Episode 01 | I Tried to Buy a Farm and Failed - Chad Krause
Show Notes
TeraGanix CEO Chad Krause shares his journey of trying to buy a farm, offering a candid and insightful look into the realities of modern farming. With a strong background in finance, Chad discusses the challenges, surprises, and key lessons learned while evaluating and negotiating farm purchases across different parts of the US. Join us as Chad offers valuable insights for farmers, business owners, and anyone curious about the business of farming.
Ways to tap in with TeraGanix:
- 🌐 Website: https://TeraGanix.com
- 📷 Instagram:
/ teraganix
- 🌱 EM Nitro Protocol: https://ag.teraganix.com/em-nitro-quote
_____
Podcast Transcript
MJP (00:34.51)
Well, this is very exciting. Hello, Chad.
Chad Krause (00:35.323)
Amen.
MJP (00:40.28)
Today we're gonna have what I think is gonna be pretty epic conversation here. We've got, I'm Matt with TeraGanix and we have Chad Krauss, our CEO here at TeraGanix. And we have a fun discussion that we're gonna dive into. Chad had recently shared with me that he had tried to buy a farm. And...
Chad Krause (01:05.861)
Yeah, we're going to talk about my failure. Is that great?
MJP (01:09.23)
We're going to talk about Chad's failure in trying to buy a farm. So I'll give a little setup and intro to you up here, Chad. Before taking over here at TeraGanix, Chad had a pretty extensive history in the beginning of your career on the consulting side. A lot of feelings in finance, lot of working in spreadsheets.
Chad Krause (01:15.414)
All right.
Chad Krause (01:32.517)
Yeah.
MJP (01:39.446)
lot of managerial consulting with large organizations. I would also call you a cashflow crisis expert, to say the least, among many other things. And really, I think it's been just kind of knowing you personally for a lot of your career and all the things we've done. think it's...
a fun transition to watch you. I think the aspect of buying a farm is really representative of you wanting to get your hands dirty. Get out of the spreadsheet life a little bit and get your hands dirty. So this is going to be a fun conversation of the time I tried to buy a farm. So just to kick it over your way, tell me a little bit about the intention there.
Chad Krause (02:17.583)
Yeah, totally.
MJP (02:36.802)
framing it maybe a little bit of timeline wise but you know why the heck were you looking at actually purchasing your own farm?
Chad Krause (02:47.737)
this is, it was when we just got, a little bit down the road in touch with our Brazilian counterpart, Sid, who shout out, mean, I owe so much of my agricultural knowledge and just knowledge with our technology to that man in Gustavo. and he's in Brazil and just so much further down the road than, than we are. And so we get to glean a lot from his, harder and lessons.
But after that, know, Sid shared with us and gave us the real roadmap of here's what we actually do and drive value in agriculture. And the biggest thing that the real starter protocol is nitro, that fertilizer reduction protocol. And as Matt said, I'm a finance guy by training and operations, but I'm like,
we're adding five to eight percentage points to the bottom line of a farm. In our experience that's doubling or even pushing some farms in profitability. There's an investment thesis in this and I set out before Terragans, my goal was to buy eight companies, something like that, arbitrary number five, eight, whatever.
and roll them up, put management in place. And we fell into tear organics, you know, the reality of not being a consultant, but really running your company sets in and it's a lot. And then, you know, a couple of years later, you start to see and get familiar with the technology and you become very emotionally connected to it. I mean, I did, you would agree. And so...
You know, we started the nitro fertilizer reduction and tried to help farmers with that protocol. you know, buying companies is something I'm good at. really just that. And we have a lever to impact the financials on them to help with the underwriting. And it seemed like a really natural progression based on the skill sets. And so,
Chad Krause (05:11.707)
So we set out to do and you know, our bread and butter is ground crops. I'm from central California. So my family's in stone fruit and citrus, some almonds and some things like that. Mostly orchards, apples. So, you know, that's all great, but we see a huge impact on
land that is less expensive per unit of yield, whereas Fresno land is very expensive and high yielding and the input costs aren't as big as a percentage of revenue. So that's the long roundabout answer, but we decided we could drive real financial impact and that we had an underwriting thesis for it.
MJP (06:02.156)
So are you looking at specifically buying a corn farm?
