Get creative: Mastering metrics
First published in the 1LoD Global Benchmarking Survey & Annual Report 2019
How this innovative approach to farm land management can drive long-term economic and ecological benefits.
An interview with Tony Lovell, CEO & Founder, SLM Partners
SLM Partners is a professional agricultural asset management business with offices in London, New York and Australia. SLM Partners acquires and manages rural assets (including farm, forestry land and operating assets) on behalf of global institutional investors. In his interview, John Moutsopoulos, a partner in the Norton Rose Fulbright Sydney office talks to Tony Lovell about the science and innovation needed to produce long-term capital and sustainable benefits.
SLM Partners is an asset management business that acquires and manages rural land on behalf of institutional investors. Our mission is to use investment capital to scale up regenerative and ecological farming and forestry systems that deliver both financial returns and environmental benefits.
Our first fund, the SLM Australia Livestock Fund, was established in 2012. We have acquired more than one million acres of land in southern Queensland and northern New South Wales for grass-fed cattle production. Our second fund, the SLM Silva Fund, invests in sustainable forestry in Ireland, with the European Investment Bank as anchor investor. We are also developing a new investment strategy for organic farming in the USA.
I have been involved from the very beginning. I am one of the founders of SLM which began its life in 2009 in Australia. There was not anything like SLM in the agribusiness space, so we built it from scratch.
SLM Partners brings together investment professionals and experts in sustainable land management under one roof. One of the other cofounders, Paul McMahon, worked as an investment manager at Climate Change Capital in London and before that as a management consultant at McKinsey & Company. He has also done advisory work with the Prince of Wales’s charities and the UN Food & Agriculture Organisation on sustainable agriculture and published a book on the global food system.
My great grandparents were some of the first settlers in the Tara district of Queensland which is located 300km West of Brisbane and known for its wheat, beef and wool commodities, so agriculture is in my blood. I have a passion for good farming, grazing in particular. It is my belief that you can make good money from doing the right thing and our goal is a simple one – to profitably leave our land in better condition every year.
Institutional investors bring a few key things to this – capital and patience being the main ones. Making changes on the land costs money and can take time. Those investors who understand just what agriculture actually is, and who are prepared to build a portfolio based on that understanding, will reap the rewards over time.
We invest in land management systems that deliver market-rate financial returns for institutional investors, while also building healthy soils, enhancing biodiversity and having a positive impact on climate change. Investors gain exposure to a real asset – farmland or forestland – that is uncorrelated with major asset classes and provides a natural inflation hedge. They can also benefit from income derived from the production of food or other natural commodities.
We have seen increasing interest among institutional investors in farmland and timberland over the last decade but most investment managers focus on conventional agriculture and forestry. SLM Partners is distinctive in its strong ecological focus, its global reach and its involvement in day-to-day land management and is one of a handful of ecological focused farm managers.
Every investment makes an impact – positive or negative. Any institutional investor with an environmental, social and governance (ESG) mandate must give serious thought to investing in ecological farming. There need not be a choice between good returns or doing the right thing. Ecological farming produces measurable and positive environmental impacts together with solid and truly sustainable financial returns. Investing in ecological farming is investing in rebuilding a nation’s soils – which must surely meet any ESG mandate.
Regenerative, ecological farming focuses on building healthy soil and harnessing the biological processes that sustain life. It minimizes reliance on inputs, especially those linked to fossil fuels, such as synthetic fertilisers and pesticides. It generates measurable ecological and climate change benefits, especially by storing carbon, while increasing resilience to climate extremes. In contrast, conventional farming often degrades soils and relies on chemistry to sustain yields. Intensive, conventional farming systems are unsustainable as they tend to pollute water, destroy biodiversity and produce large amounts of greenhouse gases.
SLM Partners’ belief is that regenerative, ecological farming can deliver superior risk-adjusted economic returns for investors by delivering higher yields, lowering operating costs and/or opening up higher value markets (such as organic or grass-fed). They are, however, usually more knowledge intensive and require a high level of farming skill.
For example, in Australia we are regenerating extensive pastoral land by introducing a form of cattle management known as holistic planned grazing. This involves dividing land up into smaller paddocks, grouping animals in larger herds, and moving animals regularly according to a plan.
We have seen a number of revolutions in agriculture over the past 200 years. First was the mechanical revolution, allowing farmers to manage larger areas. Then came the chemical revolution, when pesticides, synthetic fertilisers and new seeds delivered higher yields. However, this was often at the expense of soil degradation and other environmental damage and the profits did not always go to the farmers, but rather to the companies manufacturing the seeds and agro-chemicals.
Now we are on the brink of a biological and ecological revolution, as we harness our new understanding of natural processes to design a food system fit for the twenty-first century. The cutting edge science in agriculture today is not in chemistry but in biology. We are only beginning to understand soil microbiology, species interactions and ecosystem functioning.
