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Westchester Global Thoughts: Winter 2020

Martin Davies
Global Head of Nuveen Natural Capital
A tractor pulls equipment over farmland
The unprecedented COVID-19 crisis has only made the pressure for changes in food systems more urgent. The High Level Panel of Experts on Food Security and Nutrition (HLPE) reported this October that between 83 and 132 million people could be pushed to extreme poverty, in addition to the one-third of humanity already experiencing one or more forms of hunger or malnutrition (HLPE, 2020).

Westchester plays an important role in the food system as it manages nearly 2.3 million gross acres of globally diversified farmland. Therefore Westchester has the capacity to participate in the great opportunities linked to major trends in sustainable production that will emerge as the world approaches the Agenda 2030 targets, notability SDG 2 (Zero Hunger). This article will shed light on one specific major trend called regenerative agriculture and will report on how we are using our management skills and influence to frame it.

There is no industry-wide scope for regenerative agriculture. Commonly used definitions point to the adoption of practices which seek to reverse environmental damage, restore soil health, and improve biodiversity, while keeping farm operations profitable. Westchester intends to use its proprietary Code of Practices to enable crop managers and tenants to identify which farming practices they implement and indicate the progress in this regard. 

Using soil health as an example, this self-assessment tool aims for Westchester to provide stakeholders with a comprehensive report on the adoption of conservation till, direct seeding, cover cropping, the use of beneficial organisms and crop diversification, all backed by evidence coming from actual measurement and report of nutrient levels in soils. All of which falls shortly into the concept of regenerative agriculture.

Westchester is positioned well to chart how conventional systems of tillage and use of synthetic inputs will evolve as the benefits of regenerative agriculture become more apparent. 

With crops taking carbon dioxide out of the atmosphere and increasing organic matter and carbon in soil through return of crop residue and building of root biomass, Agriculture is uniquely positioned to make a positive contribution and help halt climate change. Building internal capacity to benchmark, monitor and influence the industry towards the adoption of practices is the responsibility of institutional investors. 

Farm building development:
Metamorphosis of disused farm buildings
from environmental hazards to fully
functioning farm bases, complimentary to
the farmland surrounding them. 

By James Little, Regional Manager Northern Poland

Dilapidated farm buildings — a legacy from the communist period on Poland’s beautiful countryside — still litter the rural areas 30 years after the end of large scale state farming. Whilst many farm owners have sought to turn a blind eye to the environmental ticking time bombs these properties represent, Westchester has sought to remove the environmental hazards and rejuvenate these once functioning farm buildings. Recent initiatives have allowed Westchester to combine its broad skill set in farm and property management to demonstrate how cooperation with external partners can yield impressive results for all involved.
When state owned farms were at their peak during the 1960’s – 1970’s, a wide scale programme of farm building development was initiated. By the 1990’s when many of the state farms were privatised, the oversized farm bases were often abandoned and left untouched for decades to come. The old farm bases, many of which contained asbestos roof cladding and leaky underground fuel tanks, were fundamentally well built but require significant investment in order to make them usable again. Where possible, Westchester has sought to redevelop many of these old farm buildings rather than demolish them and build new buildings.

Westchester, in cooperation with engineers, architects and construction specialists, works through a standard process when considering the development of old farm buildings, which includes:
  • Environmental assessment — primarily considers asbestos, underground fuel tanks and buried waste
  • Health and safety assessment — can the buildings be safely re-developed or should they be demolished
  • Matching building use with farm fundamentals — tenant requirements, farm size, crops grown
  • Obtaining any required permits for the proposed works
  • Selection and appointment of contractors to carry out the building work
  • Development completion and hand over to tenant/operator 

Two of the most recent developments within Westchester’s Polish portfolio are the renovation of a farm base in the north east of Poland and the building of a pig farm in the west of Poland.

When Biel, Mazury, NE Poland, was acquired it was quickly recognised as a farm with potential for development. The farm had a combination of buildings suitable for both animal housing and general storage. Westchester sought a partner for the development of the animal buildings and in doing so teamed up with a local turkey farming company who acquired the animal buildings from Westchester. The buildings have since been developed into turkey housing, with an agreement between the turkey farmer and Westchester’s tenant allowing the two parties to swap straw for manure. The remaining two buildings on the farm were redeveloped into workshop facilities and grain storage. The investment included removing the asbestos cladding, re-cladding the buildings, pouring new concrete floors, installing grain walling and re-wiring the two buildings.

Jaroslawsko, Zachodniopomorskie, in NW Poland was taken over in 2016, and with its acquisition came a complex of 20 dilapidated farm buildings all of which were clad with asbestos. The buildings had been previously used for fattening pigs, which spurred Westchester to partner with a national pig production company in the re-development of these buildings. Since the buildings were taken over by the partner company, they have been transformed into a state of the art pig production facility housing 3,500 sows. In redeveloping this site, employment for 20 people has been created, environmental risks removed, and an otherwise redundant set of farm buildings brought back to life. Westchester has entered into an off-take agreement with the pig company allowing for all of the pig manure to be applied to the 1,235 acres of Westchester managed farmland surrounding the buildings, allowing Westchester’s tenant to reduce their reliance of artificial fertilisers. 