Chad Krause (06:06.885)
Yeah, we're specifically trying to buy a corn farm. Later on, we pivoted and took a look at citrus, but we'll stick to corn because it's kind of a different conversation of what happened there.
MJP (06:21.198)
So what was your approach going into it? So you're, okay, cool, know, I've got the, you know, everything in theory. Now, what's your process? What was your process like in, you know, approaching which farms, which prospects, and, you know, ultimately we'll talk about just going into it.
Chad Krause (06:21.795)
Okay.
Chad Krause (06:37.167)
Yeah.
Chad Krause (06:40.689)
Even before we get there, even before we get there, how the journey to even getting to the point when we were ready to to look at a corn farm and where to look at a corn farm, there's the whole US. And and I'll tell you what, East and West Nebraska are very different markets. And it's it's it's rainfall and it's water access and there's all these other elements. And so
Before we even got there, we had to prove to ourselves, can this actually work? And so I got ahold of, I I talk to so many people. I got ahold of the Nebraska Corn Budget, University of Nebraska. I even got the authors on the phone and spent a very long time on the phone with the authors of it, going through it in detail.
And the net operating income was, it depends. They've got a hundred freaking taps. And for different variations and, you know, corn after corn or whatever. And, you know, we picked our favorites, of course, and it was about a 20 % roughly, like net margin. So, so what, where we landed was, okay.
It does work based on the model. Farms are really profitable and we think we can make it more profitable, which is the ideal state, to be not profitable, it's profitable, that's harder. And then where we got to next was we said, the land price, where's the mismatch between land price and yield of corn? Right?
because in Pennsylvania, the land price to yield didn't make sense a lot of the time. And there was a lot of places like that. And so we were looking for value opportunities candidly. And so we settled on a few places, Oklahoma, West Nebraska, and some others. I can't even remember all.
Chad Krause (09:06.033)
So that's how we started the search was like regions. And and you know, in the central Valley, you know, my family's pretty well connected. And so a lot of deals would come to us before they, you know, even if a broker had it, they bring it to us first. Mostly my family members candidly, but, but yeah. So we didn't have that in the Midwest and it's over such a big region that I don't know who would have that.
MJP (09:09.678)
Does that make sense?
Chad Krause (09:35.633)
you know, in any significant sprawl. But yeah, so where we landed was we used brokers, we went through brokers and just public listings and that's how we got our lead flow in and then we would spin up conversations.
MJP (09:55.083)
Give me an example of one of the early conversations that you had with a potential farm prospect. Where were they? What kind of farm, what kind of acreage were we talking about and what was that conversation look like?
Chad Krause (10:08.625)
Yeah, yeah. 4,700 acres in Oklahoma. And the broker plays middleman a lot. So it's almost like you're going to court and there's the council member and then there's the actual guy getting tried and he's more or less silent. then the attorney does all the talking. So was a lot of that.
And some were better than others and you know, those guys can just be transactional guys in ways I mean they are generally but not a lot of them are So there's a lot of just sales and them going through their their public listing which gave way too little information to me Yeah, it was it was all about the acreage for them
MJP (11:01.612)
What's the, what do you find is like a common motivation for them to be selling?
Chad Krause (11:12.881)
hard. You know, we...
We really didn't,
wasn't too too many consistent patterns.
Chad Krause (11:27.633)
I that, I mean, this is going to be my speculation, right? This isn't me taking everybody's, you know, what they said, analyzing it, but the value of the land versus the value of the operations wasn't worth it to keep farming rather than sell. think that's really what it came down to for most of these guys.
MJP (11:54.818)
That's interesting. do you feel like it was, know, again, just kind of the prospects that you were most looking at, do feel like that they were mostly family farms? Or?
Chad Krause (11:54.988)
Thanks
Chad Krause (12:12.271)
most of them were. A couple weren't.
MJP (12:14.434)
Seems like that would have a different flavor than more of a corporate transaction, so to speak.
Chad Krause (12:20.847)
Yeah, and in every one of those scenarios where it was a family farm, the kids weren't involved or they were involved in a limited capacity or they were off custom farming and strange from the rest of the family. There was a break down there. But yeah, most of them were family. yeah, under at 10,000 acres, even 15,000, a lot of them are families. I should we work with a
A very big farm that is 20 to 30,000 acres that's family.
