Input Capital is the world’s first agricultural streaming company. It is well-known in some circles in Vancouver and recently marked a major accomplishment with the initiation of a quarterly dividend. After this news, I reached out to Brad Farquhar, Executive VP, CFO, & Director, to have an in-depth conversation on the news. Does the dividend signal that they have limited opportunities to reinvest in themselves, or is there something else going on? Read on to find out!
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P: Hello Brad, thanks for taking the time to talk with me here today.
B: Hello Peter, thanks for getting in touch -- lots to talk about.
P: Great, let’s get into it. One interview template I like to use is to follow along the company's presentation deck. You guys have a substantial one there.
B: Including one with commentary side by side. If you go to the website, you have the corporate presentation and the Acumen Small Cap Conference presentation right beside it. The deck from Acumen conference includes the speaking notes that CEO Doug Emsley used for each slide.
P: Great! I will provide a link for readers in the transcript here, but the fact that you have the material available simplifies things for us a bit. Let’s start with a few high-level questions I have based on the news release last week.
P: The academic theory is, roughly, that a company should start to pay a dividend when they can't reinvest that amount in themselves. I don’t think that's really going on for you right now, but would like to find out what else could be going on for you. The news release said you may have up to $100M available for deployment over the next twelve months -- that sounds like a big number and I would be keen to discuss that in relation to the dividend.
B: Our target for deployment is $50M. Frankly, the $100M is at the upper end of the range -- it assumes we get land sold and fully use the revolver, a number of things like that. What I do to get to that range is take cash, add expected revenue from crop that remains to be sold this year, add proceeds of land sales from three packages that we are looking to sell, and then add the revolver to that. Cash was $16M at Sept 30, land sales should be around $19M, revenue from this year’s crop of around $25M, and the revolver is $25M, which gets me to $85M. The question mark is timing of 2017 crop revenue – depending on timing, some of that can add to our deployable resources.
B: Our target is $50M. We think that is achievable. It's been done once before by us and it's realistic. We might exceed it, we might come up short of it, but that's our objective for this fiscal year, which runs until September 30th. There's a little bit of retraining the market's brain and, frankly, our own brains around the time frame for that target because of the new fiscal year end. There was always an attitude that deployment had to be done by March-April. That's still the focus of our deployment season, between now and May, but we have always been surprised by what we have been able to do during the growing season. Summer is, obviously, a quieter period for deployment, but look at what we reported in the last 6-month period: $7.9M. That will continue to grow over the fiscal year and we are feeling pretty good about our ability to get there.
B: There will always be anxiety from the market surrounding our quarterly operational update in January, which is where I see a lot of expectations pointed right now. My sense is that people are going to be looking for an impressive number there. December's not over and we're not sure how the numbers will stack up -- it may or may not seem impressive to people. In a sense, this quarter is what I call our 'seeding season'. We don’t often harvest the work we're doing now until January, February, March and sometimes into April or May. I expect that I will be saying that a lot more often in January because some people expect that "this is the first half of the deployment season and they’re trying to do $50M, so we should see $25M done already!" I think it would be a stretch to see us at $25M by the January update.
P: That seems to remind me of how important the relationships with farmers are to the business model.
B: Yes, we build relationships and it takes time. We have a number of new sales people. They're good, they're doing a lot of work, but they need to build their relationships and plant a lot of seeds. We track all of their contacts, all of their meetings, and we can see how that stuff gradually feeds into the pipeline, but some of that goes cold. They will say that they haven't been able to get one prospect to call them back for 3 or 4 weeks and so we figure it's gone cold. Then -- boom -- 6 weeks later the guy will phone and say "we met three months ago and that was interesting, but I've been looking into some other avenues, and now I want to do something." Stuff comes out of the blue that we had thought had gone cold and suddenly it's a done-deal.
P: Wow, that sounds difficult.
B: That might be the biggest challenge to this business in a public market environment. Public markets have these quarterly expectations and this is very much an annual business. From your own involvements in things, Peter, you know that agriculture is a very annual business. It's even difficult to make comparisons between this quarter and the same one last year because lumpy things happen. Especially in these early days. If we were Farm Credit…
P: (laughs)
B: If we were Farm Credit, then we would have a lot of history and a multi-billion dollar book and there would be patterns on a quarterly basis. But our data is still lumpy because we're still early in the development of the company and we’re pioneering streaming in ag – nobody has done this before. One significant deal can move the dial.
P: Well, that raises a question for me: are farmers still getting familiar with what you are doing? You mentioned deals coming your way when you may not expect and I suspect that is because people are still figuring out what to think about you.
B: From your observations of markets and the ag-sector, Peter, you have some sense of how well Bay Street understands farming at the farm-gate level. It’s very foreign to them and that means we have to translate a lot of the farming business for them. Farming is very fluid, it depends on many uncertain and uncontrollable outcomes, like the weather. It's a lot different than being a financial institution. A bank and a grain company are two wildly different things. We're so much closer to a grain company than we are to a bank, in spite of what some people might say.
P: And are you close enough to a grain farmer that the farmers really get it, in general? Or is there still a lot of education going on?
B: There is still a lot of education going on. There is no grain company that I have ever heard of that's been willing to pay farmers up to half of the proceeds for their crop in advance, let alone six years in advance!
B: We are a wildly different beast to everybody. The grain companies don't see us as a grain company, but more like a farmer. The farmers don’t see us as a farmer, but more of a grain company and sort of a financial institution combined. The financial institutions recognize that we are like them because our capital can be used as a source of financing, but we are also a lot more like a farmer than anything else they have seen. We're kind of a hybrid of everything. To some degree, we are like an Uber-grain company. We don't own much stuff -- literally, the only thing we own are a bunch of PCs. Even my desk is part of our lease and we don't own it either!
P: I saw a picture of your new door on your twitter account there, Brad.
B: We don't even own that! That's part of the lease.
B: We own nothing and, yet, we are like a grain company -- just without the facilities. To the grain companies, we are a lot like a farmer, but we don't have any of the farming stuff. We're an interesting hybrid of all those things. I think that makes us nimble and capital-light, which focuses our capital on where it can generate the highest returns -- streams with farmers. Ultimately, over time, that is going to turn out to be fantastic. In fact, it already has!
B: I got a very nice email from a shareholder this weekend who has been a shareholder since the beginning. He sold some of his position back above $3 and he has still got the rest of it. We're up 30% or so in the last month. And now he's getting a dividend -- he's just pleased as punch. It's always nice to get positive emails from shareholders, those are always a nice source of encouragement.
P: I'm right there with him. It's been a great ride.
B: It's been a lot of fun. It hasn't been without it's bumps -- a year ago was a pretty big bump. I think the beauty of what happened there is that we will look back -- those of us who are wired to have that perspective already do -- and say that those three contracts breaking last year will be a very good thing for Input to have happened at that stage, rather than later. It will prove to people that our security package is effective. It protects our capital. How many metal streams break, and then you are just left with a tax-deduction? In the big picture and the long run, Input’s canola streams will be seen to be less risky and with higher returns than a metal stream.
B: The one thing we won't have is 'deposit optionality' in the same way that the guys at Franco like to talk about the Goldstrike property, but those don’t come along everyday. I'd far rather take a farm client who is already in production and will continue to be in production, and not have those huge risks around a mine going bad or not getting built in the first place! I like metal streamers -- I have shares in a bunch of them -- but, fundamentally, I like our business better.
P: The quick time to repayment is a big deal.
B: Build out a model with 20% IRR with one year to cash flow and put that against an 8% IRR with three or four years from cash flow. Even though I have to redeploy the capital every six years, the last time I did this analysis it took until year 25 before a metal stream had a higher return than ours and it was only by a hair. Until then, we had way better returns. To me, that's a good environment.
P: And you just said it, but this ability to reinvest is the big issue now.
B: Yes, that's right. We'll take our cash flow, reinvest it, and pay a little bit of it out to shareholders. I saw a few analysts trying to do the math and calculating our cash flow payout ratio at sub-20% and that fits my calculations. We can deliver on our $50M deployment plan without that dividend having any impact on that.