The Biel and Jaroslawsko projects demonstrate Westchester’s unique ability to leverage its internal property management skills, whilst partnering with external experts. In both cases environmental risks have been removed, farms made safer, and the carbon foot print of the tenants reduced through the symbiosis of crop farming and animal production. 

Partnering with prize winning farmers who
focus on high output cropping in Poland

By James Little, Regional Manager Northern Poland

In 2017 Westchester took over the management of the Jazowa portfolio of farms, a collection of five row crop properties located east of Gdansk in north Poland. The properties have a total area of 8,995 acres with 8,030 acres of good arable land suitable for a wide range of crops. 

The main tenant on the Jazowa portfolio, is Laird Agro, a diversified farming business owning and leasing land on the Delta plain along the banks of the Vistula River. Producing wheat, canola, sugar beet and seed potatoes, Laird Agro was founded in 1994 by two Scottish farmers — Mark and Simon Laird — and remains a family business. Currently Laird Agro farms 9,884 acres of owned and leased land, including 6,178 acres leased from Westchester.

Laird Agro have a focus on soil health and the sustainable management of land to drive yield potential, whilst keeping operational costs in check. The low lying nature of the land on the banks of the Vistula River, much of it below sea level, means a constant focus on field drainage and ditch maintenance is required — an area of farm management in which the team at Laird Agro have specialist skills. Bronislaw Stodus — Farms Director at Laird Agro — told Global Thoughts: there are a number of key factors to successful farm management on the Vistula Delta, including:
  • Drainage and ditch management
  • Maintaining optimum soil ph
  • Precise timing of crop applications
  • Good crop rotation — shallow and deep rooting crops, spring and autumn established
  • Minimal use of the plough — to maintain soil structure 
Under the stewardship of Mark Laird — Chairman of Laird Agro — the farm management team has been honing their wheat production skills for over 25 years. In 2020 the years of investment in people and soil paid off when Laird Agro took the title for the highest recorded wheat yield in Poland, with a barn storming 4.7 tonnes per acre. Ensuring high yields through precise use of modern farming technologies and best in class agronomy is a key focus for the team at Laird Agro.

In addition to award winning wheat, Laird Agro has been developing a seed potato business at one of the farms leased from Westchester. With an initial area of 99 acres in 2019, which was increased to 198 acres in 2020, Laird Agro is looking to further expansion in 2021. In order to support this diversification, Westchester has financed the development of an insulated and ventilated potato store at one of the properties. Once completed the renovated building will provide storage for 1,000 tonnes of seed potatoes. Diversified income streams from high value crops such as seed potatoes make Laird Agro resilient in a challenging farming environment, whilst reducing their exposure to the global commodity market. 

Piotr Gawecki — CEO of Laird Agro — told Global Thoughts: “our mission at Laird Agro is to develop a responsible agricultural business based on high ethical standards, transparency and accountability through applying best practices and advanced technology and close cooperation with business partners.”

Laird Agro, with their mix of broad acre and high value crops, combined with a blend of owned and leased land are a text book example of the award winning and diversified farming businesses with whom Westchester seeks to partner.

The True Oak Vineyard – recognizing
alpha through residential development

By Matt Parker, CEO, Global vineyards

The True Oak Vineyard presented an opportunity to plant a large vineyard in a well-regarded area and also reduce the investment basis significantly by selling several high value home sites from the property.

Napa Valley is not only the premiere grape growing region in the United States, but also a very desirable area for first and second homes. Because of its proximity to the San Francisco Bay Area and Silicon Valley, the historical demand for housing threatened to change the character of the valley from an agrarian area to dense residential housing, to the detriment of the wine industry. To maintain the rural character of the valley, a series of agricultural preserve restrictions were implemented beginning in 1968. These restrictions set the minimum parcel size at 40 acres, but grandfathered existing parcels that were already below 40 acres.

The True Oak Vineyard is located in the Oak Knoll District of Napa Valley, between the City of Napa and the Town of Yountville. This is one of the most desirable residential areas of Napa Valley, where homes routinely sell for more than $10 million. Additionally, this area is generally known to have highly productive soils and ample water supplies, making it a prime area for productive, yet also high quality vineyards. Many historic wineries are located in the area, including Trefethen Family Vineyards, Laird Family Estate and Darioush.

The property had been in the same family for more than 100 years. It had previously been planted to vineyards, but as the vines approached the end of their useful life, the family that owned it did not have the capital to replant and were approaching retirement age, so they were looking to exit. The value proposition was twofold. First was the opportunity to develop an 80 acre vineyard in a high demand area. Ownership in Napa Valley is highly fragmented, and it is rare to be able to acquire properties of this scale. The second part of the value proposition was the fact that the property consisted of four legal parcels, three of which were grandfathered as non-conforming below the 40 acre minimum. Immediately upon close we began working with surveyors, septic engineers and the well drilling company to create three high value, independent home sites with the intention to sell. Although we could not legally create more saleable parcels, we were able to reconfigure the existing parcel boundaries, which required an application and review process through the county. Additionally, there were several large stands of oak trees, which compete with vines for water resources, so we were able to configure the ranch such that the sale parcels contained these trees, further improving the viticulture aspects of the site.