MJP (12:57.56)
Was there, were there any farms that were really close to a, like a go decision? Like was there any, anything that was so close on the line where you were, you like what was the, what was the farm or the potential deal that was closest to happening for you?
Chad Krause (13:17.935)
Yeah, yeah, there no coma.
Chad Krause (13:26.521)
It was a team of us. It wasn't just me, to be clear. We put in an offer and we shouldn't have. But we put in an offer that we thought we could theoretically make work because everybody on the team at the time, but myself included, right? Like we don't like to put an offer in front of somebody that we don't even think we could perform on. That's not good for anybody. And it's bad on our reputation, right? And so...
MJP (13:26.54)
And then.
MJP (13:33.024)
Yeah
Chad Krause (13:56.133)
Some of us thought that we should and I did not think that we should. They were losing money.
They're losing men.
MJP (14:03.72)
and what made the deal not happen.
Chad Krause (14:07.409)
Well, I went out and I spent five days with the owner and we went through everything and
Smart people. yeah, he had a little bit of the case of metal disease. So there's so many just abandoned cars like everywhere. It was so untidious. It was insane to me. ultimately what made the deal not happen is that the economics just didn't back out. They just didn't back out. Even getting solid data is near impossible in this world.
And I know that's not true for all firms. I know that for a fact. My uncle is, you know, my whole background is in finance and I think he's got better financial controls than I do. But for quite a few of the guys that we met, that was the case. And yeah, they just, they weren't profitable. And I think if I can get into like why, right?
what it came down to is a lot of it was.
Chad Krause (15:24.113)
Like the biggest and easiest thing is just the whole land, the whole separation of land versus, or operation versus real estate and land. Some of our, members on that team that was trying to do that, they were big real estate people and they were thinking of it as a real estate plan, which is ultimately why we put in that offer. My whole background is in thinking of the portfolio company.
not at the private equity level, which is great, but like, I want that business to succeed. Because if that business doesn't succeed, then your freaking fund doesn't succeed. And so what are you doing in business? What are you doing making financial decisions for that portfolio company? It's how I feel. It's part of why I left. The map of disconnect. And, the problem was,
You assign a per acre value to all of this land, the whole pool.
Let's say, to exaggerate the numbers, 50 % you're actually even planting on. 25 is irrigated, 25 dry land. I mean, depending on if you have a lot of water or not, makes a big deal difference. And you're paying for the whole thing. as a buying a business, because, but for that farm, I'm not buying that property.
So your business, you have a 100,000 square foot warehouse, but you have business for 50,000 square feet of it. But I got to buy the whole thing. And so that's kind of where we landed was that extra cost from the unusable portion sunk a handful of these. yeah, maybe we could have made some of that acreage plantable, but.
Chad Krause (17:28.997)
it would have been a journey to do it. We think we could do it in three years. So a lot of the soil that was, you know, it wasn't worked. It was either really sandy or in case I'm thinking of it was too sandy or clay, like there are some things that we can do. They take time. We think we can do it in three, four years, which is an abbreviated timeframe.
Chad Krause (17:58.971)
But three, four years is a lot. So.
MJP (18:03.47)
What kind of a combo thought, you kind of touched on, I was just kind of curious, what specific operational challenges did you see with that farm? And really, I guess really what I would be interested in hearing you talk about is if you did buy that farm, if the deal went through, what, based on...
Right, like based on those operational challenges, like what would you have done? What actions would you have taken? Like what would that roadmap and game plan have looked like had you bought that farm and, you know, you know, went full speed on turning it around.
Chad Krause (18:47.343)
Yeah.
Chad Krause (18:55.181)
our our playbook is
Chad Krause (18:59.761)
It's not going to be anything that anybody put like fermented manure to soil bioactivator, we call it now and adding microbial life and carbon to it in an accelerated timeframe. Most people listening probably know if you just drop manure on it takes kind of a long, time to even reach your soil. And you lose quite a bit of it. But for that, of course, the nitro, that's easy.
feeding foliar feeding nutrients, amino acids. Plants love amino acids, right? mean, almost in lieu of nitrogen. And so those are the easy ones. And then the harder ones that are in my head, so bioactivators is kind of a bigger investment too. And not because of the cost of the product, is, Targank doesn't really make money on that one. And you know that.
