences in what they eat. And this is actually a pretty new sort of phenomenon.

In the past 10, 15 years, there has been a strong fragmentation in the food sector, and people’s diets have become increasingly fragmented. And I’m talking, of course, primarily in western countries, the United States in particular. But people are demanding very specific types of food. And that includes the way it’s produced. So, whether that’s organic, locally produced, plant-based protein, regenerative protein.

I’m gonna talk a little bit about some of these and, and how you can potentially get some exposure in your portfolio from our offerings. And so, because of this, agriculture is having to rapidly adapt. The last time there was a major change in agriculture production in the United States was really 1950s. That was when the addition of large amounts of chemicals, pesticides, herbicides, chemical fertilizers caused agriculture to become very large-scale production.

So, the farms that could get bigger and bigger took advantage of this. You know, of course, there was negative consequences of this and we’ve seen some of that in the environment. And so, because of that, people and these consumer demands, the way that food is grown is being produced. So, at the same time, everybody has seen in the past three years certainly disruptions to the agriculture supply chain.

So, we’re still seeing some lingering effects from COVID and what that did to transportation. Of course, energy prices as of late have contributed to stressing ag supply chains, railroad strikes on the horizon. And, of course, the war in Ukraine with Russia has certainly impacted the grain exports out of that country. And although that has raised some of the grain prices in the U.S. and we’re seeing some of that, it’s mostly impacting developing nations in North Africa and also in Europe.

So, at the same time, anybody that’s been to the grocery store lately has seen that sort of food has borne a disproportionate amount of the inflationary impact that we’re seeing all across all sectors. And, you know, the panelists earlier talked about food disinflation, or not food disinflation but disinflation writ large and that we can expect that next year. I think the food sector will see some of that but not as much.

Number one, food is not discretionary. There’s also a lag factor in food. You know, the food that we’re gonna eat next year, in some cases, is produced this year. So, we’re gonna see continued high food production, and some of that is due to energy, and some of that is due to the fertilizer disruptions coming out of Russia. So, the input prices for farmers are high.

So, why should you invest in agriculture? Agriculture is a pretty wide field. We just saw Josh’s presentation on coffee, which is, you know, a great, great product but it’s a much broader area than that. First of all, demographics. So, the population continues to grow. As population continues to grow and it increases in wealth, and populations that have more disposable income are going to increase the amount of protein and/or calories they consume.

So, there’s some estimates that say over the next 30 years, we’re gonna have to produce as much food as mankind has produced in the last 10,000. So, just the overall demographics of food as a industry segment will continue to expand. Secondly, returns. So, the little graph I’ve got up here specific to farmland and people who have invested in farmland that that piece of this sector have done very well in the past couple of years. And actually, historically they’ve done very well.

And our investments, some of them are very land-based and others are not but they’re all exposure to ag. Non-correlated diversification. Agriculture is generally not correlated. The returns there are not correlated to stock in fixed-income bond markets. And a final reason you might want to consider getting some exposure to agriculture in your portfolios is to improve the food system. And we’ll talk about that a little bit.

So, we have several verticals at Harvest Returns that are unique. They’re really one, if not one of the few places, that you can invest in some of these verticals as a retail investor, small-scale, non-institution. The first of these is controlled environment agriculture, indoor agriculture. So, the demand that’s driving this is a couple of things. One is those supply chain disruptions. We saw most of the leafy greens that are consumed in the United States, fruits and vegetables for that matter, are grown in Central, or Salinas Valley, California.

Of course, there’s water shortages in California and the Western United States that continue to impact those supply chains and that food production. But the other thing that’s driving this is the need to reduce food miles or the desire to eat food that is traceable. And so growing food indoors allows for year-round production, whether that’s in a small urban vertical farm in an urban area, and we’ve got several of those that we’ve invested in, in Alabama and Texas and Omaha, Nebraska, or large-scale greenhouses. And we’ve done some of those investments as you see here on these pictures.

