Alternatives: Bought the farm

by Bob Carter02 Jan 2020

According to Chris Martenson, author of The Crash Course, wealth can be classified as either primary (land), secondary (the means by which land resources are harvested) or tertiary (paper wealth like stocks and mutual funds). Throughout history, the wealthiest families have always been the ones with the most primary wealth. They owned the most farmland, forests, minerals, energy and fisheries. Their wealth increased as those resources were shepherded and sustainably converted to money.

Farmland might offer Canadians the best opportunity to start building their own reserves of primary wealth.

Move to the country

Well-known investors have sought out farmland as an asset that is nearly perfectly negatively correlated to public assets traded in the stock market. It has been equated to gold and other commodities that do well in times of turmoil, providing a sound hedge against inflation. Farmland values follow an asymmetric risk curve, which means the land will always have value. The same cannot be said for stocks and some fixed-income instruments like corporate bonds. This delivers an additional measure of safety in uncertain times.

Warren Buffett believes that, like any other business, farmland must be bought as an investment based on the yield it produces. The fact that the land itself might fall in value, as it did throughout the early 1980s, doesn’t negate the fact that farmland produces the food needed by a hungry world.

Michael Bury, the analyst made famous by The Big Short, who called the last big market crash in 2008, is also a big proponent of farmland. He moved into both farmland and gold as he exited the stock and financial markets before the 2008 crash enveloped North America.

Accrue those acres

There are many ways to play the farmland market. You could purchase the land directly and either ‘work’ the fields or rent them out to farmers paying attractive rents. You might also consider publicly traded REITs that employ the same buy-and-rent strategy, but then you would be subjected to public-market idiosyncrasies such as panic selling and the influence of market pundits who do nothing to help long-term investors. Or you could seek similar diversified and professionally managed portfolios of farmland properties within private equities.

Each of these investment vehicles offers the potential for different types of returns. Public REITs might provide more upfront income and capital gains. Private equities often rely on structures that feature return-of-capital provisions, as well as conventional income and capital gains. It’s important to do your homework, as they are all different.

For those interested in buying directly, farmland is frequently promoted online by Realtors and can be financed by banks, private lenders or Farm Credit Canada, though larger down payments of 30% or more are usually required. But there are ownership restrictions. In Saskatchewan, for instance, foreign investors and foreign-owned corporations can only purchase up to 10 acres of farmland. (Before 2002, Canadian citizens who were not residents of Saskatchewan were also limited in the amount of farmland they could purchase.)

These restrictions have effectively held back the rise in farmland prices per acre in the province. Should the restrictions be eased further, the projections for increases in values are impressive – even beyond what they have been to date. Consider the typical 3% to 4% long-term appreciation levels for residential real estate in Canada. According to Farm Credit Canada, Canadian farmland has appreciated 4.92% on average since 1985 and 11.55% since 2009. Saskatchewan farmland has appreciated by 4.19% and 13.69% over the same periods, yet farmland there is still undervalued when compared to similar areas in Canada and the United States.

Evaluating farmland is by no means easy.

Hands-on investors would need to see the land, evaluate the nutrient health of the soil, get a read on the area’s topography and determine its proximity to water, transport, storage and labour. Should you choose to rent the land to farmers, you would need representation to negotiate the best rents and terms to make sure your income is steady and safe. This might all be possible with the right property managers and agents, but it’s a fool’s errand to try on your own without specialized knowledge.

Then there’s the matter of diversification. Does owning one property constitute appropriate diversification? What crops will your land produce? In what markets, domestic or international, will the crops be sold? Do you have the contacts? A packaged investment neatly answers all these questions by representing several farms with varied crops (commodity and highvalue, high-margin) and sales contracts for the resulting production.

There are 7.7 billion souls inhabiting the planet today, and the United Nations projects that number will reach 9.7 billion by 2050. Arable farmland with nutrient-rich soil is increasingly being sold to property developers, putting pressure on the remaining acres to produce the food we need to feed the world’s hungry masses. When supply is constrained and demand expands, the only outcome can be increases in both food prices and the value of the land on which it’s produced. It’s something worth thinking about when evaluating just how truly diversified your real estate holdings are.

Bob Carter is a real estate investor with more than 35 years of sales and business ownership experience. He built a successful financial advisor practice on Bay Street and today serves as a vice-president of sales for a leading Canadian life insurance carrier. To connect with him, visit catchupinvesting.ca.

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