But it has a high impact. The challenge really is that it's a high volume of liquid and just the operational challenge of actually spraying 110 gallons an acre on, you're not going do it on your whole farm. You should do it on certain patches and rotate. That's how I probably would approached it.
Of course, activated in furrow, about some additional activated to try to tamper down some of disease and pests just by healthier plant, healthier soil. Fewer excess nutrients, more micronutrient or micro... It's escaping me. Minerals.
in the plant really helps. And there are a couple other things I can't think of off the of my head.
MJP (21:01.934)
Yeah, so as you're alluding to, we would have come in, done some efforts to make the 50 % non-usable land usable over a period of time. The usable land that we're working on would have applied some techniques, like we're talking about the nitro to.
to recoup some bottom line and at the same time bring back some fertility and vitality in the soil itself.
Chad Krause (21:23.675)
Yeah, that's easy. That one goes across the whole freaking farm.
Chad Krause (21:34.565)
Yeah, and disease and drought tolerance. So I'm gonna take that question back. I'm doing it over. In that area that I'm thinking of, just, they didn't have a lot of rain. And the microbes in there make a huge difference, huge difference to drought tolerance from Central Valley.
There's a billboard on every freeway, every five, 10 minutes. And so we get quite a bit about that down with the Delta smell, right? But yeah, so I would have tried to restore, I wouldn't have tried, I would have restored the microbial balance and added microbial life to it in organic matter. needed organic matter, needed that.
Cover crops are easy one. That's RegenAg 101. The Nitro is what funds those investments. So that's kind of an important distinction too. In my head, that's how I approach it. So Nitro goes across the whole dang thing. A lot of people don't do Nitro on soy. I would have even tapped in a little bit on soy. And then as for restoring those unusable acres, it fell apart because I
A lot of those were never going to be planted. They just weren't. For rocks, for just the geography in that case.
MJP (23:14.988)
What other things did you see potentially as areas of opportunity that would have tapped into, again, your background? Were there other outside of, maybe again, outside of actual farming operations, but more business operations that you would have been able to tap into?
And I don't know, I'm just throwing things out there, like, you know, stuff related to their crop insurance or stuff related to how they were managing cash flow or stuff related to how they were financing equipment or getting loans and dealing with their debt. Like, was there anything kind of in that area of your world and expertise that you were like, man, here's some areas where we pull on these levers and man, this picture looks a lot more pretty.
Chad Krause (23:45.211)
Yeah.
Chad Krause (24:04.987)
Yeah, definitely. And you know my four pillars that I'm very fond of. Everything falls into those four buckets for me.
MJP (24:14.168)
For everybody that is the four pillars of business. We've got our revenues, expense, our risk, and our cash management. So I'll tee you up with that.
Chad Krause (24:24.431)
Yeah. Yeah. So yeah. Those, to me, it impacts all of them, but yes. So.
Let me just, I'll start, I'll go one at a time if I may. So one thing I love about Eumnitra that nobody thinks about as a side benefit, very few people do until they see it, is if you have 10 inches of rain, nine inches of rain, and you're growing corn, you're gonna have a hard time having crop, right? And weather's weather, right?
And if you lose that crop and you have crop insurance and you get paid out and you just spent $100 less an acre on your nitrogen, that goes in your back pocket. Not only that, but you would still have some of those microorganisms left that you would have bought even after saving $100 an acre to then invest into your soil and increase its drought tolerance for next year.
So those are, and that's a risk to me. I mean, it's also expense. So it's got an expense impact, but it's a huge risk mitigation thing. So that's one way. And that actually got baked into our financial model too, right? Obviously, you know, kind of mid case low high sort of thing. But, but that's one thing. then yeah, crop insurance, right? Just getting on the phone, phone with people, farmers are doing this today, but being a little bit more creative and
Inquisitive and not being an adult right? It's just incredibly valuable so for not in Oklahoma, but in Nebraska one insurance agent was explaining this this cool little Hack where if you planted one acre of organic You would get some significant 15 25 forget what was exactly some significant disc
Chad Krause (26:36.401)
count across your whole farm's crop insurance. Right? That makes a big difference. Two, plant one them organic. Not only that, mean, our product's organic. So we have ways to do it. We don't think of ourselves as organic or regenerative, but okay, right? That has ROI right there. Yeah, of course, financing equipment.
is another whole thing, right? I talked to, yeah, framing, mean, framing is freaking brilliant. You guys are joking so much, right? Like, how do you choose your equipment? So one person I was talking with is like, okay, well, we choose two-year-old equipment and we roll it over every single year. So it's always two-year-old equipment. And we've got to deal with, you know, New Holland, John Deere, Safety Cab.