The market is continuing to grow. Although there’s been some recent fallout, some of the larger companies are laying off employees, there’s still a lot of traction in this space, and we anticipate we’ll see more of these offerings in the future in 2023. The second, I’d call kind of a contrary in opinion. This is one of the only places that you can invest in actual beef and livestock production.

So, this is another industry. You’ve seen a lot of interest from venture capitalists in alternative proteins, specifically plant-based proteins. And we’ve also seen in the past year or so that all the revenue grew during COVID of those products. It’s falling significantly now and those companies are losing a lot of money. So, our contrarian opinion is that consumers are gonna turn more towards regenerative livestock.

And when I say regenerative, that means different things to different people. But primarily, it means that you’re taking livestock and grazing them in a manner such that it’s improving the quality of the soil. It’s improving the water retention of the soil, less runoff, no use of pesticides, or herbicides. These farms are generally organic. Farms and ranches are generally organic, and moreover, they can be carbon negative. So, you’re actually sinking carbon in the soil because of the actions of the animals related to the soil.

So, this market is growing. Specific to the U.S., most of the grass-fed products are imported. So, there’s a lot of room for the domestic market to grow. We’ve done some debt and equity deals in the grass-fed market and they’ve done very well for our investors. So, we like this space.

Finally, something that we started to do about a year and a half ago, and it’s done pretty well for us, is investments in early-stage agriculture technology companies. So, obviously, these are a bet on a startup company, higher risk, higher return potential. The things that are driving agriculture technology… And, you know, ag is a very conservative industry, but the things that are driving this is the need for farmers to make a stronger profit and the need to reduce the environmental impact of growing larger amounts of food over smaller land areas.

So, there’s different flavors of technology that are in the ag space, and we’ve done a couple of investments on all of these. One is precision ag, so this is like the drone that surveys the fields. It sensors in the soil, moisture sensors, things like that. There’s a biotechnology component of agriculture. And then there’s also automation and robotics. We recently completed a robotics essentially automated tractor investment offering.

And we’ve had some of… Although we’ve only done a handful of companies in this space, sort of seed round, pre-seed round investments, a couple of these companies have already completed subsequent rounds at higher valuations. So, we’re pretty happy with that. The other, I didn’t cover it here but we do have a specialty ag vertical, and we’ve done things like… I’ll let you see that. So, we’ve done, recently we completed a vineyard offering here in Texas.

We’ve done mushrooms. We’ve done aquaculture. We’ve done any number of sort of specialty crops. The one sort of thing you probably won’t find at Harvest Returns is row crops. These are commodity-based crops primarily, soybean, corn. There’s other places to invest in that if you want exposure in your portfolio to those sorts of crops but we don’t. We’re more of a specialty time.

So, we got plenty of time for Q&A and I want to give you all a chance to ask them. Excuse me. So, I’ll get to that. The screenshot on the right shows our platform and we’ve got some questions coming in. Jimmy, if you want, I’ll just start asking them or answering them, if that’s okay.

Jimmy: Yeah, go ahead, or I can pose them to you.

Chris: Yeah, go ahead.

Jimmy: It’s up to you. Okay. I’ll pose them to you. So, the first question that came in, “How many deals do you typically offer in a year?”

Chris: So, generally we launch one to two offerings per month, sometimes fewer, sometimes, you know, two or three, but that’s about our average. So, plenty of chances to wait and see and wait for that offering that you want in that sector that you want.

Jimmy: Good. And do you run a diversified fund or are all the investments made a la carte by individual investors? What does it look like for a typical investor who comes into your platform?

Chris: Good question. So, currently, we are doing a la carte investments. You’ve seen some of ‘them. You know, we do one or two a month but we are working on a fund that we intend to launch for 2023. So, obviously, this will be a more traditionally scheduled fund. The nice thing about the kind of structure that we built is we’ve got a great deal pipeline of all the… You know, every single month we get maybe 20, 25 deals that come across our desk. And only about 3% of those or so actually end up on the platform.

