How myth and ignorance create the opportunity for above market returns.

Mispricing in the organic agri-sector creates opportunities for investors. An opportunity to capture above market returns whilst delivering improved environmental performance.

Land, plants/livestock and other variables can all be mispriced relative to actual organic financial performance.

The myth of organic yield and cost. A myth so powerful people will choose to go out of business rather than go organic, even while, at the same time, organic operators are expanding their business and financial success. This could also be described as another example of ecology in action.

Twenty years ago apple growers in Hawkes Bay, New Zealand were ripping trees out and burning them, such were the poor returns being delivered by conventional apple production. The local organic grower however, was acquiring land at rock bottom prices (priced for conventional production) and creating the largest and most successful organic apple growing and exporting business in NZ. This business now represents around 90% of all organic apples exported from NZ. Effectively, these orchardists ripping out and burning their trees, were choosing to go bust over going organic at the same time as the organic guy was making outsize profits and establishing a business empire.

This is a consistent scenario that occurs over and over again in the organic farming sector.

The belief in the myth of low yields and high costs of organic production is so powerful that investors will believe it even in the face of actual data and operator experience. To some extent the myth can be supported by the example of those who convert and fail as a result of poor management. Their failure is more palatably presented as an organic failure, rather than their lack of management expertise.

If this deeply flawed thinking of ingrained economic disadvantage in organic systems is followed to its limit it therefore suggests that a poor manager running a conventional enterprise will outperform a good manager running an organic enterprise. This view lacks any intellectual or evidential credibility.

At the same time, it is this very ignorance and failure to understand and recognise genuine investment value that creates an environment where above market returns can be secured.

Mispricing comes in the form of land, plants/livestock etc. which are always aligned with the underlying conventional enterprise performance. This in turn, can create the opportunity to generate superior returns, as in general (and certainly with all the enterprises we focus on), regenerative organic production systems deliver a better margin which is then extended through mispricing of components such as those outlined above.

It is twenty years since the apple situation described above and right now we have a situation in a different enterprise sector where mispricing is such that organic cash yields are materially superior to those being offered to conventional investors in the same enterprise.

There is, in our opinion, a clear opportunity to establish a position of strength that will prospectively be maintained for decades, as happened with apples in Hawkes Bay.

As one investor said to us recently “This is ecological arbitrage”. It is a good description.

Short conventional, long regenerative organic. GTC.