And we're just constantly rolling it over two years. Okay.
Push it three years.
Nah, I the nicest, best equipment. Screw that. You know? So like, I mean, there's little things like that. I think they'd be intuitive to most people that are, you know, on the ground actually working the land, but they were new to me at the time. And those are some tweaks. Obviously lines of credit and kind of the normal playbook. Let me think about it.
Chad Krause (28:14.641)
Siloes are an interesting one, like a grain silo.
Chad Krause (28:23.537)
A lot of people are big believers in it and they've made a lot of money in it. And it helps you time the market better. And that's a whole nother conversation and just maybe where my experience would come in a bit, but the markets and the geography and how close you are to a distribution channel or where you can sell your grain. Maybe even having a pre-negotiated place to sell your grain.
A lot of guys are doing that. And something that tracks a running average.
So.
Chad Krause (29:05.839)
Okay, I'm gonna take all of that, I'm gonna make a short version. Don't make decisions on highs or lows.
make a decision off of like weighting risk and that adds enterprise value. So if you had a contract that takes, you know, some like a futures price of corn and last year's price of corn and you know, some factor, like some formula and you can smooth out the ups and downs. Yeah, you might not have had the high in 2022, but you wouldn't come down as hard either.
immense amount of value in that.
Chad Krause (29:49.275)
So I guess that's how I would think about it. It's just negotiating rates and thinking like moving cash later and smoothing out expenses and smoothing out revenue as best as possible, de-risking.
MJP (30:03.862)
anything on the debt side that you, and again, it could be with that particular firm. I know we've been using that as a little case study just to kind of dig in and give some, you know, some tangibility to it. But anything that you learned on the debt side, you know, that was, again, like a little hack or something where you thought to yourself, yeah, like I can use this lever, you know, when we...
Chad Krause (30:10.673)
you
Chad Krause (30:16.336)
Thank
MJP (30:33.58)
you when we go forward we're definitely going to use this lever because this is going to help us this this will help you know this will help transform any any farms balance sheet income statement whatever you know the PNL
Chad Krause (30:47.417)
Yeah, that's hard to guess.
MJP (30:51.31)
And we're seeing that right now with the Kansas City Fed was sharing some info about agriculture loans. right now the loans that are a million or more dollar loans are outnumbering the...
Chad Krause (30:56.635)
Yeah.
MJP (31:13.902)
you know, the loans that are under a million, which is the first time in what history that's ever happened. So there's a lot more, a lot more debt out there, which I would assume is making it more expensive.
Chad Krause (31:26.321)
You know?
Chad Krause (31:29.745)
Somebody told me this. I may butcher a little bit, but...
but I couldn't unsee it and I shouldn't be sharing it on this podcast because it's teetering on conspiracy but.
Chad Krause (31:47.119)
I mean, a question, do banks want you to actually be current and pay your loan?
MJP (31:57.048)
Dude, the answer is no. I mean, yeah, maybe a borderline conspiracy, but the answer is no. The bank doesn't want you to pay back. I mean, you go back to real estate, you know, that's something that I think a lot of people don't, I mean, a lot of people do, but a lot of people don't necessarily understand is, I mean, you even just get a mortgage on a house and, you know, your first month's payment.
Chad Krause (32:09.393)
Yeah, and.
MJP (32:25.958)
is 90x % going towards interest. are, you know, you're effectively not building equity. Like, you know, you're, you're not paying off your loan, so to speak. And then, you know, come to find the loan company is more than happy to help you refinance at any point in time, because that just starts the clock all over again. And you're, you know, like it, it's just so easy to, to look at things at that service level and, and one of
want to get the lowest interest rate possible and this and that but you're, you're, it's like, you know, just looking at that it's like man, you're not building any equity. Like, the bank owns you.