So, because of that, we’ve decided that yeah, we do wanna see some of those economies that you might get running a fund, and we’re still working on the thematics of that fund but it’s going to be very similar to what. the type of offerings you see on the platform and a bias towards sustainability and impact in future, you know, sort of companies that are really focused on keeping American farmers farming, and doing it in a way that benefits the land and produces quality food.

Jimmy: Yeah, I think that’d be phenomenal if you guys were to offer your own fund at some point next year or at some point down the road, maybe probably offer a handful of funds. Maybe one focused on AgTech, one focused on sustainable farming, one focused on livestock. I’m just spitballing here but I think that’d be interesting for you guys to do something like that.

Chris: We’re definitely looking in that direction.

Jimmy: Very good. Well, we’ll keep an eye out for that. Let’s see, our next question comes in, “What’s your process for vetting deals on your site? I agree with much of your thesis but I think I would struggle to do due diligence.”

Chris: Yeah. So, what happens is, you know, that pipeline comes to us. You know, a farmer or an ag company will come to us. And, you know, the first thing we’re gonna do is just take a look at what they’re trying to raise or what their business plan is, their experience. That’s sort of the first swag. Once we decide that we wanna pursue due diligence on these companies and we kind of come to a mutual agreement on that, we will dig into the founder’s backgrounds.

So, we’ll do, you know, typical bad actor checks on the security side and criminal, bankruptcy, all those sorts of things. We’re gonna dig into the proforma financials. We’re gonna look at the, make sure that the structure that they’re offering makes sense, is appealing to the investors and executable. And then we’re gonna go, you know, typical we’re gonna look at their lease agreements and their offtake agreements and their corporate documents and all that sort of things.

We’ve got a pretty good due diligence team now. I’m really happy with it. We’ve got the process down to about 30 days, so we’re able to do that with some certainty and some deliberation.

Jimmy: Good. Bob asks, “Do you operate the greenhouses?”

Chris: We are not an operator in any of these companies. That’s hence the due diligence process. So, the companies come to us and they decide how they’re gonna operate. Essentially, we have a passive investment in these, although if we do do a fund, we’ll have a more traditional sort of voting rights with the relationships with the companies that are in that portfolio.

Jimmy: Good. Let’s see. A question here from Alan. Alan asks, “What are the trends in terms of organic food, both in terms of production and what the end consumer is looking for?”

Chris: So, you know, organic, if you go by any grocery market, you’re gonna see organic food there is gonna have a price premium. And the premium relative to conventionally grown foods, you know, depends upon crop, season, any number of factors. It is something that consumers see, are demanding a lot. You know, USDA in the United States is who certifies organic farms.

So there’s a lot of questionable labeling in food, as many of you know or suspect. You know, things like naturally raised, that’s just a label. That doesn’t mean anything. USDA or organic means that the USDA has actually certified that farmer ranch.

Jimmy: All right. The next question. This is a great question that I think all of our presenters today should be asked. “Do you or your team, Chris, personally invest in any of these deals?”

Chris: Yes. As a matter of fact, I just invested in our current offering. And some of our team has, and some of our families have. So, the company usually doesn’t. You know, we’re not set up as an investment company. So for the most part, Harvest Returns does not invest. And that may be different for the fund as we launch the fund, but in these individual offerings, yeah, we do invest in, I’d say probably 70% of them have one of our, you know, company members investing in them.

Jimmy: Very good. It’s always good to see. Scott asks, “You mentioned mushrooms. Do any of your mushroom work focus on medical uses?” And then he gives an example of Turkey tail fungus and cancer being used as cancer treatment.

Chris: So, you know, an interesting question, Scott. We did do a mushroom company a few months ago, and they are… Theirs is more on creating sort of a circular economy between food waste and then, you know, buying food from restaurants and then selling it, selling mushrooms back to those same restaurants, and then reusing the blocks as compost. We are in due diligence, early due diligencem with another mushroom company that’s looking at some additional uses. So, yes, we see it all.