For example, glomalin, a glycoprotein that plays a crucial role in binding soil particles together and creating soil fertility, was only discovered for the first time by an American scientist in 1996. Thanks to DNA sequencing, scientists have recently discovered the diversity of bacteria, viruses and fungi that live in and around plant roots in the soil. Studies show that one gram of healthy soil can contain up to one billion bacterial cells and 100,000 fungi. The important role of these microbes in agricultural production is now being understood and acted on.
Firstly, ecological farming can produce higher yields per unit of external and artificial inputs. These external and artificial inputs are usually expensive, intrusive, addictive, and often harmful. Too often, we see higher prices for agricultural commodities being quickly absorbed by rapidly rising input costs.
By minimising the use of these inputs, we can significantly lower operating costs. Secondly, ecological farming builds natural capital, the true foundation of any investment in agriculture. Industrial agriculture is somewhat like a mining operation, extracting in a few short years the fertility that nature has taken millennia to build. Fortunately, once we start to work with nature we can rebuild the health, fertility and productivity of our land asset.
Lastly, ecological farming rebuilds soil health and brings resilience back into the ecosystem. Farming means dealing with the vagaries of the weather, and a strong, living, fertile soil within a healthy diverse ecosystem is a resilient system. Over time, this resilience will allow for more consistent and predictable production of both crops and livestock.
By farming ecologically, we can access the growing markets for chemical free, organic, nutrient dense food and fibre that is produced in a genuinely sustainable and positive way. Combine the upside benefits of this higher price potential with the downside protection of low inputs and resilience, ecological farming can produce higher margins per unit of production. High prices alone do not guarantee high returns to investors; strong margins are the best indicator of good long-term returns.Farming ecologically also means that we are able to access the new and developing markets for ecosystem services, such as carbon offsets. These ecosystem services are produced as a natural “by-product” of our management, and so represent strong upside built on the foundation of a profitable farming operation.
There can be a need for investment in new systems, and in some cases there may be a lag of a few years before the full benefits appear in the form of dollars. This can be challenging for farmers who are living from month to month – but it is also why patient investment capital can play a role. However, perhaps the biggest barrier is mindset, as regenerative farming can fly in the face of well-established practices. Change happens slowly in agriculture.
We are faced with a growing world population, many of whom are also benefiting from growing real incomes. Much of this growth is happening almost on Australia’s doorstep, in the countries to the north of us. As incomes increase, one of the first lifestyle changes they make is to improve their diet. They look for better quality food, and increase their consumption of protein. This protein comes usually from meat and dairy and Australia is well positioned to supply their needs. However, with any rapidly growing market we often see the entry of unscrupulous operators. The spate of food scandals in some Asian markets is testament to this. Australia’s welldeserved reputation as a clean, green supplier means we are well placed to be the go-to source of high quality and safe food and fibre for the burgeoning Asian middle classes. Producing this food and fibre using ecological farming strengthens our position.
In many parts of the world, land and water resources are under severe pressure. Soil erosion and degradation, dead zones in the Gulf of Mexico, encroachment from urban development onto some of the most productive land, all these mean that we have less land each year to grow our food and fibre on. At a time when we need to not only maintain levels of production, but increase them. These forces all bode well for the value of Australian rural land, with solid steady increases likely over the next decades.
There is plenty of food in the world, but it is not always of high quality, leading to poor diets and illness or affordable to the poorest members of society. It is also often produced in an unsustainable way. Our view is that we need to shift towards farming systems that deliver nutritious, healthy food, while preserving natural capital. In the long-term, agriculture can play an important role in combating climate change by acting as a carbon sink. Farmers will increasingly be rewarded not only for the food they produce but for the carbon they store in and on the ground.
We are starting to see this in Australia with the Government’s Emissions Reduction Fund, which is having a significant impact on land management in certain regions. We are participants in this scheme via our Australian cattle fund and will be supplying more than two million tonnes of verified carbon credits because of our land management approach.
I think the most exciting recent developments are a return to basics. Agriculture is based on biology, and we are refreshing and renewing our connection with and understanding of how nature functions.
The work on glomalin and mycorhyzzal fungi in soils, advances in composting techniques and the extraction and application of biologically enhanced “fertilisers”, the growing acceptance of the massive benefits of good grazing management on soil health, water retention, and carbon stocks, are just a few of these.
The growing awareness by consumers of the importance of food quality to our health is leading to a growing demand for nutrient dense food, produced in ways that heal rather than hurt. The importance of our gut micro-biome to human health, plus the impact food plays on this, will only drive this demand ever more strongly over the next decade.
First published in the 1LoD Global Benchmarking Survey & Annual Report 2019
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