B: Some of the early questions I got from people were along the lines that: "If you're going to give this money back to shareholders then it won't be available for deployment and that impacts your ability to compound your growth". That would be true if the dividend was eating into the capital that we had available for deployment, but it isn’t. Over the next two years, the dividend will actually be funded by stock options being exercised. There are a number coming up to expire in the next 18 months and they are in the money, they're going to get exercised and that will fully fund the dividend for the next several years.
P: Wow! Well, that wasn’t in the news release. To repeat what I’m hearing here: The dividend can be paid from the gains off the contracts, not eating into the original capital base.
B: Yes, it's all coming out of new cash flow and not the original capital base at all.
B: There were a number of reasons why we did the dividend now. We built out a business plan that shows we can grow according to our plan and pay this dividend at the same time -- one doesn’t conflict with the other. It's also important to consider our current investor base and the new investors that we can now start to approach. Over the last four years, we’ve done over 800 investor meetings.
P: (laughs)
B: Let's think about that for a second. 800 seems like a big number, and it is, but even if it was half that you’re going to cover the Canadian small-cap, resource space several times over. By the time you're done the first 50 meetings, you're starting to meet with the same people again. There are a lot of places where we have been many times and they've gotten to know us pretty well. We still go and see them and we’re happy to have some of them as shareholders, but having a dividend now opens us up to a whole new universe of investors who need some kind of yield to fit their investment mandate. There is a whole new group of investors that I get to go visit now and tell the Input Capital story to. Some are investors who we met in the past and asked us "do you have a yield?" When we said no, they said "come back and see us when you do." Well, now we can go back and continue that conversation.
B: There's one slide in here that shows the "Other Institutional" ownership. I'm trying to find a better way to triangulate that number, but I think that number is too high. It was probably more accurate a year ago, but it's really hard to track who your shareholders are. Given the conversations I'm having, I wouldn’t be surprised if the "Other Institutional" was more like 10-15% and the difference is retail, but not just any retail. Our retail base is generally high net worth and long-term.
B: We've got an individual shareholder who owns 4M shares. We've got another who I know owns 2M shares. These aren't insiders, but some of them have larger positions than I do as a co-founder!
B: There are several broker teams in various firms that I know of who have 3M, 4M, or even 5M of shares owned by their group of clients. I think of them as almost institutional money because they have discretionary managed accounts and the advisors are making decisions for the shareholders.
B: We had a mention on BNN today. Steve Takacsy from Lester Asset Management named us as one of his top picks. That's when the volume spiked today and the price went up a bit.
B: He said that they own 3% of Input now. I think he said they will probably go higher still. We've had a good, long-term relationship with them. They're partially institutional, because they run a Canadian small-cap fund, but they also have a large number of discretionary managed accounts where they try to replicate their fund universe within those accounts. Those are separate assets under management, which would be considered retail.
B: So, I imagine that our retail number may be higher than we think and our institutional number has likely fallen since last year. The TSXV gives us a tool that is supposed to help identify some institutional shareholders and there are probably 45 lines of positions that have existed at some point, but only 3 that have any current holdings today. In contrast, I know that there are some institutional investors who do not have any public reporting requirements, but do own our stock. We know of a pension fund that owns over 5M shares of Input Capital and they will never make it into these tables. I only know that because they tell us.
B: It's an interesting part of public company life. There is a little bit of fog around who exactly your shareholders are and I am starting to understand that those numbers in corporate decks are effectively estimates. Ours is an estimate, but I think it may be an over-estimate on the institutional side. It's hard to measure.
P: Well, the family offices and the institutions you mentioned make for a very strong shareholder base, I think.
B: It really is. When we printed stuff for the AGM, there were 2,200 copies for the last meeting. That means that there are 2,200 shareholders and the institutions are each only one of those. So, there are a lot of retail people that are invested in us.
B: I remember someone making a comment on CEO.CA -- for all I know it could have been you! -- they were surprised that everywhere they turned they seemed to run into people who owned Input Capital.
P: Yes, that was me! They're everywhere out here on the West Coast, at least.
B: When you and I met, I was speaking at the 2012 Agora Conference at the Hotel Vancouver and we picked up a good number of founding shareholders out of that. I am amazed how many of them are still with us! In fact, the very nice email I mentioned earlier was from someone that I met at that conference. It's remarkable how many have stuck with us from those early days.
P: It's great to see that you still have those infographics from Visual Capitalist up on your website from all those years ago, too!
B: We need to update a couple of those because there have been a few tweaks along the way, but we're busy running the business and sometimes you forget about old content on your website.
P: The websites are always a challenge. Talking about founding shareholders here, I continue to be impressed that you are not issuing more equity.
B: Well, we don’t think we have any need to and we'd rather not. While Input will get some money into treasury from these options that will get exercised, there's no real need to raise other capital.
B: One person actually told us that he thought we should deploy half as much and use the rest to buy back shares.
P: Hold on! (Laughs)
B: That would move the dial. I would have to build out a model to see but, in principle, it’s an interesting idea.
P: What a weird thing that would be for such a young company. Some would take that as a strong statement of confidence: you're so far ahead that you're not concerned about anyone else trying to crowd-in on the space and do similar lending.
B: I want to get through another full deployment season before even contemplating that kind of thinking. This year is an interesting year for us from a business perspective because we don’t know if we will deploy $25M, $50M, $80M, or what the demand will be like. With our re-tooled sales force, a really focused Director of Sales, some improvement to the product and the way we present it, and these broken contracts in our past, I want to see what we can do. That will give us a much better sense of what we can do going forward.
P: Great to hear. Going back to Chris Mayer's book "Hundred-Baggers" the big ideas there are all about quick repayments and ability to reinvest. It's good to hear you're figuring those issues out, but I can’t imagine trying to plan with such a huge variance in the potential deployment.
B: $50M feels like a good pace for deployment. It feels like a good pace for the infrastructure that we have built. If we were only deploying $25M then we may have a little redundancy in the office and probably wouldn't need as many sales people. The machinery that we've built is really for a $50M annual deployment machine. There's good scalability that comes now as we can triple or quadruple the business from here and maybe only add a clerical position or two. There's great leverage off the installed base of people that we have now.
P: Another big question that came up for me was the growth in the sub-million dollar contracts.
B: Almost every deal is sub one million dollars upfront now. There will still be bigger ones but if I can build a really solid, wide base of contracts that have great security and low risk of non-delivery then that will make us enormously resilient going forward. If one of those contracts breaks, then it's likely to be completely immaterial to the business as a whole.
P: I just had to wonder, myself, what would it look like to deploy $100M in all sub-million contracts?
B: Well, you'd have a pretty bulletproof portfolio. And you'd have a whole lot of farmers.
B: I think there’s something interesting there, too. It may be that "capital deployed" is not the best measure of success for us. It may be that a better measure is growth in reserve tonnes: how many tonnes are we getting rights to? Suppose that we only deploy $25M in the coming year but we add 250 clients. Is that a success or a failure? I think that's an enormous success.
P: Yes, I do too.
B: Adding 250 new clients would be huge as a signal of market penetration and farmer acceptance. There really is more than one way to track our performance -- more than just "how many dollars did you push out the door today".
P: That's good to hear for the analysts who will be trying to figure out if you are doing well or not! My sense was that if a farmer takes $100,000 this year, then they may come back for another $100,000 next year or more a few years down the line.
B: That's what I call our "land and expand" strategy. We just want to have our foot in the door. The farmer has their toe in the water with us and we can grow the relationship later. We provide such a different type of farm financing that it is important for the farmers to just try it!
P: I will admit that when I saw that in the deck and started thinking about it, I thought that you may be hitting a new phase of growth.
B: That’s why I'm looking forward to this year.
P: It's different now -- there's more structure. You've been doing this for a few years and things are getting more clear.
B: It's been a process of continuous refinement and that will continue. We will have some other variations on a stream that may allow us to talk about the whole thing differently with the farmer. We're seeing potential demand for streams that have less capital up front and more on a deferred basis because it is more of a canola pricing tool for farmers.
B: There are lots of interesting applications for what we do, along a spectrum from "high upfront payment, low crop payment" to "low upfront payment, high crop payment". We do this regularly now when farmers are concerned that they are giving us all the upside if the price of canola goes to the moon: the streaming contract specifies that over a certain price, say $550/tonne canola, we split proceeds with the farmer 50-50. It helps show that we are both working together. The farmers recognize that we have to get paid for putting up the money and taking the risks we do, but when we offer to share some of the upside in prices the farmers are more inclined to work with us.
P: As an outsider, I always thought it would be really hard to calibrate the parameters of those contracts.
B: There are very few that are identical to the last ones. We try to address concerns that each farmer might have, as our counterparty. If they are concerned that they are leaving too much on the table, then we are willing to figure out a way to change the terms in a mutually beneficial way. After our returns exceed a certain point, we are generally happy to split gains above that with the farmers.
P: Right. You want to be doing these win-win deals.
B: If we make too much money then farmers may perceive that it came at their expense and we won't have a long-term business. If we make good money while farmers make good money, then we will have a phenomenal business and a lot of happy customers.
P: That was the spirit of it from day one. It’s great to see you coming back to that in new ways. And with the small contracts, I suspect you could offer up a menu of options that would be very interesting.
B: Our sales team was telling us recently that they figure they can do at least five $100,000 deals in the same period it takes to do one $500,000 deal. They're quicker, they're easier, the security is more straightforward. Everything is more straightforward. There's a lot less finagling around with the farmer to get the information we need for due diligence purposes. We have to become a lot more invasive the bigger the deal gets.
P: And how many farmers are there out there who would take a $100,000?!
B: Most of them! The addressable market gets a lot bigger when your average deal size is $100,000 versus $2M.
P: Wow, that is very exciting! Great to hear about how the business is growing over the years. I was chatting about Input on CEO.CA and someone sent me some questions to ask you. Let’s go through those now. The first one was whether you are still moving towards commodities?
B: We're not. I'll put it this way: we're not looking to formally stream other commodities. We've concluded, after studying soybeans for a while, that we were good at canola and should stick to that. The price volatility in canola is less than some other crops, particularly wheat, where grade variability makes for large price variability, which makes it harder to predict outcomes. We're not going to expand to other commodities, at least not anytime soon.
B: That said, we've long said that we are willing to accept other commodities in lieu of canola, as long as it has the same dollar value. Last year, I think we recorded revenue from 8 different crops, which includes wheat, durum, lentils, flax, oats, and a few others. Canola is still 90+% of that, but we are happy to accept those other crops to settle up accounts. In the end, canola is our base currency in the same way that some widget manufacturer might operate in Canadian dollars -- we convert other crops into canola just like they would convert other currencies into Canadian dollars.
B: There are some things that we are doing that may lend themselves to other commodities down the road, but a big part of our value proposition is that we can get a better price for canola than the farmer can. Here's why that's important to the farmer: we're streaming 10 bushels/acre of his production, but he's producing 30 or 40 bushels an acre. The smart ones are starting to say "if you're getting $40/tonne more than I am, then how about you sell my non-streamed tonnes and I will split the upside with you?" I think that will be a growing source of activity for us and we're trying to figure out how to take best advantage of that.
B: If Input has a 50,000 tonne canola book that we are selling this year and all our farmers say "you can sell all of mine too," then, all of a sudden, we may have a 200,000 tonne book! That would give us even better negotiating power with the canola buyers and trucking providers, which should create an even greater difference between the price the farmer would get and what Input can get.
P: Well, that would certainly make you more like a recognizable grain business.
B: Right. We can become a canola consolidator, but to the combined benefit of the farmers and our shareholders. And, sometimes, the farmers and shareholders are even the same people!
B: Were you ever familiar with the farmer-owned terminals, like Weyburn Inland Terminal?
P: Nope, please tell me about them!
B: Well, Weyburn Inland Terminal was the first one of these farmer-owned terminals built back in the '70s. A few farmers banded together and said "look, we need to take more control of our destiny. Let's build our own inland terminal." So, they built a concrete terminal near Weyburn, Sask. It took them two years to raise the capital, two years to build it, then they were up and running. Some of those guys who were in at the beginning made a lot of money over the years. First of all, they delivered all of their crop to the Weyburn Inland Terminal because they were effectively delivering to themselves and they had an alignment of interest between who they were selling to and themselves. They knew that what they might be giving up at the elevator, they were getting back in dividends through their share ownership.
B: That worked really well for 25 years. Then, after 25 years, the average shareholder was getting to be near retirement and thinking "how do I sell out of this thing?" It was inevitable that it would be sold -- Parrish & Heimbecker came along and bought it -- and some of the early guys made out really well. There was a bit of a gray market in shares along the way, but very few shares ever transacted. It was a private company. It paid out a good dividend stream, especially if you were an early investor. I'm sure that, by the end, the dividends yields on the original investment were quite fantastic.
B: On the success of Weyburn Inland Terminal, many other farmer-owned terminals sprang up over 25 years. There may be have been a dozen around the prairies at the peak but, now, I think there is only one left as they've all been acquired up by the big grain companies. But farmers can't own shares in Richardson because they're a private company. They can own shares in Bunge or ADM, but you're not getting anything close to a pure play because those are such massive global companies and there are a lot of other influences on those stocks. Farmers have sold out their ownership stake in the grain gathering and collection system, and there are very few ways for farmers to build in a hedge to the grain marketing side of their business.
B: When people tell me that they don’t like companies making money off them, I tell them that they need to become shareholders. If you don’t like bank fees, buy bank stocks. Or if you don’t like high oil prices, buy oil stocks. My family likes Boston Pizza, so we own some units in Boston Pizza Royalty for the dividend stream. It’s like making an RRSP contribution every time we go for pizza.
B: What I see in Input Capital is an interesting parallel to farmer-owned grain terminal companies, except we have more than a single stand-alone terminal. We're not in one location, we're everywhere. We now pay a dividend, so you can collect dividends in the same way as you did with your Weyburn Inland Terminal investment, but we have liquidity because we’re publicly traded! You can buy and sell Input shares anytime you want. I actually think there's a compelling argument here for farmers.
B: When we approach farmers, we typically focus on what their best use of proceeds is. First-best is generally to buy fertilizer when it's on sale off-cycle, second-best may be holding their crop longer to pick up margin in prices. We also focus on helping farmers who use trade credit to reduce their borrowing there. That's been at the core of our pitch from day one.
B: If you look at that slide, page 12 from the Acumen conference that shows where our cash flow per share ought to be based on $50M of deployment and canola selling at $475/tonne. If the farmer buys into that idea, then he might conclude that owning a few Input Capital shares is a good use of his capital too.
P: Just buying the shares -- wow.
B: You could create this virtuous circle where you find farmers who do $100,000 deals and they say "well, I'm gonna use some to go buy Input Capital shares!" You end up with a bunch of aligned shareholders and, here is the interesting thing, streaming their canola could turn out to be better than selling their canola on their own. Let me walk you through it, you'll enjoy this argument.
P: Yes, please!
B: If you're a farmer, how much is $1 of cash flow worth to you? It's just $1. There’s no market multiple to the valuation of your farming business and the total value your farm is just the breakup value -- assets minus liabilities. When I was buying farms for Assiniboia Farmland from 2005 to 2014, we paid farmers the value of the assets – nothing more. Farming is not like some other business where you might get a multiple on your cash flow. For a farmer, the only thing that makes one farm worth more than another, in the end, is the productivity of the farm and what the farmer does with their enhanced earnings compared with their neighbour.
B: If farmer A gets 50 bushel an acre canola yields and farmer B gets 25 bushel an acre canola yields, then farmer A should end up owning a much bigger farm after the same career, assuming farmer A reinvests his profits in the farm. The dirt is the same as the neighbour’s dirt, so the land will be worth the same per acre. There's nothing fundamental about the farm that will have any additional value -- the value is in the skill of Farmer A doing the right thing at the right time in the right place. A farmers’ position at the end of his career depends on how he farmed and what he did with his profits. Did he reinvest in the farm and get the benefits of compounding there, or did he invest it outside of the farm and build up a nice portfolio of other assets? That will be the difference in the farmers' respective net worths at the end of the day.
B: When I look at Input Capital, I ask "what is a dollar of canola cash flow worth at Input Capital?" Well, if I take a dollar of canola revenue into Input Capital then we have to cover expenses but, when I boil it down, there may be fifty cents of free cash flow out of that dollar of revenue. Now, let’s say Input gets a market multiple on that of 6x cash flow, which is where we are trading now. As you can see from the charts, that is well below where the metal streamers trade. At six-times cash flow, that fifty cents is worth three bucks! As a result, canola that is worth a dollar to a farmer is worth three dollars in the public market.
B: We've run some analysis based on ranges of multiples and my sense is that when Input is deeply undervalued a dollar of canola revenue is worth two to three dollars at Input Capital. When we're firing on all cylinders and the market loves us, it could be double that.
B: Now think of that in relation to what we talked about before -- farmers becoming streaming clients and shareholders in Input Capital. A farmer who takes a stream and invests in Input Capital face a great opportunity for capital expansion over time because he is effectively securitizing some of his canola income into a vehicle that will change it from high-tax farm income, at the margin, to lower-tax capital gains plus dividends. Even without significant multiple expansion, shareholders can make a nice capital gain on their investment and collect dividends along the way. If you’re a farmer, when you translate that back into the number of tonnes you committed to the canola stream, it's like selling that canola for the equivalent of between $1,000 and $1,500 per tonne!
P: Forget the share buyback -- you’ve found a whole new source of investors there. You were right – I certainly like that line of thinking.
B: Imagine a scenario where farmers start to look at Input like that: a canola cash flow securitization vehicle. I think this is a compelling idea for successful farmers. It’s like taking your farm public, but without the headaches. Farmers may or may not need Input’s capital, but access to a public market multiple on their production is unlike any other opportunity I’ve seen in agriculture.
B: A ten bushel per acre stream is probably “costing” the farmer the equivalent of two to three bushels an acre net. Farmers who take a stream with Input may effectively give up two to three bushels of production per acre on land that yields forty-five bushels per acre, on average. How many farmers would be willing to give up five to six percent of revenue in exchange for the opportunity to make two to five-times on that money over the next several years in a more tax efficient way?
P: And do it through an investment that is related to the local agricultural sector.
B: Suddenly, what do we get from this line of thinking? A bunch of clients who are also shareholders. Their interests are completely aligned with Input. What are the odds of them trying to cheat us in any way? Very, very low.
B: I can imagine a scenario over several years where insiders plus farmers could own a significant portion of Input’s shares. Bay Street can come along and play, if they want, but farmers will be in the driver’s seat. And I think farmers would love that.
P: Well, that sounds like an important new type of agri-business for the 21st century -- taking power away from financial markets and global companies to give it back to local farmers.
B: And think back to the timing of the Weyburn Inland Terminal -- two years to raise the capital, two years to build it. We're four years into Input. Bay Street put up all the money. It's built, it's profitable, and it's dividend-paying and ready for your participation.
B: What the farmers at Weyburn Inland Terminal built, in a sense, was a different version of a streamer. It involved a lot of physical capital expenditures and it was restricted to one location, but it helped farmers diversify and benefit from more aspects of the farming value chain. Now, Input doesn’t have the same cap-ex and is not restricted to one location. We’ve shown that our collections procedures work for recovering capital from broken contracts. I think the concept of Input Capital has been proven and now it’s a matter of signing up more and more farmers to do business with us.
P: Well, it’s exciting to hear. I’ve been following you for years but I hadn’t heard of any of this before! It seems to me like you have more potential for expansion than at any time in the past.
B: We’ll see. I have been trying to find new ways to explain what Input Capital is, really, and why should farmers pay attention to us? There have been a couple farmers who have understood what we’re trying to achieve here and I have seen some of them on the shareholder list, but I think all of them ought to be.
B: If a farmer is coming to Input because they are capital-constrained, then he’s not likely to take his whole upfront payment and put it into Input Capital shares because he needs the money for farming. But for those farmers who don't need all of the money from the streaming contract for farming -- some of them actually have too much income and resent their tax bill -- this is an incredible vehicle.
P: And I suspect that, to some degree, those elite farmers got to that level by making careful choices. Coming to them and talking about a $500,000 stream may be a difficult conversation, whereas talking about $100,000 is much simpler for them.