In the end, we were able to sell the three home sites at attractive prices, recouping approximately half of the investment basis, while retaining more than 80% of the farmable acreage from the original property. Additionally, we have trademarked the True Oak Vineyard name, and Plata Wine Partners, Westchester’s own wine making business is in the process of producing a vineyard designated wine from this site.

Crops 0f many colors

By Mark Coelho, CEO, Global horticulture

The mainstay of the Westchester horticultural portfolio has long been almonds. Recent investments in walnuts and pistachios have provided greater diversity to the core nut crop portfolio. While these investments have offered strong returns and fit well with the profile of our institutional
clients, Westchester’s demonstrated permanent crop expertise and growing global presence have prompted the pursuit of new investments in select high value permanent crops.

Westchester’s commitment to delivering on investor expectations requires that the pursuit of new investment strategies is preceded by a diligent crop specific industry review, including a top down analysis of macro-economic factors such as production windows, global competition and labor considerations, all complemented by a review of crop specific cultural requirements and economics. Often this review reveals key insights which help narrow the investable universe to those crops and areas which possess the most promising productive and economic characteristics.

Two such crops have emerged as colorful examples of the foregoing – avocados and mandarin oranges – and despite their distinct appearances, flavor profiles and economics, these crops have much in common. Global trends that include a desire for healthier eating, food-on-the-go and a growing middle class willing to pay more for food have resulted in surging consumer demand and prices. Meanwhile, the unique growing requirements of both crops limit suitable production regions, constraining overall supply growth.

In the case of avocados, the compelling story surrounding growing global demand is supportive of a variety of investment options. However, with U.S. per capita consumption increasing more than 5x in the last forty years, and now accounting for nearly half of the global avocado market, an investment in U.S. avocados to capitalize on exploding domestic consumption stands out among the crowd.

The Heritage Ranch, located in a prime avocado production region of Ventura County, California, is Westchester’s largest existing avocado project and exemplifies the partnership and vision required to undertake a large scale development in a new crop category. While the property had a long history of agricultural production, its rolling to steeply sloped hillsides had largely been left uncultivated. Where many would see only the regulatory and logistical challenges of developing and farming this previously unutilized land, Westchester saw an opportunity to improve productivity, reduce risk and increase property value. As a frost sensitive species, avocados benefit from hillside planting locations as they promote drainage of cold air away from the orchard, increasing yield potential and decreasing risks associated with cold weather events. Executing on that vision required leveraging the decades of development experience of the on-site farm manager engaged as well as appropriate technologies and infrastructure to manage critical resources. To that end, low volume drip irrigation technology and comprehensive drainage systems were incorporated into the project, together fulfilling both investment and sustainability objectives by reducing water consumption and preventing soil erosion.

Westchester recently expanded its holdings in the area with the acquisition of the Hopper Canyon leasehold – a 220 acre lemon development project.

Much of the foregoing knowledge and experience is also being applied to Westchester’s growing Chilean horticultural portfolio. While avocados and lemons are also on the menu, mandarins stand out as a strong investment candidate for a variety of reasons. The popularity of mandarins has increased substantially over the last decade and brands such as “Cuties” and, more recently, “Halos,” have become among the most recognizable in the produce aisle. Chile is uniquely positioned to capitalize on this trend, leveraging its southern hemisphere location and counter-season production schedule to deliver the freshest product to key northern hemisphere markets during a desirable export windows, generally spanning summer and the back-to-school season. Over 90% of Chilean mandarins are exported to the U.S., where it has maintained market share as high as 70% among its key southern hemisphere competitors, who tend to be focused on early season production (May-August) and often generate lower quality, poor coloring fruit. Chile’s Mediterranean climate, featuring wider day and night temperature swings, results in a very good-eating and easy-peel piece of fruit relative to its more tropical competitors Peru and Uruguay.

Not only are the dynamics of international trade advantageous for mandarin investments, but the economics of production, notably reduced labor costs associated with harvest and packing activities, suggest that the Chilean mandarin industry possesses positive fundamentals to support long term success. Chile’s ability to lever geographical, size and quality advantages, combined with reduced labor costs, clearly position Chile as a high-quality investment candidate within the mandarin industry.

Westchester’s first investments in Chilean mandarins are located in central Chile, areas with strong water resources and featuring later production characteristics to coincide with the most defensible, later season export window. Complementary investments in avocados, navel oranges, lemons and grapefruit further diversify revenues. Additional investments being pursued in Chile include cherries, table grapes, organic apples, walnuts and hazelnuts.

Learn more about Westchester

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Dimitrios N. Stathopoulos
Head of Americas Institutional Advisory Services
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on
numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain
“forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and
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Nuveen provides investment advisory solutions through its investment specialists.

As an asset class, agricultural investments are less developed, more illiquid, and less transparent compared to traditional asset classes. Agricultural investments will be subject to risks generally associated with the ownership of real estate-related assets, including changes in economic conditions, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties.
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