Chad Krause (33:08.406)
From like a from a portfolio management perspective there is there there is a formula there's a calculation for the optimal amount of debt technically Like on on paper, right? So there is a place for that I believe in debt. I don't think it was I So balance I know we're talking about real estate here But it just
Are the prices going up to help farmers or are they going up to refinance or like have you noticed debt and land is getting disproportionate from the underlying value of the operation?
So that and I'm not beating any any former up. I think that they are they are so under loved and under appreciated that I just I feel for them. And.
MJP (34:08.334)
Yeah, give me some of the empathy that you learned, coming from your background, saying, okay, coming into this semi-green, so to speak, and throughout the whole process, what are some of those empathy moments that you had where, man, this is...
this is a lot harder than one would imagine or things that the everyday farmer has to deal with that you might not think that they should be getting more love for.
Chad Krause (34:44.866)
I mean, they are full-blown business owners in that they have to worry about debt, insurance, risk, all those things. And they're also generally considered the biggest gamblers. What do you plant this year? Trying to bet on a market. And yeah, you know what? Let me think of what the best example is.
Chad Krause (35:22.085)
I I don't think there's any better example than the entire system.
Chad Krause (35:32.155)
They're only recently, as it even been a discussion, and some farmers sell on quality metrics and have increased price for certain quality metrics, but a lot don't. And a lot are getting trapped in this more cost, more equipment. Get that big John Deere.
and pay it down and It's it's getting to the point where it's paycheck to paycheck for some of these guys And I I think that they they I mean they they've had to grow to survive And they've had to do more with less So so let's take our four pillars revenues pretty getting pretty chopped. I mean
Any features on corn, on soy?
They don't look great. I mean, there's a lot of volatility in it. So for all we know, it could be fantastic next year. We don't know. But the market itself is saying, OK, well, you know, it's a commodity. It's all the same. I don't care what you put on it. And then on top of that, the equipment gets bigger, more expensive. Every pressure is leading towards bigger scale and a bigger burden.
And it's like, it's the difference between managing a 700 square foot house and being forced to manage a 10,000 foot warehouse. feel like that that's where the pressure is coming from. so, yeah, mean, otherwise, and nobody will help. I mean, they're across the entire US labor is the biggest challenge out there.
Chad Krause (37:29.681)
I think that's probably the biggest one. mean, every one of these guys is a mechanic, a borderline negrotomist, if not full blown negrotomist. And there's very few people around to even be able to show them to do appreciation because they're a lot of times in the middle of nowhere. And the appreciation that they do get, they see on TV, just like all of us, it's the...
Well, to be fair, it's the guys fighting back in Europe and, you know, dumping, dumping manure in front of McDonald's or whatever they did. But yeah, I guess it's not, it's not blatant disrespect except for through the legislation that is blatantly disrespectful. I'm specifically thinking of Fresno, California right now. but otherwise.
There's just not a lot of appreciation shown or any sort of emotion that's shown. I think it's why that's a tough question for me to even think of an answer to.
MJP (38:35.882)
Thank you. I think you gave some thoughts there. You shared how you feel. I said you shared how you feel.
Chad Krause (38:36.955)
I think neglect. Yeah. Yeah, took me a long time to get there, but... Huh?
Okay, okay.
MJP (38:48.94)
Maybe we kind of cruise into a close here. I want to get your thoughts on if you were restarting this process again today. Chad's going out. He's giving it a second go. He says, hey, let's go buy a farm. What does that process look like for you today compared to what it did before?
Like, know, what are you thinking now as far as, you know, you know, to your point, attacking it from regions, you know, or would you still be thinking the same, you know, what regions, what, you know, what crop types, what size farm, and what kind of, I guess, tangibles and intangibles would you be looking for now if you were kicking this process off all over again?
Chad Krause (39:40.688)
Okay.
I'm running it or am I hiring?
MJP (39:47.918)
Put your gloves on, you gotta run it.
Chad Krause (39:51.537)
If I have to run it, one to seven thousand acres. I know it's a big spread, but I one to seven thousand acres. I want to be in a niche community. The guys that I've seen that seem to be doing the best, they have a niche. It's not just corner soy.
and they have a portfolio approach to everything. So they're in balance.
