What is happening to farmland in the US?
Overview
Despite a drought in Western Canada and bumps in the economic recovery, robust commodity prices combined with low interest rates continued to support strong demand for farmland and elevated land prices. Across the country, farmland values increased by an average of 8.3% in 2021.
During last year, the largest increases were in Ontario (22.2%) and British Columbia (18.1%).
The remaining provinces also face more than 5% increase except Alberta.
Over the last ten years, Canada faced two economy recessions in 2015(-16.67%) and 2020(-5.88%).
However, even though the recessions somehow affected the farmland market as well, the farmland market still remained positive returns in 2015(10.1%) and 2020(5.4%).
Instead of economy, farmland market is more related to interest rates. The declining Interest rates and borrowing costs remained historically low also pushed up the
Figure 2. Average borrowing costs Farmers’ incomes
demand of purchasing investment products, including farmlands (Figure 2 on left). This supports the demand for farmland and weakens the supply of available land for sale in the market, pushing land prices upward. By
In contrast, the rising borrowing cost will decrease demand and therefore the market price.
Farmers’ incomes are an essential factor, too. This is because, besides the appreciation of farmland, investors also charge farmers for extra profits in different ways in order to hedge risks like vacancy and weather. Table 2. The below shows that farmers in Canada have generated stable income in recent years. Farmers have benefited greatly from the rise in soft commodity prices over the years as people pay more for food. Farmers also receive benefits from government programs like cheaper gasoline at the pumps, affordable farm insurance, and low financing rates on farm equipment for younger farmers. Those benefits that farmer received
and those revenues they generated year by year guarantee investors a healthy cash flow from holding the farmland.
Table 2. Average Income per Farm Family 1
Farmland VS Stocks VS Commercial Real Estate What is happening to farmland in the US?
Annual return over the last 20 years:
Farmland: 12.1%
S&P 500: 9.2%
Commercial real estate :8.3%
Volatility over the last 20 years:
Farmland has only seen 6.7%
S&P 500:17.2%
Commercial real estate: 8.2%
Risk
Farmland investment also faced uncertainties that traditional investments face or do not face: vacancy, weather, liquidity and politics (tax or restrictions for foreign buyers , tariffs, etc.)
Summary What is happening to farmland in the US?
We can therefore conclude that, even though the Covid-19 pandemic had a huge impact on the economy, the farmland still stands in a growth trend. In addition, unlike residential real estate, prices of farmlands are less volatile since there is no accumulated-depreciation asset carrying large fixed costs when it comes to annual assessments. Hedging is the main reason why some investors are looking at agriculture. But unlike gold, which is also a hedged tool against risks, farms have the added benefit to produce goods and generate income.
We suggest three provinces that are worth farmland investment most: BC and ON, where allow foreign ownership is allowed. (see part 2. 1.1 for more details) SK, the province offers cheap prices of farmland while producing the most valuable crops.
1.2Crops and Potash Fertilizer
1.2.1 Crops
What is happening to farmland in the US?
Since the Covid pandemic, the rising commodity prices (The figure below) in the second half of 2020 lifted farm cash receipts and provided an optimistic outlook for farm operations looking towards 2021. Receipts for grain, oilseed and pulse producers in the last six months
of 2020 were 28% higher than the data in the same period in 2019. This trend continued in the first six months of 2021, with receipts being 22.6% higher than a year ago.
Average monthly prices for Crops of Saskatchewan and Ontario
What is happening to farmland in the US?
Besides crude prices, agriculture commodity prices are continuously pushed up by the Russian-Ukraine war as well. Ukraine is a significant producer and exporter of agricultural products, and is already among the top three grain exporters and a world leader in areas such as soybeans and sunflower oil. The main export markets of crops, in 2021, include:
the EU at $7.6 billion,
China at $4.2 billion,
India at $2 billion,
Egypt at $1.5 billion, ⚫ Turkey at $1.5 billion.
Ukraine crops
These top five markets accounted for more than 60% of Ukraine’s agricultural exports. Ukraine has six primary products with over a billion dollars in export sales in 2021:
corn ($5.8 billion)
sunflower seed ($5.7 billion),
wheat ($5.1 billion)
rapeseed ($1.7 billion)
barley ($1.3 billion)
sunflower meal ($1.2 billion)
Canada, on the other hand, represents the 5th largest agricultural commodities exporter in the world. The 2020 report presented that Canada had the highest year-over-year increase for agriculture commodity exports at 13.8 %.
