Organic Feed Position Paper 2015-09-15

2015
The Opportunity in
Organic Feed
LUCAS CURRIE

1
TABLE OF CONTENTS
1. SIGNIFICANT OPPORTUNITY IN ORGANIC FEED ................................................................3
2. CONVENTIONAL GRAINS MARKET OVERVIEW ..................................................................4
a. CONVENTIONAL GRAINS DOMINATE U.S. AGRICULTURE LANDSCAPE .......................4
b. GRAIN FEED PRODUCTION OVERVIEW..................................................................................6
i. CONVENTIONAL GRAINS ARE HIGHLY CONCENTRATED IN THE MIDWEST...................6
ii. ALMOST ALL CONVENTIONAL GRAINS ARE GENETICALLY MODIFIED, PRODUCED ON
LARGE SCALE IN MONOCROP SYSTEMS........................................................................................7
iii. NATION’S GRAIN FARMERS ARE AGING ..........................................................................11
c. GRAIN FEED UTILIZATION ANALYSIS..................................................................................13
i. THE MAJORITY OF GRAINS ARE USED IN ANIMAL FEEDS ...............................................13
ii. FEED USAGE IS DISPERSED ALL OVER THE COUNTRY....................................................15
d. CONVENTIONAL GRAINS GENERATE LITTLE PROFIT......................................................17
3. ORGANIC GRAINS OUTPERFORM...........................................................................................20
a. THE MARKET IS SMALL BUT GROWING QUICKLY............................................................20
i. DEMAND IS ACCELERATING DUE TO ORGANIC MEAT.....................................................21
ii. SUPPLY IS NOT KEEPING PACE WITH GROWING DEMAND.............................................23
iii. SHORTAGE OF ORGANIC GRAIN LAND............................................................................24
b. ORGANIC FEED GRAINS ARE HIGHLY PROFITABLE .........................................................27
i. SUSTAINBILITY PROMOTES SOIL HEALTH AND DRIVES PROFITABILITY......................30
4. WHY ISN’T EVERYONE GOING ORGANIC? ..........................................................................32
a. BARRIERS TO ENTRY AND RISK MANAGEMENT...............................................................32
i. TRANSITION COSTS CREATE A FINANCIAL HURDLE IN EARLY ORGANIC YEARS ........32
ii. ORGANIC PRODUCTION REQUIRES INCREASED MANAGEMENT, LABOR, AND
INFRASTRUCTURE...........................................................................................................................32
iii. CROP INSURANCE AND GRAIN SUBSIDIES GUARANTEE FINANCIAL STABILITY
DESPITE LOW INCOME...................................................................................................................33
iv. ORGANIC ROTATIONS REQUIRE DIFFERENT MARKETS FOR EACH CROP ...................33
b. OVERCOMING BARRIERS.........................................................................................................34
i. OWNER OPERATION HAS TANGIBLE BENEFITS FOR OWNERS........................................34
ii. RESOURCE UTLILIZATION ALLOWS FINANCIAL FLEXIBILITY.........................................34
iii. VERTICAL INTEGRATION ENHANCES MARGIN AND MITIGATES RISK .......................34
5. INVESTMENT OPPORTUNITY ...................................................................................................37
a. NOW IS THE TIME TO INVEST IN ORGANIC ROW CROPS .................................................37
i. FIRST-MOVER ADVANTAGE ...................................................................................................38

2
b. CONCLUSION...............................................................................................................................38

3
1. SIGNIFICANT OPPORTUNITY IN ORGANIC FEED
In the United States, there is a persistent shortage of organic. Livestock operators are not able to
produce enough organic protein due to a lack of organic feed. We believe there is an
increasingly large and profitable opportunity in developing a national identity-preserved value
chain for organic feed.
 There is growing a supply and demand imbalance in organic grains, magnified in the
organic feed market.
o The supply of organic cropland is stagnant; particularly organic row crop acres,
which are growing at just 0.3% annually.1
o Demand for organic grain end-products is growing rapidly (11% CAGR) due to a
shift in consumer preference towards organic products, especially in organic
protein markets, which require feed.2
 Grains are, and will continue to be, the fundamental base of U.S. agriculture, due in part
to their essential role in protein production.
o Eight of the top ten grossing agricultural commodities are either grains or protein
verticals that are dependent on grain-based feed.3
 Organic grains can be grown profitably and achieve a rate of return higher than that of
conventional grains. The average organic 10-year per-acre farm-gate yield is 7%,
compared to 3% for conventional.4
 Employing a vertically integrated, owner-operated sustainable agriculture model at scale
can mitigate risk and maximize profit for organic grain production.
1
USDA Economic Research Service. “Organic Production.” http://www.ers.usda.gov/data-products/organic-
production.aspx
2
USDA Economic Research Service. “Organic Agriculture.” http://www.ers.usda.gov/topics/natural-resources-
environment/organic-agriculture/organic-market-overview.aspx
3
Food and Agriculture Organization of the U.S. http://faostat.fao.org/site/339/default.aspx
4
Based on internal Equilibrium research

4
2. CONVENTIONAL GRAINS MARKET OVERVIEW
a. CONVENTIONAL GRAINS DOMINATE
U.S. AGRICULTURE LANDSCAPE
Grains are the undisputed staple of U.S. agriculture.
A variety of metrics, from financial to caloric, demonstrates
the commodity’s pervasive hold on the agriculture industry.
Table 1 illustrates grains’ financial dominance: eight of the
top ten grossing agricultural products are either grains or are
grain-dependent.5
Protein production is not often perceived
as grain-intensive, but the majority of the feed used in the
process is grains—animal feed composition is
approximately 85% corn and soybean meal.6
Livestock
products, whose biggest cost item is grain-based feed,
comprise five of the top ten products. Of the two non-grain
products in the top ten list of agriculture commodities in the
United States, one is a fiber crop (cotton) and there is only one non-grain food crop (tomatoes).
Just as grains dominate the agricultural economy, they dominate acreage. Cropland makes up 57
percent of all agricultural acres, the remainder of which is pastureland (Figure 1).7
Nearly 90
percent of all cropland acres in the U.S. are dedicated to grain production (Figure 2).8
The
majority of this cropland is divided relatively equally among the main grain types (wheat, corn,
soy), while all others crops grown in the United States (cotton, rice, potatoes, and product) make
up only 11% of acreage.
5
Food and Agriculture Organization of the U.S. http://faostat.fao.org/site/339/default.aspx
6
http://www.scielo.br/img/revistas/rbca/v5n3/a04tab01.gif
7
USDA. “Acreage.” http://www.usda.gov/nass/PUBS/TODAYRPT/acrg0615.pdf
8
USDA. “Acreage.” http://www.usda.gov/nass/PUBS/TODAYRPT/acrg0615.pdf
TABLE 1: TOP AGRICULTURAL
PRODUCTS (MILLIONS OF $)
# COMMODITY VALUE
1 Cattle $30,182
2 Milk $28,219
3 Chicken $24,269
4 Maize $22,233
5 Soybeans $21,230
6 Pig $15,252
7 Wheat $8,666
8 Cotton $5,142
9 Tomatoes $4,880
10 Eggs $4,507
27%
26%
17%
17%
11%
U.S. Cropland Breakdown
Corn Soy Wheat
Hay Other
57%
43%
U.S. Agricultural Acres
Cropland Pasture
FIGURE 1 FIGURE 2