Ideally, it would be having a strategic need that you're fulfilling and then the cash crop behind you to steady out the highs and lows. I that's, I know it's kind of a fluffy answer, but that's honestly what I think.
MJP (40:50.046)
You'd have to have some, you know, one or two acres of peach trees, For Dona May?
Chad Krause (40:57.285)
Yeah, I love peaches, yeah. Not clings, the freestone. And we got to be done with the cling peaches. I'm tired of seeing those pieces of cardboard in the market. If you're a cling peach farmer, please God forgive me. It's a personal preference.
MJP (41:15.726)
man.
Yeah, I that was a, that was an epic convo. I learned a lot.
Chad Krause (41:29.925)
Are we done?
MJP (41:31.776)
We could be done. You want to share anything else?
Chad Krause (41:57.617)
Okay.
Chad Krause (42:06.011)
Yeah, I mean...
MJP (42:06.04)
You a lot. mean, so then.
Chad Krause (42:10.021)
I felt like I was rambling.
MJP (42:13.486)
course, it's what we all do. It's we do all day every day. As humans, we just ramble on.
Chad Krause (42:19.597)
I know, I felt like that needed to be more succinct.
MJP (42:23.468)
So in the end, just, guys didn't find a deal that was palatable and decided that the overall effort was a no-go for the time.
Chad Krause (42:38.747)
Dude, it wasn't a business. The guy was selling his land.
MJP (42:41.484)
I'm just saying overall, know, kind of looked at it as, okay, you know, we've seen it, we've seen enough here and, you know, we're not going to find the right deal that's palatable for this group, for this opportunity at this time.
Chad Krause (42:59.035)
The only thing even close was the orchards in Fresno.
Chad Krause (43:05.787)
That's fully baked, fully baked with all of our adjustments. Herbicide reduction, nitrogen reduction.
MJP (43:13.176)
Did they have the water rights?
Chad Krause (43:16.869)
Yeah, Fresno has different problems. Fresno, I'm sure it's that way in a lot of places, but I hesitate to say they're the same. you can get little blocks of land and you can patch them together. But something that's pretty underrated in agriculture is
MJP (43:17.89)
Yeah.
Chad Krause (43:49.083)
where you get your inputs from, like the logistics there. We talked about that the other day. And then where the heck you sell your product to.
Chad Krause (44:01.935)
I mean, shout out to my uncle, Uncle Lance. He's the man. mean, I'm sure you'll be okay with me saying this, but he's a farmer and he's had really tough years in the farm that my mom also owned part of, And this is gonna sound awful and forgive me if this is, but at one point when I was grown up, my mom's like,
know what the farm's good for? She was also an attorney, my dad, right? Yeah. so you know what the farm's good for? It's good for a write-off.
Chad Krause (44:43.153)
brought down their taxable income. That's what did for them.
And then the train to nowhere that had to start in, was it Merced? To Madeira? Madeira.
MJP (44:58.754)
The high speed baby. Yeah, Madera to Bakersfield, right?
Chad Krause (45:02.533)
Yeah, that clipped a little part of our land off too. Thanks for the love. You don't have an option to sell it, you sell it, whatever. yeah, so buying little blocks, the present is a whole different thing, but buying little blocks is great. Where do you sell it to? Your citrus, or packing house.
What I respect so much about my uncle, that's really, I would say one of the biggest influences for me in pteranganics, in my life in general, but in agriculture is he is unbelievably and violently dedicated to the farmer's personal and financial health.
Chad Krause (45:58.081)
And they've got their PCAs, their pesticide control advisors, and hope challenge them at every corner if he has to. But he's a realistic and practical farmer. And he now helps run a packing house and takes a ton of pride in maximizing the farmer's actual return.
Their winning is his winning. They like him. They want to do business with him, of course and vice versa And I'm just it's kind of just dawning on me now, but I'm realizing that that's actually Our model if you notice that every time we talk that is literally yeah, I Yeah, I remember talking somebody was like that way
MJP (46:41.688)
course.
Chad Krause (46:50.949)
my mother, my grandmother would come out of their grave and slap me in the face if I ever did anything, any harm to a farmer. It's that important to them.
MJP (47:02.508)
Those are good.
Chad Krause (47:02.801)
So we sell black ink, not red. That's why we have that saying.