⚫ The largest portion of Canadian food exports is meat, which accounts for about 13.4 % of total food exports, particularly with an increased share in pork markets. ⚫ For agriculture commodities, Canada remains among the top three wheat exporters in the world for the last 10 years.
⚫ Oilseeds, including rapeseed, sunflower seed and soybean, make up 32.2 % of total Canadian agriculture exports, with cereals at 28% and wheat, Canada’s largest export, accounting for 80.9 % of total cereal exports in 2020.
Since some primary crops of Canada and Ukraine are coincident, we may see Canada’s agriculture benefit from rising commodities prices resulting from the Russia-Ukraine war. The price of wheat, for example, has risen sharply by about 25% since Feb 2022.
1.2.2 Potash Fertilizer
The Russia- Ukraine war also has an impact on the potash fertilizer market. Russia’s trade and industry ministry has recommended that the country’s fertilizer producers temporarily halt exports. Potash fertilizer, unlike other fertilizer like nitrogen fertilizer, highly relies on potash mines to produce. Therefore, the top three countries owning most potash mines- Canada, Russia and Belarus- represent the top 3 potash fertilizer producers in the world. Russia and Belarus together produced nearly 40% global potash fertilizer annually. Thus, Russia’s proposed export restrictions will bring big ramifications for all major fertilizers. The stock price of Canada’s biggest potash fertilizer producing company, Nutrien Ltd, benefitting from the restrictions, increased by 34.9% since Feb 2022. However, the restrictions of potash fertilizer will definitely push up the cost of farming and crops.
2. Investing in Farmland
As an investor looking to invest in Canadian farmlands, he or she can either choose to purchase the farmland directly or purchase shares through other financial institutions.
2.1.1 How Farmland Generates Profits for Investors
There are 2 ways to generate earnings from holding a piece of farmland: capital appreciation and income. Income from a farm will either be from: cash rent, crop share or custom farming.
Cash rent is calculated by dollars per cultivated acre. Cheaper farms will generally sell for around $500 an acre and can expect a cattle farmer to rent it for $20/acre annually. But high quality land with rich clay loam could be sold for $2,500 per acre or more on the market. Depending on the crops that the farmers produced, the rent willing to pay is flexible. For example, experienced cereal farmers can be very productive with good soil and can easily generate over $400/acre of output on top quality farmland. Cereal farmers will therefore generally pay higher rent if they think the land will yield more crops.
Crop share: After the crops are harvested and sold, the landowner gets a share of the total revenue, usually about 20% to 30%. In most cases crop share makes more money for the landlord, combining with more risks. If the farmer has a bad year for whatever reason (locusts, flooding, etc.) then the landlord will share the burden. Cash rent, on the other hand, pushes all these risks onto the farmer since the landlord earns fixed cash flow from the farmers, no matter what happens to the crop’s performance.
Custom farming, if investors have a background in agriculture they may consider doing so. This is when the landowner or investor hires a farmer as a contractor to operate the farm. Depending on the agreement, the contractor could perform only certain tasks like swathing and transportation, or even operate the entire farming process from seeding to harvesting. The input costs like seeds and machinery are paid by the owner. Generally, the contractor acts as an employee. The benefit of custom farming for landowners is therefore received all by the landowner. But the disadvantage of custom farming is it puts the financial and management risks completely on the owners.
What is happening to farmland in the US?
2.1.1 Restrictions on Foreign Buyers
Note: There is restrictions on foreign buyers in different provinces:
British Columbia – No restriction on foreign ownership.
Ontario – No restriction on foreign ownership.
Saskatchewan – Non-residents can own up to 10 acres of farmland. Entities that are partially foreigner-owned but controlled by Saskatchewan residents or their farming corporations can own up to 320 acres.
Manitoba – Non-residents can own up to 40 acres of farmland.
Alberta – Non-residents can own up to 20 acres of farmland.