5
The U.S. has 325.7 million acres of
planted cropland, of which corn covers 88.9
million acres, soybeans cover 85.1 million,
forage 56.5 million, and wheat 56.1 million.9
The next largest crop, in terms of planted
surface area, is cotton, which covers 9.0 million
acres. Corn, soy, and wheat account for 70
percent of all cropland (Figure 2).
The U.S. capitzalizes on its comparitive
advantage in grain production and supplies a
large portion of the global grain stock. The
U.S. cultivates 10 percent of the world’s wheat,
32 percent of its corn, and 50 percent of its
soy.10
The U.S. has a comparative advantage
due to fertile soil and its machine-optimized
production system. As wage rates increased,
farmers were forced to mechanize production
operations to avoid high labor costs. They
subsequently optimized the system around
GMO crops that can be grown on a large scale
with machinery.
If we are what we eat, then we are
grains. If you look at the U.S. adult’s average
daily consumption, 16 of the top 25 calorie
sources, and 70 percent of what we eat on a
daily basis, are grain-based (Table 2).11
Grains
are the foundation of many products that we
would not typically consider to be grains—dairy
products, poultry, and meat are all grain-based
due to the feed used in their production.
9
USDA.” Acreage.” http://www.usda.gov/nass/PUBS/TODAYRPT/acrg0615.pdf
10
US Environmental Protection Agency. “Major Crops Grown in the US.”
http://www.epa.gov/oecaagct/ag101/cropmajor.html
11
Friedman. Business Insider. “Disturbing Chart shows the 25 foods that make up most of the calories that
Americans eat.” http://www.businessinsider.com/foods-that-make-up-most-of-the-calories-american-consume-2015-
2
Rank Source Calories
Grain-
Based?
1 Grain-based desserts 138 Yes
2 Yeast breads 134 Yes
3
Chicken and chicken
mixed dishes 123 Yes
4
Soda/energy/sports
drinks 112 No
5 Alcoholic beverages 106 No
6 Pizza 86 Yes
7
Tortillas, burritos,
tacos 85 Yes
8
Pasta and pasta
dishes 78 Yes
9
Beef and beef mixed
dishes 71 Yes
10 Dairy desserts 58 Yes
11 Burgers 53 Yes
12 Regular cheese 51 Yes
13
Potato/corn/other
chips 51 No
14
Sausage, franks
bacon, and ribs 49 Yes
15
Nuts/seeds and
nut/seed mixed
dishes 47 No
16 Fried white potatoes 46 No
17 Ready-to-eat cereals 44 Yes
18 Candy 44 No
19
Eggs and egg mixed
dishes 42 Yes
20
Rice and rice mixed
dishes 41 Yes
21 Reduced fat milk 39 Yes
22 Quickbreads 36 Yes
23
Other fish and fish
mixed dishes 30 No
24 Fruit drinks 29 No
25 Salad dressing 29 No
TABLE 2: U.S. ADULT AVERAGE DAILY CONSUMPTION

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b. GRAIN FEED PRODUCTION OVERVIEW
i. CONVENTIONAL GRAINS ARE HIGHLY CONCENTRATED IN THE MIDWEST
Grains’ pervasive control of U.S. agriculture is attributed, in part, to its efficient
production and distribution system. Though grains dominate an array of performance metrics
from coast to coast, their production is not widespread. Grain production in the U.S. is highly
concentrated in the Midwest and Upper Plains (Figures 3, 4).12
Equilibrium believes that the geographic concentration of grain production creates an
efficient supply chain that optimizes access to end markets, but is highly dependent on petroleum
and low petroleum costs. From mechanized production to mass railroad distribution, getting
grains from farm to table is a highly fuel-intensive process. This model is economically logical
as long as petroleum costs remain low, but as the global petroleum supply dwindles, it is widely
believed that fuel costs may increase dramatically in the near future. Equilibrium believes that
breaking this petroleum dependency by establishing grain growing and processing facilities
outside of the Midwest and Corn Belt, which will reduce transportation needs and therefore fuel
dependency, provides a strategic advantage as the future of petroleum prices is uncertain.
Additionally, burning carbon has proven negative environmental impacts. Shifting agricultural
production away from dependency on finite, environmentally harmful resources is a large step
towards sustainable prosperity. The lack of scaled grain-growing operations outside of the
Midwest and Corn Belt creates an opportunity for localized production with more fuel-efficient
access to consumers.
The current production concentration requires growers to transport grain to shuttles for
export. Because there are far fewer shuttling hubs than local farms, grain growers exporting grain
must transport their grain far greater distances to reach a shuttle than a local delivery. Table 3
illustrates the cost difference for an average feed grower distributing locally and a grower
shuttling grain for export.13
12
USDA National Agriculture Statistics Service. “Charts and Maps.”
http://www.nass.usda.gov/Charts_and_Maps/Crops_County/#cr
13
Mcneill, Sam. “Grain Hauling Cost Calculator.”
FIGURE 3 FIGURE 4

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TABLE 3: GRAIN HAULING COST CALCULATOR FOR LOCAL AND SHUTTLED GRAIN
Local Delivery Shuttle for Export
One-way Distance (miles) 10 100
Wait and Unload Time (min) 30 60
Fuel Cost (cents/bu) 1.5 15.1
Ownership Costs (cents/bu) 4.8 47.9
Labor Costs ($/hour) 12.5 12.5
Time (hours)* 0.94 2.18
Cents per bu 1.24 7.15
Total Costs (cents/bu) 7.54 70.15
A grower that shuttles grain for export must transport his or her grain as much as ten
times further than a grower delivering to a local farm. This ultimately costs the exporter around
ten times the cost per bushel. When these costs are multiplied by the number of bushels, the
economic logic of localized produced and distribution becomes evident.
Due to the geographic concentration of grain production, the vast majority of the U.S.
Identity Preserved Grain (IPG) infrastructure is also centralized in the Midwest and in the Corn
Belt: the bulk of the country’s storage facilities, production infrastructure, and large agriculture
companies are located within this grain hotbed. Businesses set up around grain growing
operations, not vice-versa. Grain within these geographies is primarily sold to a customer or
midstream processor within approximately 50 miles of where it is grown. Establishing grain
growing operations creates an opportunity to also establish processing facilities outside of these
regions, as there is currently very little IPG infrastructure outside of the Midwest and the Corn
Belt.
ii. ALMOST ALL CONVENTIONAL GRAINS ARE GENETICALLY MODIFIED,
PRODUCED ON LARGE SCALE IN MONOCROP SYSTEMS
Nearly all of the existing conventional acres are GMO—today, 94% of all soy and 93%
of all corn are genetically modified (Figure 5). 14
These varieties are dependent on chemicals
and nutrient inputs to maintain productivity, which generate both health and environmental
concerns.
14
Fernandez-Cornejo, Wechsler, Livingston, Mitchell. USDA Economic Research Service. “Genetically
Engineered Crops in the United States.” Report Number 162.