Jimmy: I learned something new. I had no idea. So, let’s see. THe next question’s about supply chain. This questioner asks, “Has ongoing supply chain disruption impacted ag companies negatively from what you’ve seen? How have they navigated these challenges and is there any ongoing risk?”

Chris: So, COVID obviously had a big impact, you know, the early part of COVID on some of our portfolio companies, especially those that were selling retail, that, you know, some of them, some parts of the country, those that those sales became very challenging. But for the most part, you know, food remained an essential industry. It’s not discretionary. People are going to eat. Supply chains, there are risk in every investment and these are no different.

And, you know, part of that with agriculture is biological, so weather, disease, drought, those sorts of things and commodity risk, although most of the companies that we invest in are sort of shielded from the commodity risk. But supply chain risk is certainly a thing but I think we’re gonna see that lessening more as time goes on.

Jimmy: Let’s hope so, right? Patrick asks, “Chris, average size… Well, what is the average size investment in an early-stage AgTech deal, and is there any interest in biowaste management for farmers or ranchers?”

Chris: Our average size investment is half a million dollars in the AgTech deals we’ve done. Of course, the minimums, you know, for the individual investor are smaller, anywhere between $10,000 and $25,000. The bio waste, I’m not sure I can answer that question, but we could certainly, you know, keep an eye out for that.

Jimmy: Yeah, maybe you could reach out to Chris directly there. The next question says, “I didn’t quite follow the pivot away from meat alternatives, including Beyond and others like it to a new type of food or technology. Could you repeat that part?”

Chris: So, the pivot is not necessarily a pivot away… Well, the proof is in the earnings of these companies and the stock price. I think since they’ve gone public, they’ve all gone down. And I’m specifically talking about Beyond Meats and Impossible Burger. There was, you know, a lot of investment from VCs into those spaces, but not as much interest from the consumer side. And it really hasn’t panned out from, you know, both the nutritional value purported of these foods.

And also, in my opinion, and the environmental sustainability of these highly processed foods with really large diverse food change, the plant-based meat. So, you know, our pivot is not necessarily a pivot. It’s a return back to the past of growing animals in a sustainable animal-based protein in a sustainable way but at more scale. And the way we do that is through some alternative funding that we do with these companies.

Jimmy: Very good. We’ve got time for two or three more questions.

Chris: Good.

Jimmy: And then we’ll cut you loose, Chris. Amy asks, “What are the upfront loads on your investment?”

Chris: No, upfront loads for investors. We take our fees from the sponsors. We take, you know, a split, generally a 20% carry. So, if the deal performs, that’s where we really make our money towards after the deal exits or during distributions.

Jimmy: What’s the typical hurdle on that 80/20?

Chris: You know, we have some that have prep returns. I’m trying to think of one recent one. You know, it’s like an 8% to 10%. And then on a debt we’ve done, you know, what I consider high yield debt anywhere between 7% and 15% on the debt deals.

Jimmy: Pretty typical then. Richard asks, “Do you work with investment advisors?”

Chris: We do. So, you know, give us a call. We’ll have a conversation. And the same thing with IRAs, self-directed IRAs.

Jimmy: Good. Good. We’ve got time for one more question and then we’ll wrap things up. The last question asks, “Are your companies existing companies, or are some of them startups?”

Chris: Both. Obviously, the AgTech companies are pretty early stage, you know, anywhere between one to five years. Some of the companies that we invest in have been around for decades, honestly, some of the cattle operators.

Jimmy: Okay. Fantastic. Well, Chris, thanks again for partnering with us on Alts Expo. You were here last year. You liked it so much, you came back again this year, and we hope to do one or two more of these events in 2023. But I really appreciate you being here with us today for Alts Expo 2022. Thank you so much.

Chris: Thanks, Jimmy. Bye.

Andy Hagans
Andy Hagans

Andy Hagans is co-founder and CEO at AltsDb, and host of The Alternative Investment Podcast. He resides in Michigan.