B: It almost comes down to "here's our story -- if you find it compelling, let’s work together to build a company that makes more money for farmers than just farming by itself. Just dedicate a bit of canola to Input Capital, and we’ll build something amazing together.”
P: The junior resource markets are all about using your shares to go out and make acquisitions of real assets and that seems to be exactly what you're talking about here, but you're also flipping it on its head by giving the farmers a way to do it, too!
B: That's right, we are a tool for the ag community to take back ownership and control over their canola marketing process. It's a message that builds slowly over a lot of individual conversations.
P: Well, my pleasure to help you tell that story here. Inspiring stuff, Brad. Thank you.
B: Any other questions that the person from CEO.CA asked?
P: Yes, there are a couple. We talked about it, but one was "Speaking of soybeans, what are the key characteristics that make that particular commodity suitable for the business model?"
B: The reason we talked about soybeans originally was that they are highly correlated to canola. Soybean oil and canola are highly correlated in price. It's kind of the same marketplace, but it's a different geography. There's so much scalability with canola in western Canada that we plan to stick to that for the foreseeable future.
P: And another question was about small versus large contracts, whether you are tilting towards smaller ones. We've talked about that before, but could address again here.
B: How I'd like to put it is that we're not tilting towards smaller ones, rather, we've become very specific in our underwriting parameters by defining the size of the deal in terms of production and controlling for a normal canola crop rotation. We are looking to stream up to ten bushels an acre of production. What that translates to for a farmer is typically a maximum upfront payment of $100 per acre farmed (all crops). In the past, we were willing to contribute up to $200 or $300 per acre farmed.
B: It's not that we are saying "we only want to do $100,000 deals", we’re saying that we want to get the deal size right for your farm. If your farm is 50,000 acres, then we can still do a five-million-dollar deal -- there just aren't that many 50,000 acre farms. There are a whole lot of farms in that 3,000-6,000 acre range, which means there are a lot of deals we could do between $300,000-600,000.
B: We're encouraging farmers to not over-commit. Streaming contracts are new, so we just want farmers to try it. If that means we only do a $100,000 deal with you now, then that's OK -- let's do that. If we decide we like each other, maybe we’ll take the relationship to another level later.
P: I suspect that the ability to layer on streams is also quite nice -- starting with $100 per acre, then maybe adding another $50 acre in a couple years. Being able to increase the size of the stream as both parties become more familiar with each other seems like a great way to move forward.
B: There should be a limit to the size we become on your farm. Our capital is more expensive than some forms of capital, but less expensive than others. If you're using the expensive types of capital, then we can help you lower your cost of capital, but we don't want to contribute to raising your cost of capital. We really work with farmers to find the right size of streaming contract for them.
P: The last question from our friend on CEO.CA was about DRIPs. The man is Swedish and he said there is limited brokerage coverage there.
B: We don't have a formal DRIP program but are happy to watch investors take their dividends and buy more shares.
P: "See you on the bid" as they say.
B: A lot of the brokers will automatically reinvest the proceeds, even without a DRIP.
P: And, to conclude, I would put my question to you one more time: should the dividend be seen as some sort of a signal that you're reaching a saturation point in your ability to deploy capital?
B: Well, it's a signal alright. It's a signal that we think we can grow and fund the dividend at the same time. We're sufficiently resourced to that. What Doug Emsley, the CEO, has said repeatedly for the last four years was that there will come a time when we can self-fund the growth of the business and, at that point, it will probably make sense to pay a dividend. The signal is loud and clear: we think we've reached that point.
P: Great, I'm glad I reached out to you after that milestone announcement. Always nice to see you on twitter, too. Thanks for all the retweets there!
B: You’re welcome. I appreciate you following us, too. Some people's interest has fallen away after those contracts broke last year -- we lost 40% of our market cap overnight a year ago. Some people took that hard, but others stuck through it and picked up a lot of shares at low prices and they're winning today.
P: For what it's worth, I've found Chris Mayer's book very helpful there. It highlights that some of these hundred baggers went down by half more than once on their rise to glory! Long and strong. Thanks, Brad.
B: Great, thanks Peter. Goodbye.