MJP (47:07.886)
That's right.
Chad Krause (47:09.947)
Because I can't buy a farm in red ink. I can only buy a farm in black ink, guys.
MJP (47:17.223)
We're looking for farms in black ink. If you're in red ink, we'll be here to help turn you into black.
Chad Krause (47:19.599)
You know? So.
Chad Krause (47:25.327)
Yeah, so you know what, let me tell you what I would actually look for. I'm going to restate one of my earlier answers. You know what I'd look for? I'd look for a farm that has a debt service coverage ratio when you're underwriting it, i.e. the actual operations can fund the loan payment.
No, I'm not going to sink $20 million cash into a business.
just not smart. just, you know, the whole, obviously that's, you know, 20 % of the entire like cap table, right? That's different, but you know what saying? Like, I'm not going to sink 100 % just cash into a business. It's not going to happen. And so if your operations can't be slightly tweaked, like very reasonably tweaked to cover the debt service payment, the principal and interest, not going to freaking happen.
Chad Krause (48:26.609)
And so it's a balance between farms being more profitable. I think value being assigned to quality product produce for man, right? And...
quality and then just look, I'm sorry, but you might not agree with it if you own a farm and own your own land, but mean, prices are out of control. It doesn't make sense. And if it doesn't make sense, then it doesn't make sense and something's wrong. And that's great that, you know, you see your neighbor, whoever's farm went for X and you're, pegging it to that.
What does that do to society when that buyer buys a farm that's cash flow negative and has a huge debt?
Chad Krause (49:21.979)
What's that do? How's that help?
MJP (49:30.454)
Rhetorical, Rhetorical, right?
Chad Krause (49:30.801)
How's that help the community? Sorry, what?
Yeah, yeah, how does that help the community? And, you know.
Chad Krause (49:46.193)
Private equity, they get outside of their, everything's a bell curve, right? There are some great private equity people. Brilliant, brilliant, fantastic. And then there's a big chunk that really aren't that great. And I've worked in and around that world and they've got their little spreadsheets, just like I used to be really good with my little spreadsheets. And you plot out the University of Nebraska corn budget.
You say, it's going to be 20 % of our land. We're going to get it there, right? And you say, we're going to recover this land. And the actual farmer on the ground looks at you and says something sassy, but just shakes his head like, you you city slicker kind of crap. And the disconnect between a Park Avenue ivory tower and the reality on the ground and getting your hands dirty.
It's just so wide. It's impressive to where it would take me a long time to overcome it, to be a farmer in the Midwest, candidly. It would take me a very long time and it would take me very good mentorship and good support. Luckily we have that. That's one advantage we have. And the difference is in central California, most of those guys custom farm.
Most of those guys hire managers.
Most of those crops, a lot of those crops, not most of them, a lot of the crops are actually really profitable and pencil out. The land prices are way the heck up, but a lot of them do pencil out. And I think the problem in central California is, we all think the problem in central California is the water, right? And I would argue that the risk, although,
Chad Krause (51:46.801)
California has received more regulatory oversight from, you know, CDFA,
Yeah, and because of that, they've made adjustments sooner than what I think the rest of the country is going to see, especially given the new administration. And so in that way, they're sort of de-risked. But water,
Ugh, yeah, if you're white land, it's the kiss of death.
MJP (52:25.379)
I think we I think we bookmark that one for a for another discussion that that'll be a fun one But yeah, hey dude, thanks for sharing
Chad Krause (52:25.915)
care of them.
Chad Krause (52:33.722)
Alright, yeah.
MJP (52:39.767)
I think we have a few follow-ups that we could take. Just kind of dig a little bit more over coming weeks.
Chad Krause (52:44.677)
Yeah.
Chad Krause (52:50.319)
Yeah, and I can think of, you know, I'm thinking of some people on that journey that I met that I think were just honestly fantastic. I'd like to bring them on too. I don't want to just share what I learned from them, which is great too. But yeah, I I'd like, yeah, to have them have the spotlight, I think would be cool.
MJP (53:04.63)
Absolutely.
MJP (53:11.808)
Awesome. We'll cap this discussion here and definitely everyone will stay tuned for some follow-ups here on the Pair Organics pod.
Chad Krause (53:23.697)
Thank you everyone.
Tags:
