Frequently Asked Questions

Q: Aside from financial models, how do you evaluate the quality of a farm?
Q: How do you determine the soil quality, the type of crop best suited for the land, and the potential efficiencies that can be achieved?
Q: Why have you chosen to focus on the eastern grain belt?
Q: If grain producing farms have such upside, why are they being sold? What is keeping the farmer from buying the land? By selling the land, is the farmer essentially increasing his ROE and is able to farm more acres?
Q: What global macro factors do you think are driving the demand for commodities and farmland?
Q: What if ethanol ceases to be pushed by the federal government and is replaced by natural gas or electricity? Can these farms be repositioned to produce other crops?
Q: How does the purchase price paid by Ceres for farmland compare with the average sales price paid by others?
Q: Are Ceres’ investors buying into an already diversified portfolio of farms?
Q: Is Ceres Farms scalable or are there limits to your growth?
Q: What is the investable target universe for farms? Are only the largest farms an appropriate fit for this type of portfolio?
Q: Do you as the Manager place valuations on assets or do you use an independent outside appraiser?
Q: Could you explain what happens tax wise if the value of the assets increase annually but there are no withdrawals?
Q: What happened to farmland values during the years 1981 to 1987 when there was a significant decline in value? What is the probability that such a decline could occur again?
Q: How do I invest? Can I invest qualified plan assets such as my I.R.A.?
   

Q: Aside from financial models, how do you evaluate the quality of a farm?
A: We look at soil types, slope of land, elevation, percentage of tillable acres and layout of fields. We try to maximize tillable acres and buy farms with minimal slope because these issues are incurable. However, we buy farms of various soil types and elevation because they can still be productive farms it is just a matter of what price you pay to buy them and what level of income they will produce.

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Q: How do you determine the soil quality, the type of crop best suited for the land, and the potential efficiencies that can be achieved?
A: We examine soil and slope data maintained by the FSA that gives the percentage of all soils in every field and their yield productivity for corn, soybeans and wheat. We subscribe to an internet service that allows us to review every field in the US.

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Q: Why have you chosen to focus on the eastern grain belt?
A: The key to our success is having an outstanding network of farmers that we partner with. We identify farm groups/families that recognize the need to grow to gain economies of scale and who need us to acquire more land for them. These farmers take care of our farms as if they are their own and they pay us the highest rents. We started in northern Indiana because of existing farmer connections and now we have expanded to central IN, southern IN, north eastern IN and southern IL. We will continue to branch out but we will always buy where we find the best land values and have good farm tenants. Our existing farmer networks have capacity for well over ten thousand acres and we have a pipeline of good undervalued farms to choose from.

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Q: If grain producing farms have such upside, why are they being sold? What is keeping the farmer from buying the land? By selling the land, is the farmer essentially increasing his ROE and is able to farm more acres?
A: We rarely buy farms from an existing farmer and then lease it back to him. Generally we are buying the farm from a trust, widow or other relative who has inherited the farm and has no interest in farming. They usually have been renting the farm at below market rents and finally see the increased interest in farmland as a means of exiting. This is a generational shift that is occurring and that will eventually exhaust itself as farmland ownership becomes concentrated in corporations, large farmer networks and investor groups like Ceres. Farmers prefer to own the land that they farm, but they have found it more efficient to combine land ownership with leased land so that capital can also be deployed in their operations and for improved equipment.

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Q: What global macro factors do you think are driving the demand for commodities and farmland?
A: There are four global macro events occurring that led us to invest in farmland initially and which continue to be driving factors: (1) “demand” for food from the rising Asian and emerging markets’ middle class, (2) biofuels, (3) depletion of arable land for agriculture production, and (4) resurgent inflation….in this order. Americans underestimate the global demand for food which will expand U.S. exports of grain. The rising middle class in the emerging economies want to eat like Americans and when people improve their living standards, one of the first things they want to do is to improve their diets which means eating more protein. It takes 2 pounds of grain to produce 1 pound of poultry, 4 pounds of grain for 1 pound of pork and 7 pounds of grain to produce 1 pound of beef. China is already the largest consumer of pork and soybeans in the world; they also just became a net importer of corn in May 2008. In addition, as the dollar weakens versus the Chinese Yuan, our exports are cheaper in the local currency and China’s demand for our food products will increase.

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Q: What if ethanol ceases to be pushed by the federal government and is replaced by natural gas or electricity? Can these farms be repositioned to produce other crops?
A: Ethanol is only one source of alternative energy that will be needed to meet the expanding global demands for energy. Corn based ethanol is not the panacea for our energy needs, but it also has more positive attributes than what the press has focused on lately. For example, ethanol produces a byproduct, brewers grain, which is a high protein and germ remnant that is exceptional animal feed but rarely included in the economics of ethanol. The efficiency of corn based ethanol is improving exponentially as revealed in a recent study published in the Journal of Industrial Ecology. In time, technology will permit the addition of cellulosic biofuels made from switchgrass, cornstalks or other fibrous feed-stocks, but farmland and farmers will still be needed to plant, maintain and harvest these alternative crops.

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Q: How does the purchase price paid by Ceres for farmland compare with the average sales price paid by others?
A: Generally speaking, Ceres pays less per acre for its land than other farms in the same areas. This is due to the fact that properties are often brought to our attention by our existing network of farm contacts before they are ever officially listed with a realtor. Also, because of our ready source of funds and established borrowing lines, we can get farms under contract while others are still scrambling to find funding. Finally, at times we may purchase a large tract of farmland for an overall lower cost as compared with someone who is willing to pay a higher price for a small parcel within this tract; a concession is granted to the large-scale purchaser.

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Q: Are Ceres’ investors buying into an already diversified portfolio of farms?
A: Investors are buying into the existing diversified portfolio of Ceres Farms properties which currently consists of over 17,000 acres and expanding with each new investor.

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Q: Is Ceres Farms scalable or are there limits to your growth?
A: Yes, our model is very scalable. As we acquire additional farmland, we will gain efficiencies and economies of scale on many levels. For example, our fund operating expenses will benefit as the portfolio grows. Our established network of high quality farmers will continue to grow. These proven farmers manage all of our farms as tenants of Ceres Farms owned properties. Once a new farm is acquired, our ongoing involvement in farm management consists primarily of negotiating multi-year leases, monitoring these farmer relationships, and overseeing the various aspects of property management aside from daily farming operations. We do not see any limitation on the Funds’ capacity as to number of farms in the portfolio. Our plan is to selectively add additional human resources as we experience further growth in number of farms and expanded geography of farms in the portfolio.

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Q: What is the investable target universe for farms? Are only the largest farms an appropriate fit for this type of portfolio?
A: The target universe consists of millions of acres of prime Midwest farmland. We continue to follow our acquisition strategy, which is to purchase under-valued farms ranging from 100 acres to 1,000 plus acres. Attractive farm acquisition opportunities are not limited to only the larger farms. We do not see any capacity issues as to potential investments or farm acquisitions. Our relationships and building reputation in the Midwest enable Ceres Partners to gain access to an increasing number of the best under-valued farmland buying opportunities.

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Q: Do you as the Manager place valuations on assets or do you use an independent outside appraiser?
A: We utilize independent outside appraisers to establish asset values both at the time of purchase and annually thereafter. In addition to local appraisers who are familiar with local value trends, we employ a national appraiser as Fund Administrator (BAAR Realty Advisors—MAI Valuation Services) to oversee all valuations and to insure consistency of generally accepted appraisal methods. These appraisal metrics are also used to bolster our acquisition acumen. An extensive appraisal (Self-Contained or Summary) is obtained at the time of purchase that meets or exceeds the requirements of our lending institutions, and a limited (Restricted format) appraisal update is prepared annually until either the third anniversary of the property purchase or the Fund Administrator determines that circumstances (i.e. market value trends and/or property specific issues) have changed to such a degree that a new complete appraisal is necessary.