Quebec – Non-residents must get permission to buy more than 4 hectares (about 10 acres) of farmland.
BC and Ontario are the only two provinces that allow unrestricted foreign investment from non-Canadians. This is the main reason that their farmland prices are the most expensive in the country.
2.2 Direct investment
What is happening to farmland in the US?
An individual investor can buy farmland directly. To do so, the investor will require a realtor, a lender (optional), and a lawyer. The maximum landing amount is up to 75% of the market value of the farmland so at least a 25% down payment is necessary. The easiest way to do financing for a farm is to ask Farm Credit Canada. Farm Credit Canada finances more than half the farms in the country, while the interest rates they provide are not as competitive as a traditional lender’s. Note that the lawyer should be from the same province where to buy the farmland because only lawyers from the same province have access to the bar in their jurisdiction.
2.2.1 Federal Agricultural Loan
The government of Canada also provides financial support for farmers and cooperators who plan to purchase farmland: The Canadian Agricultural Loans Act (CALA) Program is a loan guarantee program designed to increase the availability of loans to farmers and agricultural co-operatives.
Available funding What is happening to farmland in the US?
Under the CALA, the federal government guarantees, to the lender, repayment of 95% of a net loss on an eligible loan issued.
The maximum aggregate loan limit for any one farm operation is $500,000. Loans are limited to a maximum of:
• $500,000 for the purchase of land and the construction or improvement of buildings • $350,000 for all other loan purposes, including consolidation/refinancing
The maximum aggregate loan limit for agricultural co-operatives is $3 million, with the Minister’s approval. For example, if a farmer gets a CALA loan for $300,000 for a tractor, he can still access up to $200,000 for land purchase or building repair, or $50,000 for another implement and $150,000 for land purchase or building repair.
Program delivery What is happening to farmland in the US?
Lenders, such as banks and credit unions, issue and administer loans under the CALA program.
Lenders must take the same care and prudence in issuing CALA loans as would be taken in conducting ordinary business. The CALA Program has been designed to enable lenders to incorporate it into their normal lending practice, while providing the government guarantee on eligible loans to farmers and agricultural co-operatives.
If a purchase has already been made, a lender has 60 days from the purchase date to issue a CALA loan.
2.2.2 Commercial Agricultural Loan
Commercial banks and other financial institutions also provide specific loans to support farmers.
Scotia, as an example of commercial banks, provides two types of special loans to farmers:
1. Scotia Farm Mortgage Loan What is happening to farmland in the US?
• Limits up to $1,000,0001
Annual prepayment privileges to 10% of the original balance.
• Amortization period up to 25 years.
• Terms of 1 to 5, 7 and 10 years available. Payment terms to match seasonal cash flow
• Loan may qualify as a government-guaranteed loan
• Fixed or floating interest rates with options to fix at any time
2. Scotia Farm Legacy Mortgage.
- Designed transfer farm property to your offspring
- Payment terms to match seasonal cash flow
- Annual prepayment privileges to 15% of the original balance
- Down payment minimum of 5% of the value of the farm property
- The seller is allowed to provide a vendor take-back for financing the buyer in the transition
- Rate is determined by the amount of the credit request, security provided, and credit history.
- Interest-only payments may be permitted for up to 5 years on both the mortgage and vendor take-back loan
What is happening to farmland in the US?
Other finance institutions, except Farm Credit Canada, like Agriculture Financial Services Corporation (AFSC) also provide different types of farm loans to meet borrowers’ demand.
- Maximum lending limit of $30 million to an individual or any group of connected individuals or companies
- Long-term competitive interest rates
- No annual fees
- Payment schedule fits cash flow
- Lastly, repay or pay in full at any time without penalty
2.3 Indirect Investment
Here are some ways of indirect investment tools to enter the farmland market in Canada: PE fund, agriculture index ETF, stocks in the farming sector, and loans. In the U.S., there are some extra methods of farmland investment, which we will mention as well: crowdfunding and publicly traded REITS.