8
FIGURE 5
The increase in GMO adoption parallels a decrease in the number of crops cultivated per
farm. Today, the average number of crops per farm is down from around 4.5 in 1945 to only 1.2,
illustrating the extent to which the monoculture production model has taken ahold of U.S.
agriculture (Figure 6).15
15
Dimitri, Effland, Conklin. USDA Economic Research Service. “The 20th
Century Transformation of U.S.
Agriculture and Farm Policy.” http://www.ers.usda.gov/media/259572/eib3_1_.pdf
0
10
20
30
40
50
60
70
80
90
100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
PercentofPlantedAcres Adoption of genetically engineered crops in the United
States, 2000-2013
Corn Cotton Soy

9
FIGURE 6
Farmers have become specialists, and have therefore limited their market exposure. This
self-inflicted hurdle makes it difficult for them to switch to other crops, and it makes them more
dependent on increasingly fewer suppliers with significantly more bargaining power. The seed
and chemical input marketplace has consolidated to six big players: BASF, Bayer, DuPont,
DOW, Syngenta, and Monsanto. Specialized farmers are also dependent on fewer buyers with
increasing market power. This market has seen a similar consolidation to four players: ADM,
Bunge, Cargill and Dreyfus. By embracing the monocrop model, these farmers subject
themselves to the limited market power that comes with participation in an oligopolistic market.
The decrease in the number of crops per farm has paralleled a growth in the average size
of grain-growing operations. The GMO, monocrop model employs machinery that makes
cultivating large extensions of cropland feasible. A simultaneous increase in the number of small
farms has kept the mean farm acreage relatively constant, but the midpoint acreage, the point at
which half of all farms have a greater number of acres, more clearly illustrates trend towards
larger farms (Figure 7).16
16
USDA Economic Research Service. “Farm Size and the Organization of U.S. Crop Farming. Report number
152.” http://www.ers.usda.gov/media/1156726/err152.pdf
6
4.5 4.6
2.8
1.2
0
1
2
3
4
5
6
7
1900 1930 1945 1970 2002
Commodities per farm
Crops per farm

10
FIGURE 7
Cropland midpoint acreage has steadily increased as grain farmers employ machinery and
expand their operations. Table 4 illustrates the growth in midpoint acreage of harvested acres
for specific cropland commodities.17
Commodity 1987 1997 2007
Corn 200 350 600
Cotton 450 800 1,090
Rice 295 494 700
Soybeans 243 380 490
Wheat 404 693 910
Hay 120 140 160
Farmers are able to expand acreage by mechanizing production and growing input-
dependent GMOs. Monocropping depletes the soil of nutrients, namely nitrogen, as crops extract
nutrients from the soil but do not replenish them. In a sustainable crop rotation, another crop,
typically a legume, is used to bring nitrogen back to the soil.
The productivity of GMOs is dependent on chemical fertilizers and pesticides for
nourishment, which introduce more pollutants into the land and waterways. Whether justified or
not, this chemical use has created significant consumer backlash. Chemical fertilizers have been
shown to lower soil pH, which acidifies the topsoil and kills microbes essential to soil health.18
17
USDA Economic Research Service. “Farm Size and the Organization of U.S. Crop Farming.” Report number
152. http://www.ers.usda.gov/media/1156726/err152.pdf
18
Primavesi, Ana. Agricultures. “Soil Life and Chemical Fertilizers.”
http://www.agriculturesnetwork.org/magazines/global/complementary-use-of-external-inputs/soil-life-and-chemical-
fertilizers
TABLE 4: MIDPOINT ACREAGE OF SELECTED CROPLAND COMMODITIES
0
200
400
600
800
1000
1200
1982 1987 1992 1997 2002 2007
Acres
Measures of Average Farm Size
Midpoint Acreage, Cropland Midpoint Acreage, Harvested Cropland
Mean, Cropland

11
About 40 percent of the world’s agricultural soil has been degraded or severely degraded—
meaning it has lost at least 70 percent of its topsoil—primarily as a result of our current GMO
production system.19
These chemical inputs also create serious health concerns, as they may trigger allergic
reactions, increase the toxicity of the product, and decrease its nutritional value.20
Health
concerns surrounding GMO crops have increased dramatically and are the primary impetus
behind the shift in consumer preference for organic grains. GMO does not have negative health
impacts in it of itself, but the chemicals required for this kind of cultivation create concerns
surrounding both soil and food health.
iii. NATION’S GRAIN FARMERS ARE AGING
FIGURE 8
As Figure 8 illustrates, family farms represent nearly 98 percent U.S. farms, and they are
responsible for 85 percent of all farm production. 21
The remaining two percent produces a
disproportionate amount, 15 percent, of all agricultural output. These are the corporate farms,
highly capitalized and able to produce on a very large scale. Nonetheless, small, family farms
19
World Economic Forum. Time. http://world.time.com/2012/12/14/what-if-the-worlds-soil-runs-out/
20
University of Minnesota School of Public Health. “Genetically Modified Organisms.”
http://enhs.umn.edu/current/5103/gm/harmful.html
21
USDA Economic Research Service. http://www.ers.usda.gov/media/1684958/wed-share-of-us-farmshare-of-ag-
production.png
0 10 20 30 40 50 60 70 80 90 100
Provides most of the labor used on the farm
Provides most of the labor employed by the farm
Owns and operates the farm
Percent
Share of U.S. Farms/share of agricultural production
by the role of the farm family, 2011
Share of all U.S. farms Share of U.S. ag. production

12
are the foundation of U.S. agriculture. These farms are operated by a generation of aging
farmers, the average age of whom is 58.3 and steadily increasing (Figure 9) 22
.
FIGURE 9
The nation’s crops are produced by a generation of aging farmers that has made its living
optimizing a GMO monoculture system and has brought the average number of crops all the way
down to 1.2 per farm. These farmers saw a cyclical commodity boom over the last 20 years,
earned tremendously high profits, and have accrued much wealth. Due to the combination of
their age and prior success, these farmers are unlikely to make systemic changes to their
production model in the late stages of their careers.
These farmers produce the country’s grain supply on 2.1 million farms, most of which are
small: 75 percent sold less than $50,000 in agricultural products in 2012 and 57 percent had sales
less than $10,000. 23
(Disclaimer: the previous information is provided by the USDA ERS, which
does not distinguish agricultural legal entity from contiguous farm. As a result, the size of U.S.
farm incomes may be underreported.)
22
USDA Agriculture Census.
http://www.agcensus.usda.gov/Publications/2012/Online_Resources/Highlights/Farm_Demographics/Demographics
_Figure_2_150dpi.jpg
23
USDA Agriculture Census.
http://www.agcensus.usda.gov/Publications/2012/Online_Resources/Highlights/Farm_Economics/Economics_Figur
e_3_150dpi.jpg
50.5
52
53.3
54.3
55.3
57.1
58.3
46
48
50
52
54
56
58
60
1982 1987 1992 1997 2002 2007 2012
Average Age of Principal Operator
Age