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Q: Could you explain what happens tax wise if the value of the assets increase annually but there are no withdrawals?
A: Investors are given a K-1 each year that provides your tax liability. Generally there will be tax liability for current income, but there are some things such as depreciation expense on irrigation equipment and other improvements that will serve to lessen tax liability. Investors will be given the opportunity to make annual withdrawals to cover this tax liability, if they choose. Gains from the appreciation of land values will only be taxable when the property is sold and this will generally be long-term capital gains. Beyond this brief summary, we encourage investors to speak with their tax attorney/accountant.

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Q: What happened to farmland values during the years 1981 to 1987 when there was a significant decline in value? What is the probability that such a decline could occur again?
A: This period of time reflects the “Bad Years” for farmland prices across the United States. Since World War II there have only been four years when average farmland prices in the United States declined in value—1983, 1985, 1986 and 1987. To understand what led to the decline of the 1980’s, we first need to review the build-up to this period during the 1970’s.

Agriculture during the 1970’s was characterized by a move to greater efficiencies. Technological advances in equipment produced larger tractors and harvesters that permitted a single farmer to dramatically increase the amount of acres that could be farmed in the same amount of time. This equipment was expensive and was purchased on credit. In order to recoup this capital investment in equipment, farmers had to increase their tillable acres and they choose to increase their debt loads further by purchasing land on credit as opposed to leasing it. These land purchases caused a generational consolidation of small family farm plots into large contiguous tracts that accommodated the new and much larger farm equipment; it also caused a significant increase in land prices. The credit incurred for these equipment and land purchases caused the agriculture sector’s debt to equity ratio to peak at 28.5% in 1986.

Throughout the late 1970’s and early 1980’s there was sufficient foreign demand to absorb the increased production from these modernized efficient farms. However this changed after Russia invaded Afghanistan which led to President Carter’s imposition of a grain embargo. Suddenly with the export market nearly shuttered there was a much greater supply of grain than could be consumed domestically and prices declined. Interest rates also skyrocketed at this time and farmers were simply unable to service all of the debt that they had accumulated to make equipment and land acquisitions. Farmers went out of business and as they did so, repossessed equipment and land was sold at fire-sale prices which drove prices down even further. Land prices bottomed in 1987 which in some instances was nearly 50% in nominal terms. In inflation-adjusted terms, however, price declines were dampened because this was also a time of high inflation; inflation-adjusted prices returned to mid 1970’s levels.

Since the 1980’s, farmers have found that they can increase profitability and reduce risk by using a combination of equipment ownership and partial land ownership with leased land making up the additional acres needed to obtain the optimal production necessary to cover their capitalized expenses. Most farmers now recognize the advantage of outside investment capital and seek land investors such as Ceres Farms who they can lease land from. This has allowed farmers to increase their capital efficiency, reduce debt and obtain better return on their investments. In 2009, the average debt to asset ratio for the agriculture sector is only 9%.

Land values are directly impacted by the amount of revenue that can be produced on that land. Currently agricultural supply and demand favors farmers and landowners since foreign demand for food and domestic demand for biofuels have depleted inventories which will support or apply additional upward pressure on prices in the coming years. However if anything dramatically alters this supply-demand balance, it will have an impact on land prices. For example, if simmering protectionist rhetoric increases to a point where international trade is materially impacted, then this could cause an interruption in demand which could lead to a decline in farmland values. But we give this scenario a low probability and even if it does occur, a decline seen in the mid 1980s is not expected because farmers are in a much better position financially with low debt levels.

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Q: How do I invest? Can I invest qualified plan assets such as my I.R.A.?
A: After fully reviewing the Private Placement Memorandum and other Offering Documents, interested investors must (1) complete the Investor Questionnaire to establish that they are accredited investors, (2) execute the Subscription Agreement, and (3) execute the LLC Agreement. Yes, I.R.A. funds may be invested. One alternative is to open an I.R.A. account with Sterling Trust where Ceres Farms LLC is approved as a suitable asset for custody and then follow their instructions. Also, National Financial Services permits both qualified and non-qualified plan assets to be invested in Ceres Farms LLC
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