2.3.1 Private Equity Fund
Investing in PE funds is the main indirect method of agriculture investment, besides investing in the public market. However, PE funds usually allow accredited investors only, except one example, Veri Path Farmland fund, which didn’t mention accredited investors requirements in their fact sheet. PE funds definitely have high barriers to entry since it requires only accredited investors, minimum investment amount of $10,000 or more and low liquidity (long locking period up to 10 years.) We provide 4 Canadian Farmland PE fund as examples:
1.AG Invest
Introduction
AGinvest Farmland Funds was formed to raise capital to buy, optimize and manage premium Ontario farmland. The company targets farmers primarily in Southwestern Ontario because the region has:
⚫ A long frost-free growing season with ample heat for growing 200 plus staple crops ⚫ Consistent rainfall throughout the growing season (little need for costly irrigation) ⚫ Access to unlimited fresh water supplies through most of the Great Lakes basin ⚫ Deep and rich soils deposited in the region during the last glacial period ⚫ Exceptional logistics and infrastructure that can quickly access ports to the global market
⚫ Highly educated workforce able to plan and manage farm operations efficiently ⚫ Major urban markets in the surrounding areas that require fresh market produce
Investment Strategy
⚫ purchasing and operating farmland properties and selling them when opportunities arise to realize value for shareholders.
⚫ working in partnership with progressive farmers under long-term grower agreements, collecting revenue from crop sales and distributing any surplus to the Company’s shareholders –
⚫ financial leverage: Up to 30 percent of Net Asset Value (or “NAV”) with an ongoing operating target of 25%. Leverage can temporarily climb to as high as 35% in order to accommodate redemptions. Leverage must be reduced back to less than 30% within 12 months of a redemption event.
Management Team
Kent F. Willmore-BEd, BEnvs, CAFA, President
30 years of experience in the agricultural field.
⚫ shareholder of WR Detasseling Ltd. and Willmore Farms Ltd.
Kent developed WR Detasseling Ltd. into Canada’s largest contract seed corn service provider
Anthony Faiella-MBA, CFA, CPA (II), Senior Vice President
⚫ 30 years of experience in the investment industry
⚫ at Merrill Lynch Canada before join AGinvest
2.Area One Farm
Introduction
Area One Farms operates private equity funds in the Canadian farmland sector. They partner with established farm operators to buy off-market farmland. Headquartered in Toronto, and the company currently has 24 farm partners in Ontario, Manitoba, Saskatchewan and Alberta.
The company assists the farmer in buying the land. Investors then become equity owners in the new expanded farm.
Area One Farms has qualified to become a signatory and has signed the United Nations supported Principles for Responsible Investment Initiative (UN-PRI).
*UN-PRI is an international network of investors that follow a set of six principles that protect the environment, benefit society, and promote sound governance through integrity and transparent reporting.
Investment Strategy
Area One Farms partners with Canadian farmers – most of them are family farms – that are looking to expand. Often, they find adjacent property for sale, perhaps owned by retiring farmers. Once found, the company assists the farmer in buying the land. Investors then become equity owners in the new, expanded farm.
The annual source of income for investors comes from farm production, such as corn, oats, barley, soybeans and other crops. The platform helps pay the farm’s expenses, and then distributes earnings to investors.
A key component in growing income is improving land value, so that the land is worth more than the total of the investment money poured into it.
Management Team
Joelle Faulkner-CEO
⚫ Rhodes Scholar and Fulbright Scholar
⚫ worked at Onex, Morgan Stanley, Bain & Co., Stanford University, and Roy-L Capital. Derrick Rolfe-CFO
⚫ oversees all financial management and financial due diligence of new potential partners. ⚫ owner of his personal investment company, Bridgebank Capital Limited ⚫ was the Co-Founder of Borealis Capital, Environmental R&D Capital Corp., Penfund Partners Inc. and Canadian Maple Leaf Financial Corp.
3.Bonnefield
Introduction
Bonnefield is Canada’s leading provider of land-lease financing for farmers and was established to become financial partners with progressive farmers. It offers qualified investors the opportunity to hold Canadian farmland through pooled limited partnerships. Walter Global Asset Management (“Walter GAM”) is in partnership with Bonnefield Financial Inc.
In November 2014 Bonnefield became the first Canadian farmland investment management company to qualify and become a signatory to the United Nations supported Principles for Responsible Investing (UN-PRI), which subsequently awarded Bonnefield an “A” rating for its overarching approach to responsible investment in 2015, and every year since.
Bonnefield launched LP V in November 2019 with initial investments totalling $137m. LP V is an open-ended fund that will be accepting new investments on an ongoing basis. Lease Renewals In 2020 was 100% renewal rate for lease renegotiations.
Investment Strategy
Bonnefield realized that the path to financial success was in restructuring the balance sheet. By selling some of the land, and leasing it back on a long-term basis, the company could unlock equity in the land, and finance business appropriately. The funds do not operate farms, but rather form long-term relationships with Canadian farmers and seek to promote long-term sustainable farming practices through Bonnefield’s Standards of Care. This strategy helps the company make $1billion AUM over the last ten years.
Bonnefield is the investment manager for farmland funds that are structured as limited partnerships, each with a mandate to invest solely in Canadian farmland.
Management Team
Tom Eisenhauer- Founding Partner, CEO
⚫ Also managed the Longitude Fund LP
⚫ was the managing partner of Latitude Partners, managing director of TD Securities, managing director of Lancaster Financial and the founder and head of TD’s technology investment banking operations.
Richard D’Archivio- Managing Partner, CFO, CFA, CPA
⚫ was CFO at an investment fund manager of education savings solutions with $5B AUM. ⚫ was CFO of one independent investment fund managers with over $13 billion AUM. ⚫ 8 years of public accounting experience with Deloitte LLP.
4.Veripath Farmland Funds
Introduction
Veripath Farmland LP is an open-ended fund created for the purpose of investing in a portfolio of Canadian farmland in the provinces of Saskatchewan and Manitoba. Senior managers have over a decade of experience in the Canadian farmland investment space and have transacted on over 110,000 acres of farmland and gone full life cycle on three past farmland funds generating land IRRs ranging from 13% to 21%.
Investment Strategy What is happening to farmland in the US?
Veripath employs a data driven investment approach based on a number of quantitative tools for land analysis. Key portfolio metrics sought are: Low cost per bushel of productivity, Low volatility of yield, High gross rental rates and prudently managed lease durations.
Stage 1 (Qualitative): Site inspection
⚫ Configuration – preference for absence of residential buildings & presence of storage ⚫ Location – proximity to infrastructure
Rent-ability – local rental rates & trends, is a tenant identified
⚫ Aggregation possibilities – are local holdings fragmented
Stage 2 (Quantitative): Investment committee
Productivity cost – price per bushel of productive capacity of land
Weather risk – historical volatility of yield
⚫ Market comparable – create theoretical market price for every land package by soil type from land titles market data
What is happening to farmland in the US?
⚫ Local price trends – operator and investor interest
Local productivity trends – measure regional yield trends
⚫ Diversification – does acquisition add geographic diversification
Management Team
Barclay Laughland – Director, Investment Committee
⚫ over 25 years of experience in the areas of finance. More than half that time has been spent in direct involvement with private equity
⚫ has been a co-founder in alternative funds focused on energy and healthcare. Stephen Johnston – Director, Investment Committee
⚫ was the head of the Société Générale Asset Management Emerging Markets – UK private equity team with approximately C$500 million of assets under management. ⚫ founded a series of alternative funds including: a farmland strategy, an SME PE strategy, an energy strategy and a private credit strategy.
What is happening to farmland in the US?
| Table.3 Key Feature of PE funds above | AGinvest Farmland Funds | Area One Farms | Bonnefield | VERIPATH FARMLAND FUNDS |
| Inception Date | 2012 | 2013 | 2009 | 2007 |
| Target return | 6% compounded annually | No public information provided | No public information provided | Canadian CPI plus 5% |
| Farmland Area | 6400 ACRES | 140,000 ACRES | 119,000 ACRES | ~90,000 ACRES |
| Main location | Ontario | Ontario, Manitoba, Saskatchewan and Alberta | British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick and Nova Scotia. | Saskatchewan(mainly), Manitoba and Alberta |
| Farm Partners | 25 | 28 | 120 | 30 |
| Investor Eligibility | Canadian or permanent resident Accredited Investors, up to 49 | accredited investors | accredited institutional and private investors. | Not mentioned |
| Minimum investment | $150,000 | $100,000 | No public information provided | $5,000 |
| Minimum holding period | * No redemptions for 36 months (“best efforts” to meet redemption requests prior to this at a 25% discount if funds allow) | 10 years | No public information provided | 4 years Annually post hold |
| * After 36 months at a 20% discount * After 48 months at a 15% discount * After 72 months the company intends to find a buyer for 100 percent 2 of the outstanding common shares. * Redemptions are limited to a maximum of 10% of the outstanding shares annually | ||||
| AUM | $92 million | $450 million of committed and invested capital. $560 M, including the most recent launched open-end fund on Feb 2022 | $1,000 million | $200 millio=n |
| Management Fee | Management fee, calculated and payable monthly, of 1/12th of eligible fee. Referral fees, if any, will be paid by the management company from the management fee. | No public information provided | No public information provided | 1.95% |
| Performance Fee | A compound annual return of 6% or more will generate a | No public information provided | No public information provided | 18% |
| success fee of 20% of the gain in excess of the hurdle. | ||||
| Redemption Fee | * No redemptions for 36 months (“best efforts” to meet redemption requests prior to this at a 25% discount if funds allow) * After 36 months at a 20% discount * After 48 months at a 15% discount * After 72 months the company intends to find a buyer for 100 percent of the outstanding common shares. Redemptions are limited to a maximum of 10% of the outstanding shares annually and will be offered on a “best efforts” basis. | No public information provided | No public information provided | 1.0% in year 5 & 6 |
2.3.3 Agriculture related PE/VC fund
PE or VC funds may also tend to invest in agriculture related industries. Emmertech, for example, is a $60m venture capital fund focused on ag-tech and agribusiness innovation, such as farm software, farm robotics and equipment, storage and transportation, etc. This VC fund is managed and operated by Conexus Venture Capital Inc. Unlike Farmland PE funds that generate stable crop income and value appreciation, this kind of fund faces higher uncertainty of cash flow-generate ability in the early stage.
2.3.3 Publicly Traded Farmland REITs What is happening to farmland in the US?
Unfortunately, there are no Canadian REITs focusing on the farmland sector. This is because of the current laws – that only Canadian citizens can own farmland, in many provinces such as SK. If there are Canadian REITs listed on the exchange, foreign investors would be able to purchase the farmland by holding units of the particular REIT.
2.3.4 Public Agriculture Company or ETF
Even though there are no publicly traded agriculture REITs for non-accredited investors in Canada, there are other ways to buy shares of publicly traded companies or ETFs that relate to the farm industry. Nutrien (largest fertilizer producer), for example, has the average return to its shareholders almost 100% over the last 4 years. Since some Canadian agriculture companies are listed in the U.SThe easier way to invest in agriculture is to purchase related ETF like the iShares Global Agriculture Index ETF, which has increased nearly 400% since inception in 2007 as well.
2.3.5 Crowdfunding (in the U.S.) What is happening to farmland in the US?
There are a number of these platforms operating in the U.S. Those platforms like AcreTrader, for example, simplifies the investment process for investors. This platform does the due diligence for investors and typically lists fewer than 1% of the deals that come across its plate. Additionally, it allows investors to get started with as little as ten thousand dollars.
• Highly vetted (~1% acceptance rate)
• Low minimum investment starting as low as $10,000
• investors can select deals freely
• Non-citizens can invest as long as they are US resident
• Accredited investors only
• No secondary market at this time
2.3.6 Other Listed Agriculture Companies/ETF
• Farmland-focused ETF, U.S. based: Farmland Partners Inc (FPI) and Gladstone Land Corp (LAND).
• Agriculture ETFs: COW or MOO
• Fertilizer companies: AGU, POT, MOS
• Equipment: DE, AFN
• Processing companies: ADM, BG, CAG
• Seed producers: MON, DD, SYT, DOW • Meat producers: TSN, PPC, SAFM.
What is happening to farmland in the US? written by Zhiliang You
US lost 11 million acres of farmland to development in past 2 decades | The World from PRX
Farmland Values Hit Record Highs, Pricing Out Farmers – The New York Times (nytimes.com)
https://www.nass.usda.gov/Publications/Todays_Reports/reports/fnlo0222.pdf