13
c. GRAIN FEED UTILIZATION ANALYSIS
i. THE MAJORITY OF GRAINS ARE USED IN ANIMAL FEEDS
The corn and soy harvested on the 174 million acres of cropland is destined for various
markets—feed, food, and fuel. The most common destination for U.S. corn and soy is animal
feed. While a portion of the corn supply goes to ethanol and fructose production, and a
significant quantity of soy is saved as stock and used in oils, the majority of each grain is used to
feed animals. Nearly 60 percent of conventional corn and 50 percent of conventional soy are
used in animal feeds, which serve as the base for various protein sources (Figures 10, 11).24
Protein production is highly grain-dependent due to the Feed Conversion Ratios (FCR):
the weight of feed in kilograms required to produce one kilogram of edible mass. The FCR for
different types of protein varies—most fish have an FCR of around 1.3 to 1, while beef, the most
grain-intensive protein, requires about 30 kilograms of feed to produce 1 kilogram of beef.25
The
average FCR for U.S.-produced protein is 4 to 1.26
Figure 12 shows averages for the FCRs of
different protein sources.27
24
Corn: Beef2Live.
http://beef2live.com/cdfm/Beeive53/author/995/2014/5/corn_usage_1_635356608283518055.jpg
Soybeans: USDA Economic Research Service. http://www.ers.usda.gov/topics/crops/soybeans-oil-crops/market-
outlook/usda-soybean-baseline,-2010-19.aspx
25
Johnston, Gene. “Why is Beef Losing Ground to Chicken?” http://www.agriculture.com/livestock/cattle/why-is-
beef-losing-ground-to-chicken_276-ar21983
26
EQ Internal Calculation
27
http://www.sciencebuzz.org/sites/default/files/images/Meat_conversion.jpg
40%
30%
9%
9%
12%
Corn Usage
Feed Ethanol Export (feed) Ethanol DG (feed) Fructose
47%
6%
15%
8%
20%
2%
Soybean Usage
Feed Food Oil Crush Loss Stock Protein
FIGURE 10 FIGURE 11

14
FIGURE 12
The extensive role of grains in protein production is one of the main reasons for grain’s
dominance of the U.S. agriculture industry. Five of the top ten, including the top three, grossing
agricultural products are grain-fed protein sources: cattle, milk, chicken, pig and eggs (Table 1).
Figure 13 shows the breakdown of animal feed usage in the U.S, illustrating that chickens
receive nearly half of the nation’s feed.28
The U.S. animal feed market is the second largest in
the world in terms of volume, behind only China. In 2013, U.S. farms produced 169 million tons
of feed grain, with an approximate value of $84.5 billion.29
FIGURE 13
28
2014 Alltech Global Feed Summary http://www.alltech.com/sites/default/files/alltechglobalfeedsummary2014.pdf
29
2014 Alltech Global Feed Summary http://www.alltech.com/sites/default/files/alltechglobalfeedsummary2014.pdf
34%
4%
14%4%
12%
1%
14%
5%
14%
U.S. Animal Feed Usage
Broil Horse Pig Turkey Dairy Aqua Beef Pets Lay

15
ii. FEED USAGE IS DISPERSED ALL OVER THE COUNTRY
While grain production in the U.S. is highly concentrated, feed usage is not. As a direct
result of the FCR and the grain-intensive protein production process, the highest feed-consuming
regions are the largest protein-producing regions. These producers require extensive quantities
of grain to feed their animals. Broiler production—the largest single recipient of U.S. grains—is
concentrated in the Southeast. Hog production is concentrated in the Midwest, beef cattle in the
plains states, and dairy cattle and layers are distributed based on population centers throughout
the country (Figure 14).30
FIGURE 14
Feed usage is dispersed all over the country, as different grain-dependent proteins are
produced in different regions. Feed usage is not centralized in the same way as production. This
disparity creates an opportunity to install grain production facilities more efficiently located to
protein producing regions. This is key to the opportunity in organic row crops. Equilibrium
believes that establishing infrastructure closer to consumption hubs can improve logistics and
efficiency.
30
http://www.factoryfarmmap.org

16
FIGURE 15
Whereas protein production spans the country, protein consumption is higher on an
annual, per capita basis on the coasts and in the Midwest (Figure 15).31
There is a strong
positive correlation between income and protein consumption. These high income regions, with
the ability to consume higher protein diets, tend to center around well-industrialized cities near
the coasts and in the Midwest. The concentration of protein consumption in the Southeast and
the pocket in Texas can be explained by local tradition: barbecue. These regions are ultimately
the markets where grain meets consumers via the protein they consume, despite the extensive
transportation required to get the grain from the farm, to the livestock producers, to the end
consumption markets. Equilibrium believes that investing in cropland and processing facilities
closer to protein consuming regions creates an opportunity to cut down transition time, costs, and
environmental impact.
31
USDA Food Atlas

17
d. CONVENTIONAL GRAINS GENERATE LITTLE PROFIT
Demand for conventional grains is not keeping pace with supply, and as a result, global
stockpiles are increasing. In fact, since 2008, world corn production has exceeded consumption 5
out of the last 7 years. This trend is likely to be exacerbated in the future, as countries who
historically who do not grow corn and soy, particularly in Asia, have started growing more
grains domestically. Meanwhile, grain acreage in the U.S. and other grain-leading countries
continues to increase. Of the 8 percent forecasted increase in global corn supply, the U.S. is
expected to account for the majority of the production. Figure 16 illustrates the upward trend in
the global stocks of crop commodities.32
FIGURE 16
This cyclical shift to grain surpluses will exacerbate already low grain commodity
prices, and put further downward pressure on commodity prices.
32
USDA Economic Research Service. “Global Stocks of Major Crops Rising.” http://www.ers.usda.gov/data-
products/chart-gallery/detail.aspx?chartId=49317
0
100
200
300
400
500
600
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
MillionsofTons
World Stocks of Major Crop Commodities
Corn Soy Rice Wheat

18
FIGURE 17
The steadily increasing grain stock outpaces demand growth, which manifests itself in
declining prices. In 2015, the average corn price is down to $4.00 a bushel, representing a 10%
decrease from $4.45 a bushel in 2014 and a 42% decrease from $6.89 a bushel in 2013. The
2014 price of soybeans is down 23% to $10.00 a bushel (Figure 17).33
Declining prices
discourage conventional row crop investments, as prices are inseparably linked with returns.
FIGURE 18
33
http://www.ers.usda.gov/data-products/chart-gallery/detail.aspx?chartId=48560&ref=collection&embed=True
0
2
4
6
8
10
12
14
16
Dollarsperbushel
Year
Average U.S. prices for major commodities
Corn Soy Wheat
0
100
200
300
400
500
$Billion(2009)
Year
Gross farm income, production expenses, and net
farm income, inflation adjusted, 2000-2014F
Gross farm income Net farm income Production expenses

19
The decline in prices is coupled with a concerning four-year upward trend in farm
expenses due to the rising cost of inputs, namely fuel, fertilizer, and pesticides. In 2014 farmers
saw a 5.7% increase in total production expenses. As a result of increasing expenses and
declining prices, farm incomes are falling: 2014 farm income was down over 21 percent from
2013 (Figure 18).34
Additionally, average rent-to-value ratios, the ratio of rental income to the price of the
property, have been decreasing for the past 45 years (Figure 19).35
Most row crop farmers in the
U.S. lease additional land to supplement the land that they own, but they are finding it
increasingly difficult to do so profitably. Relatively, land prices have continued to increase, but
farmers have not been able to pay higher rents due to the aforementioned declining income. As a
proxy for this deteriorating situation, landowners have seen a decline in the average rent-to-value
for their property. The faltering financial performance of conventional grains is an enormous red
flag and creates very legitimate skepticism around conventional row crop investments.
FIGURE 19
34
USDA ERS Farm Income and Wealth Statistics http://www.ers.usda.gov/data-products/farm-income-and-wealth-
statistics/returns-to-operators,-us-and-state.aspx
35
Trends in US Farmland Values and Ownership http://www.ers.usda.gov/media/377487/eib92_2_.pdf
0
1
2
3
4
5
6
7
8
Cropland rent-to-value, 1967-2011
percent

20
3. ORGANIC GRAINS OUTPERFORM
a. THE MARKET IS SMALL BUT GROWING QUICKLY
While the conventional grains market has historically dominated the agriculture industry,
its investment upside is quickly declining due to rising land prices, declining commodity prices,
and increasing costs. The deterioration in the conventional market opens the door for organic
grains. Organic products are not produced with the same synthetic fertilizers, pesticides,
herbicides, hormones, or antibiotics as conventional products, and they cannot be genetically
modified. Organic growers and producers must instead employ more sustainable and
environmentally conscious practices to cultivate commodities. Demand for organic grain has
been increasing dramatically in the last few years, while supply has lagged demand.
Despite the increasing demand, production of organic grains still pales in comparison to
conventional production. Today, organic food makes up just 4 percent of the total food basket,
amounting to a $34.5 billion industry in 2014 (Figure 20).36
Of the organic end markets, fruits
and vegetables have the highest sales, followed by dairy and beverages.
FIGURE 20
To underscore the magnitude of the differential in market sizes, the organic poultry and
meat market today is 65 times smaller than the conventional market (Table 5).37
36
USDA Economic Research Service. “Organic Agriculture.” http://www.ers.usda.gov/topics/natural-resources-
environment/organic-agriculture/organic-market-overview.aspx
37
EQ Calculation
0
5
10
15
20
25
30
35
40
2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F
$(Billions)
U.S. Organic Food Sales by Category, 2005-14F
Fruit and vegetables Dairy Beverages
Packaged/prepared foods Breads and grains Snack foods
Meat, fish, poultry Condiments

21
TABLE 5: 2014 MARKET COMPARISON
VALUE (millions of $) CONVENTIONAL ORGANIC
Beef 30,182 464
Chicken 24,269 373
Pork 15,252 235
Eggs 4,507 69
Milk 28,219 5,071
Though the markets differ drastically in size, they have a similar structural breakdown.
Just like conventional, organic grain is used predominately in animal feeds to produce organic
protein (Figures 21, 22).38
This means that the transition from conventional to organic grain
production does not necessarily require growers to find a completely new market, simply a buyer
interested in organics.
i. DEMAND IS ACCELERATING DUE TO ORGANIC MEAT
Though the current organic market is significantly smaller than its conventional
counterpart, U.S. organic sales are growing at 11 percent annually and have grown at double-
digit rates most years since the 1990s.39
Organic meat and dairy—produced with extensive
organic grain inputs—is growing at 14 percent per year, making it the fastest growing segment of
the organic sector.40
Organic demand originated in the produce section of the supermarket, but
38
EQ calculation
39
Organic Trade Association Annual Report https://www.ota.com/about-ota/annual-report
40
61%
8%
20%
12%
Organic Soybean Usage
Feed Food Oil Crush Loss
65%
19%
15%
Organic Corn Usage
Feed Food Export (Feed)
FIGURE 21 FIGURE 22

22
as customers became more familiar with organic, the demand for organic has spread to other
aisles, particularly the meat and dairy sections.
FIGURE 23
Consumers are shifting their preference dramatically towards organic, which significantly
increases the demand for organic grains on an annual basis. Today, organic protein—dairy,
meat, poultry, and fish—is a $6.2 billion industry and organic food grain is a $3.1 billion
industry. By 2020, organic protein is expected to total $12.1 billion, and organic food grain $5.5
billion (Figure 23).41
The organic market is on pace to double in the next five years, as
consumers increasingly prefer organic to conventional. Equilibrium believes that most of the
growth in organic meat, poultry, and fish will come from poultry and fish, not pork and beef.
Due to the high FCRs for pork and beef (Figure 12), the necessary grain input multiplied by the
organic premium (illustrated later, Figures 27, 28) creates a shelf price with an unfeasibly high
organic price tag. In the case of beef, grass-fed is a more cost-efficient sustainable alternative
than organic. Aquaculture is a nascent industry in the U.S. in which Equilibrium does not see an
immediate investment opportunity. As a result, Equilibrium believes the primary opportunity in
organic feed is for dairy and poultry.
. The steady growth in the demand for organic grains signals their long-term value and
investment opportunity. Additionally, the market prefers domestic organic grains because of
their reliable certification and smaller carbon footprint. The market exhibits this preference by
paying a $1-$2 premium per bushel on domestic organic corn. In 2014, the U.S. imported 2.1
million bushels of organic corn, about 43 percent of which came from Romania. The delivered
U.S. price for these imports is $11.74 per bushel, $1.34 less than the national average domestic
price. The lower import price illustrates the market premium for domestic organic corn. The
41
Based on internal Equilibrium calculations
0
2
4
6
8
10
12
14
16
18
20
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Marketvalue($billions)
Organic Grain Markets
Food Dairy Meat, Poultry, Fish

23
rapidly increasing demand for organic grains, paired with the domestic preference, suggests that
there is strong consumer demand for U.S.-grown organic grain.
Equilibrium expects this 10-15 percent growth to continue for at least 10 years. Buyers
have repeatedly stated that the lack of organic input has held back the growth in demand, and
that the demand for organic grains is actually understated.
ii. SUPPLY IS NOT KEEPING PACE WITH GROWING DEMAND
While demand for organic grains is booming, the supply of organic farmland is not
keeping pace. Organic acreage today makes up less than 1 percent of total U.S. agricultural
acres: in 2011, organic made up just 0.6% of U.S. farmland, 0.5% of pasture, and 0.8% of
cropland in (Table 6).42
TABLE 6: U.S. CROPLAND BREAKDOWN
U.S. Cropland Certified Organic
Crop Acres Share of Total Acres Share of Total
(Thousands) (Percent) (Thousands) (Percent)
Corn 91,900 30 234.5 12
Soybean 78,000 26 132.4 7
Hay 61,600 20 786 39
Wheat 54,400 18 344.6 17
Fruit and nuts 4,000 1 154.8 8
Vegetables 2,800 1 160.7 8
Rice 2,700 1 48.5 2
Barley 2,600 1 63.9 3
Oats 2,500 1 62 3
Dry beans, peas and lentils 2,100 1 46.5 2
Total, selected crops 302,500 100 2,034 100
The minute portion of agricultural land dedicated to organic farming is not sufficient to
meet the double-digit growth in demand. The growth rate of land dedicated to organic grain is
effectively stagnant, growing at 0.3 percent per year. The 11 percent demand growth simply
cannot be met with stagnant supply (Figure 24).43
42
USDA Economic Research Service, based on information for USDA-accredited State and private organic
certifiers and USDA, National Agricultural Statistics service, “Agricultural Statistics 2012.”
43

24
FIGURE 24
iii. SHORTAGE OF ORGANIC GRAIN LAND
As organic sales quickly increase, the number of certified organic operations and organic
farmland acres are growing very slowly, if at all. The current trend lines project a shortage of 15
million bushels of organic corn and 10 million bushels of organic soy by 2020 (Figures 25,
26).44
44
0
5
10
15
20
25
30
1992 1993 1994 1995 1997 2000 2001 2002 2003 2004 2005 2006 2007 2008 2010 2011
U.S. organic farmland acres, number of operations,
and sales, 1992-2011
U.S. Organic Sales ($ billions) U.S. certified farm operations (1,000)
U.S. organic farmland acres (million)

25
FIGURE 25
FIGURE 26
The increasing demand for organic protein and the FCRs are the primary drivers behind
the growing shortage in organic corn and soy. The demand for organic protein is growing at 14
percent annually.45
The average FCR for organic meat is 4:1, which means that the 14 percent
growth in organic demand increases the demand for organic feed grain by 56 percent per year.
This upward pressure on the demand for organic grains is a key driver behind the rapidly-
45
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
40,000,000
45,000,000
50,000,000
Bushels
Organic Corn Bushels
US Import Shortage
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
Bushels
Year
Organic Soy Bushels
US Import Shortage

26
increasing shortage of organic corn and soy. To keep up with demand, organic corn and soy
acreage will need to grow at about 63 percent annually.46
The 63 percent CAGR in the shortage for organic corn and soy indicates that the market
will need over 1 million new acres of organic farmland to come into production to meet the
projected shortfall. To fill this shortage, more domestic acres must come under production, or
the U.S. must import more foreign organic grains. Due to the domestic preference, illustrated by
the premium for domestic organic corn, there is an opportunity for domestic production to fill
this shortage, and the U.S. doesn’t necessarily have to rely on imports. The projected shortage of
1 million organic grain acres, assuming the average price per organic grain acre is $6,000,
translates into approximately $6 billion of farmland. Investing in organic grain feed production
presents the opportunity to capitalize on this enormous market inefficiency.
46

27
b. ORGANIC FEED GRAINS ARE HIGHLY PROFITABLE
Whereas supply of conventional row crops is too high and demand too little, organic
grains are in abundant demand and scarce supply. The increasing demand for organic grains in
the face of constrained supply manifests itself in increasing prices. As organic grain prices rise
and conventional grain prices fall, the spread between the two is widening (Figures 27, 28).47
Historically, organic has traded at twice the price of conventional, but the current market shows
that the spread has grown. The organic market is now becoming deeper, more liquid, and more
transparent. Organic farmers are now independently pricing based on supply and demand
principles instead of benchmarks related to conventional prices.
FIGURE 27
47
USDA National Organic Grains and Feedstuffs Bi-Weekly
-50%
0%
50%
100%
150%
200%
250%
300%
350%
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
$18.00
4/2/2007 4/2/2008 4/2/2009 4/2/2010 4/2/2011 4/2/2012 4/2/2013 4/2/2014
Dollarsperbushel
Corn pricing: conventional vs. organic
Conventional ($) Organic ($) Organic Premium (%)

28
FIGURE 28
The organic premium—how much more consumers are willing to pay for an organic crop
over its conventional counterpart—is growing. Today, organic corn receives around a 200
percent premium to conventional, while organic soy enjoys about a 150 percent premium to
conventional. As prices head in opposite directions, this premium is growing and Equilibrium
expects this trend to continue. This divergence in prices implies greater profitability for organic
row crop growers.
It should be noted that the organic premium fell significantly in 2010 and 2011, following
the global macroeconomic turndown. While a similar economic recession may cause demand
growth to slow, and therefore the premium to fall, Equilibrium does not expect the decrease to be
as significant as the one observed in 2010. The organic market is more developed and has a
larger base of demand than it did five years ago. The market has structurally changed due to the
volume of organic demand, a portion of which is sticky and relatively inelastic. Because organic
demand is constrained by supply, demand will rise with supply, to some extent, regardless of
economic circumstances.
As organic corn and soy prices continue to rise and strengthen, farming organic corn and
soy has become more lucrative for farmers. Higher returns illustrate that the organic payout is
simply higher than the conventional payout. Even with yield drag, organic current income is
double that of conventional. Table 7 illustrates the 10-year average current income yield for an
organic small grain-alfalfa-corn-soy rotation and a conventional corn-soy rotation.48
48
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
4/2/2007 4/2/2008 4/2/2009 4/2/2010 4/2/2011 4/2/2012 4/2/2013 4/2/2014
Dollarsperbushel
Soybean pricing: conventional vs. organic
Conventional ($) Organic ($) Organic Premium (%)

29
TABLE 7: 10-YEAR AVERAGE RETURNS
10-year Average Organic Conventional
Revenue $794 $610
Costs $217 $237
Profit $577 $373
Current Income 7% 3%
Historically, row crop farmland investors have received higher than a 5-cap return
utilizing a cash rent business model. Declining rent-to-value, coupled with declining
conventional grain commodity prices, has deteriorated cash rent row crop farmland investment
returns below this 5 percent threshold in recent years. Given current condition, conventional row
crop grain farmers cannot generate enough income to support farmland investment returns above
the historic 5-cap benchmark. Based on current and forecasted organic grain prices, organic row
crop farmers should be able to exceed a 5-cap return. Further, with relatively higher income
generating potential, organic row crop farmland should be valued higher than conventional row
crop farmland, holding cap-rates equal.
While average incomes are consistently higher for an organic rotation, Figure 29 shows
the annual income fluctuations associated with an organic rotation.49
FIGURE 29
The organic income fluctuates dramatically year to year because it depends which crop is
harvested that year. Organic growers grow a different crop each year to promote soil health and
productivity without the use of chemical fertilizers and pesticides. In a four-year rotation of
small grains, alfalfa, corn and soy, organic corn is the most profitable organic row crop, which
explains the income peaks in years 3 and 7. Organic wheat is the least profitable, hence the
49
0
350
700
1050
1400
1 2 3 4 5 6 7 8 9 10
$Income(PreFees)
Year
Per Acre Returns
Organic Conventional

30
income troughs in years 5 and 9. This income volatility is one of the key reason investors and
farmers prefer conventional and its more stable profit stream.
Although average organic returns are higher than conventional, the same is not true of
yields. With the ability to use a broader range of tools for pest, disease, and weed control, as
well as chemical fertilizers, conventional farmers produce slightly higher average yields than
organic farmers (Table 8).50
TABLE 8: NATIONAL YIELD COMPARISON
National Yields (per acre) Conventional Organic
Wheat/Small Grains (bushels) 80 70
Alfalfa (tons) 4 4
Corn (bushels) 180 150
Soy/Beans/Legumes (bushels) 50 40
Across the board, conventional farming methods produce higher yields, but returns are
significantly lower due to the price at which crops can be sold. The organic premium more than
compensates for the yield drag. The challenge in organic is the fluctuation due to rotation and
overcoming the transition hump.
i. SUSTAINBILITY PROMOTES SOIL HEALTH AND DRIVES PROFITABILITY
Cultivation of organic row crops is a sustainable practice with the ability to mitigate some
of the negative environmental impacts associated with conventional agriculture. Rotating crops
returns nutrients to the soil and promotes long-term soil health. In an organic small grains-
alfalfa-corn-soy crop rotation, each crop plays a specific agronomic role. Organic wheat is used
for weed management. Organic alfalfa is used to build up nitrogen in the soil, which is
significantly depleted by certain crops, namely corn. Organic corn is planted to maximize
income, but only once every four years in order to minimize the effects of nutrient depletion.
Organic soy is planted for profit and nitrogen fixation. By returning nutrients to the soil, this
crop rotation increases microbial health and makes the land more productive. Organic farming
also spares the soil from adverse chemical effects by replacing fertilizer and pesticide use with
more environmentally conscious practices.
Due to the rising cost of fertilizers and seeds, the cost of farming organically can be
competitive with conventional. Pesticides and insecticides can be replaced to permit organic
cultivation and keep input costs low. Introducing beneficial insects is a common way to combat
harmful, crop-destroying insects. This practice eliminates the need for insecticides, as the
targeted species can be controlled by an alternate species of insect. Similarly, farmers can
employ natural predators—falcons to quell a destructive starling population, for example—to
keep pests at bay and allow crops to be harvested organically. These traditional strategies rely
on the ecosystem’s food chain, allowing crops to be harvested as certified-organic and the
farmers to enjoy the organic premium. The costs associated with conventional farming have
risen to the point that these organic practices are now cost-competitive.
50
USDA National Agricultural Statistics Service

31
There are four potential sources for organic row cropland, of which Equilibrium is
interested in three. The first is conventional cropland, which can be converted to organic by
farming organically for three years. The second is existing organic cropland, which can start
producing organically immediately. The third source is land coming off the Conservation
Reserve Program, which is considered organic because it has been chemical free for at least three
years. This USDA program takes a maximum of 32 million highly erodible acres out of
production and implements conservation measures for at least 10 years. Equilibrium will look
into CRP land, though most of it is not well suited for row crop cultivation for both agricultural
and environmental reasons. The fourth possible source is clear-cut land, in which Equilibrium is
not interested. Equilibrium does not support clear cutting because of its negative impact on soil,
water, and wildlife health. As a part of our commitment to sustainability, Equilibrium will not
consider growing row crops on clear-cut land.
Equilibrium believes that sustainability is key to the long-term, scaled success of an
organic feed operation, as it helps maintain soil health and yields, keeps inputs costs low, and
receives a market premium.

32
4. WHY ISN’T EVERYONE GOING ORGANIC?
As nearly every indicator suggests, organic grains can be more profitable and sustainable
than their conventional counterparts. Given this evidence, it seems contradictory that less than 1
percent of agricultural land is dedicated to organic farming and that organic acreage is effectively
stagnant. Most farmers ignore the potential for higher profits and continue conventional
production due to high barriers to entry.
a. BARRIERS TO ENTRY AND RISK MANAGEMENT
i. TRANSITION COSTS CREATE A FINANCIAL HURDLE IN EARLY ORGANIC
YEARS
To receive USDA organic certification, land must be farmed under organic conditions for
three years, after which point the soil is deemed free of chemical inputs. If a farmer starts
operating organically immediately before a harvest, three calendar years will expire just before
the third harvest, so he must sell at least two harvest years as conventional despite having
produced them organically. The increase in necessary labor and costs associated with the
transition process significantly reduce income during these first few years. During these first
two transition years, projected conventional incomes are higher than projected organic incomes.
Many farmers do not possess the cash cushion or a large enough, diversified enough land
portfolio to insulate against a bad harvest during this period. Conventional farmers also typically
hold all of their land in one area, meaning any single issue has the potential to affect all of their
acreage at any point in time. Most farmers are not financially capable of absorbing years of
lower income to transition to organic. Additionally, most farmers have leased acres, on which
landowners will not allow them to transition to organic. Landowners are similarly unable absorb
lower income, as they are trying to maximize rental income in any given year. Unwilling to take
these risks, many farmers opt to continue farming conventionally.
ii. ORGANIC PRODUCTION REQUIRES INCREASED MANAGEMENT, LABOR,
AND INFRASTRUCTURE
Organic farming requires more labor and management than conventional farming.
Farmers cannot plant the same seeds year in and year out, or spray their crops from afar with
blankets of herbicides. There are simply more tasks to be done on an organic farm, and each of
these tasks require some component of labor and management. Most farmers’ children have
moved off the farm, and the decrease in available labor makes highly mechanized production
more attractive. GMO adoption allowed farmers to scale, mechanize, reduce labor and labor
costs, and generate higher crop yields. For these farmers who have made their living cultivating
GMO crops, there is little incentive to move away from that model, take on additional financial
risk, and increase labor requirements as they eye retirement.
Producing organic Identity Preserved Grains also requires extensive infrastructure, of
which there is very little, particularly outside of the Midwest. These varieties have specific
isolation restrictions and transportation requirements that most conventional infrastructure does

33
not meet. The lack of appropriate infrastructure creates another hurdle in the transition to
organic grain production.
iii. CROP INSURANCE AND GRAIN SUBSIDIES GUARANTEE FINANCIAL
STABILITY DESPITE LOW INCOME
The Federal Crop Insurance Corporation, a branch of the USDA’s Risk Management
Agency, is responsible for distributing crop insurance payments to farms, based on either yields
or revenue. These payments are intended to provide financial support for farmers who suffer
from reduced yields and incomes in order to guarantee that farmers continue producing certain
commodities. In 2011, more than 10,000 farming operations received federal crop insurance
subsidies, ranging from $10,000 to over $1 million.51
Farmers receiving this federal aid are
reluctant to sacrifice the financial security and transition to organic production, as the equivalent
organic insurance program is still in its infancy.
iv. ORGANIC ROTATIONS REQUIRE DIFFERENT MARKETS FOR EACH CROP
Once the soil is free of chemicals and prepared for organic crop rotation using transition
crops, a typical organic crop rotation involves different crops almost every year. Those crop
rotations can be as short as four years and as long as ten years. They usually include cover crops
and green manure, and the primary cash crop on any given acre is likely to change every year.
This rotation prevents the nutrient depletion associated with monocropping and maintains soil
health and plentiful yields. An organic farmer growing different crops each year under this
rotation system must find distinct markets for each crop, whereas conventional farmers have an
average of just 1.2 crops that they must bring to market. This increase in the number of crops
and biodiversity creates increasing complexity in finding markets for organic crops. Monocrop
conventional farmers do not have to face this challenge. Despite the abundant demand for
organic grains, selling crops on a different market each year can be a formidable task.
The aforementioned barriers to entry create enough risk that most farmers are unwilling
to undertake the transition from conventional to organic.
51
Environmental Working Group. Crop Insurance. http://farm.ewg.org/cropinsurance.php

34
b. OVERCOMING BARRIERS
These barriers to entry, while daunting, can be overcome using an owner-operated,
vertically integrated model implemented at scale, oriented around maximizing long-term profit
rather than on a year-to-year basis. Equilibrium can maximize profit and overcome the
aforementioned barriers to entry by establishing an organic grain feed operation with the
following characteristics.
i. OWNER OPERATION HAS TANGIBLE BENEFITS FOR OWNERS
Owner operation is a key characteristic of an effectively scaled organic row crop
operation. In a land-leasing model, improvements to infrastructure and land benefit the
landowner, not the lessee. As a result, lessees are reluctant to make capital investments, and both
landowners and lessees are reluctant to undertake organic. In an owner-operated model, any
revision or addition to infrastructure and improvements to soil heath benefit the owner directly.
Owning the infrastructure allows producers to establish a system that most closely fits their
specific requirements. In other words, an owner and operator of growing and production
facilities for organic IPG can implement the protocol necessary to process this type of grain.
Additionally, if the owner operates multiple facilities, this model promotes the
dissemination of knowledge across properties, as all employees are under the same management
system with common operating protocols. Successful implementation of a new irrigation
schedule, for example, can be quickly executed across all of the firm’s properties. The traditional
land-leasing model is inefficient, as it doesn’t allow farmers to capture these benefits.
ii. RESOURCE UTLILIZATION ALLOWS FINANCIAL FLEXIBILITY
A well-capitalized farm with enough scale may afford the cash cushion to finance the
lower income of the transition years. The majority of the country’s farms are small—57 percent
sold less than $10,000 in agricultural products in 2012. For these farmers, a two-year drop in
income is a significant worry and a bad harvest can be fatal. A higher capitalized farm with
multiple income streams can typically afford the transition years, allowing it to capture the
additional organic profit.
A higher capitalized farm may also be financially capable of employing the labor
necessary to produce organic crops. As a result of its ability to pay higher working capital costs
on the front end, a scaled, owner-operated and vertically-integrated firm can ultimately enjoy the
premium for producing organically. Farms of this type also have a longer time horizon, as they
are able to enter long-term contracts and have a cash cushion to help clear financial hurdles.
They do not have to worry about surviving year to year, so they are able to focus on long-term
profit maximization.
iii. VERTICAL INTEGRATION ENHANCES MARGIN AND MITIGATES RISK
Vertical integration allows firms to capture and enhance the margin across the supply
chain by cutting out the intermediaries and aligning all of their facilities. This efficient structure
uses value-added processing to maximize product utilization and mitigates risk against price and
yield volatility by guaranteeing a market in each step of the process. Vertical integration

35
captures margin and allows the knowledge gained from each activity to influence and enhance
the others. It allows the company to be a price maker opposed to price taker and to have
ownership of the channel via buyer relationships. This allows companies to focus on higher
value goods instead of commodities, and generates higher margin in downstream activities.
A vertically integrated system owns the growing, processing and marketing facilities.
This guarantees that the crops make it from the growing phase, to the production phase, to the
marketing phase, as each channel handoff is an internal activity. These internal handoffs help
preserve the identity of the grain throughout the entire value chain. Aligning these facilities also
promotes efficient dissemination of information between each production phase. Direct
communication with the farm managers ensures knowledge of crop harvests and timing. For
example, accurate forecasting of corn protein and availability enables the marketing team to
work collaboratively with livestock operations to build animal nutrition programs. If the farm
managers are confident they can harvest high-protein corn through mid-September, the
marketing team will build a specific late season nutrition campaign. Additionally, customer
preferences can be used to refine upstream activities to meet the market’s specific demand.
These sorts of firms also tend to be larger than individual growers. This increase in size
gives a vertically integrated farm operation—a larger supplier presence—access to a broader
geographical base, a national footprint, and larger retailers. This dynamic reduces volatility in
commodity pricing, reducing risk of organic farming.

36
Though there are risks and obstacles associated with the transition from conventional to
organic, a vertically integrated, owner-operated model significantly diminishes these hurdles and
makes investing in organic row crops a highly profitable undertaking.
Enhanced Value from Vertical Integration
♦ Grow What You Can Sell: Integrated marketing operations provide
invaluable insight regarding long-term demand trends that drive crop
type and selection.
♦ Planning Drives Midstream Profits: Milling, crushing, storage
costs are dominated by variable expenses associated with asset
utilization and labor. The knowledge gained from integrated
growing operations, including detailed demand forecasts and yield
expectations, provides a significant edge in cutting midstream costs
as it allows for advanced planning of a farm’s operations.
♦ Marketing Drives Demand: Integrated growing and midstream
operations support marketing in creating demand through customer
oriented supply programs for the specific grain needs of large
retailers and consumer food companies. Certainty over product
supply and the ability to create custom strategic sourcing solutions
are the key items that retailers and consumer food companies seek in
establishing partnerships. Contrary to conventional wisdom, retailers
will not only acquire larger volumes of a promoted product, they will
also pay attractive pricing to a supplier that can ensure through
vertical integration delivery of a high-quality organic grains product,
year round, and nation-wide.

37
5. INVESTMENT OPPORTUNITY
a. NOW IS THE TIME TO INVEST IN ORGANIC ROW CROPS
The fallout from the recent economic crisis drastically altered the current investment
landscape and shifted investors’ approach to the market. The present-day investment market is
characterized by economic uncertainty, price volatility in mainstream assets, concerns over
inflation and poor returns on cash deposits. Consequently, investors have shifted their focus to
alternative assets that are not highly correlated with the financial markets and whose values do
not fluctuate with the same volatility. These assets are tangible and retain their capital value.
They are simple and secure, generate tax-efficient income, and their capital growth is supported
by solid fundamental trends.
Productive agricultural land, dominated by the grain class, possess all of these
characteristics and is a unique asset class for institutional investors to diversify portfolios, reduce
risk, hedge inflation, generate income and growth, and in many cases improve tax efficiency.
Productive farmland is a low risk investment and there is very high demand for organic land,
though very little exists. Figure 30 illustrates the risk and return for several major asset
classes.52
Over the last decade, U.S. farmland has consistently posted high returns with low risk
for investors.
FIGURE 30
The demand for food is inelastic, and because so much of what people eat—70 percent
for the average U.S. adult—is grain-dependent, this asset class is not affected by the volatility of
financial markets. Even if there is a broader macroeconomic downturn, Equilibrium expects that
the growth in organic grains will not slow drastically because demand is growing so quickly and
52
Morningstar, NCREIF
U.S. 3 mo. T-bills
U.S. Aggregate Bonds
U.S. Timberland
U.S. Commercial Real Estate
U.S. Farmland
U.S. Equities
Int'l Equities
Commodities
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0 0.05 0.1 0.15 0.2 0.25 0.3
Return(annualizedreturn)
Risk (standard deviation)
Risk Vs. Return by Asset Class January 1994 - December
2013

38
is constrained by supply. In a low interest rate environment, organic row crops produce a high
current income yield every single year. Now is the time to invest in organic row crops, while the
market favors each of its investment characteristics. An owner-operated, vertically integrated
organic grain investment program is well-positioned within the current macroeconomic
framework.
i. FIRST-MOVER ADVANTAGE
Demand for organic feed grain is much greater than the existing supply, and many big
players are looking for reliable solutions. Whole Foods, Organic Valley, Applegate Farms,
Chobani, Chipotle and Bell & Evan are among the large food companies that have explicitly
expressed eagerness for an increase in organic grain supply to Equilibrium. These large retailers
and consumer brands have been limited in the number of organic products they are able to bring
to market and the size of those product offerings due to a lack of organic supply. These
companies are looking for long-term sourcing partners to provide a strategic solution. Large
food retailers and consumer food companies are willing to engage in long-term channel
relationships and business structures to which they have historically not been accustomed. These
food companies also believe organic the grain need is understated. Had they had more grain, they
would have put it on the market and the market could have grown even more quickly. Getting
into the market early creates the opportunity to enter into long-term contracts with the multitude
of companies chomping at the bit to satisfy consumers’ increasing demand for organic food.
b. CONCLUSION
The growing supply and demand imbalance in organic grains, exacerbated in organic
feed markets, generates a need for one million acres to go into organic grain production just to
satisfy the forecasted need in the next five years. With organic and conventional performance
trends forecasted to continue in opposite directions, investing in a vertically integrated, owner-
operated, organic dairy and poultry feed system provides an opportunity to capture the enormous
market inefficiency. Consumers and suppliers are anxious for large-scale increases in organic
grain production, and they are looking for someone to satisfy the market’s demand.

Organic Feed Position Paper 2015-09-15

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