Business & Policy
Farmland becoming fields of gold for investors
By The Toronto Star
Amid concerns of global food shortages, investors outside Canada are sinking more money into farmland. But could there be problems if Canadian farmland were to fall into the hands of the wrong financial managers?
By The Toronto Star
August 09, 2008
The Ontario Federation of Agriculture, which represents farmers in the province, recently asked some focus group participants to sketch their ideas of a farmer. As expected, there were depictions of ma and pa, complete with the straw hat and pitchfork. But surprisingly, there were also some illustrations of a man in overalls with a briefcase, even a suit and tie-type riding a tractor.
The notion of farmer-as-businessman is increasingly the reality in Canada and around the world as agricultural producers try to navigate volatile markets and economic uncertainties.
But the image could become even more entrenched as agriculture experiences a paradigm shift and farms become the subject of corporate takeover.
Around the world, farmland is being snapped up by large investment houses, private equity firms, sovereign wealth funds, even hedge funds known for their relentless search for the quick buck.
Big spikes in crop prices have shown institutional investors it's time to invest not just in commodities, but in the farmland itself, not to mention the agriculture infrastructure that supports it, such as fertilizer distribution centres and grain elevators.
The bet is that the world's need for food is only going to intensify, making the means of producing it increasingly valuable. Yet the rush of capital into agriculture raises questions about national control over our resources, as well as what kind of environmental stewards these new profit-seekers will be.
While still a rather new phenomenon worldwide, institutional investing in agriculture has just arrived in Canada, where a combination of factors has kept corporate interests at bay. But the "fundamentals," as investment-types are wont to say, are changing.
In April, a private equity firm in Calgary made its first foray into the agricultural realm, purchasing 5,000 acres of farmland in northeastern Saskatchewan, with another 5,000 acres set to close. The firm, Agcapita, hopes to have 40,000 acres under its belt by early next year. The fund Agcapita set up, which investors can grab a chunk of for a minimum $10,000, is now worth $20 million. Its partners hope the fund will grow to $500 million within a few years.
"As an investment for non-farmers, this is new," says Stephen Johnston, a partner in Agcapita.
The market is set for land price increases, Johnston says, because "you have a lot of growth on the demand side, not matched with commensurate increase in production.
"When the West became wealthy, we're talking 400 to 500 million people. Now a 2 billion (strong) cohort of consumers is making that transition. And the Earth and land ultimately have a finite productive capacity."
Take a quick look at some of the key numbers and you'll find the reason why institutional investors, who may know nothing about farming, are finding green acres attractive.
One barometer of crop prices can be found on the fluctuating charts at the Minneapolis Grain Exchange. The price for spring wheat shot up sharply in February and March, reaching a record high.
Land prices, too, have spiked. Farm Credit Canada, the primary agriculture-sector lender, reports that from July to December of last year – the latest analysis available – farm land values increased by 7.7 percent across the country, more than double the six months prior.
Values have probably accelerated upward since then, says Ken Rosaasen of the College of Agriculture and Bioresources at the University of Saskatchewan.
This trend was fueled primarily in the West. Ontario, by contrast, where land values are already much higher than on the prairies, saw increases of just 1.2 percent.
If the profitability of using the land goes up, that's reflected in the land price, explains George Brinkman, professor emeritus of agricultural economics at the University of Guelph. For decades, save for a few great years in the mid-70s, farmers in Canada have endured painfully low returns. Some years, like 2005, their aggregate income was even in minus territory, meaning as a whole, farmers lost money.
But that's all old news, Brinkman argues. "Now it's a new ballgame and profitability is changing and grain prices are likely to remain stronger than in the past.
"So," he continues, "its generated interest in other capital investors …they think the price of land is going to continue to go up."
The trend is unfolding more rapidly outside Canada. Major investment firms based in New York and London, among others, are springing up to buy agricultural assets in places like the U.S., Britain, South America and sub-Saharan Africa.
Giant investment manager BlackRock last year rolled out its agriculture fund, with assets of about $500 million. Most of the money was to go to agribusinesses that made fertilizers or biofuels, the rest to commodities and farmland.
In Britain, the Braemar Group is investing in farmland because land values there haven't caught up to those in Ireland or Scandinavia. Another firm is looking to Africa, where values are quite cheap. This is the same thinking behind Agcapita's movements.
Canada, and in particular Saskatchewan, has some of the lowest prices per acre – about $400 – in the world, the company says.
Johnston says that Canada has lagged behind in attracting investment in farmland because of all the regulatory hurdles. At one point, Saskatchewan didn't even allow Canadians from other provinces to invest there.
That rule was repealed in 2003. Now only non-Canadians are effectively barred from ownership. Similar regulations exist across the prairies. The firm thus requires proof of citizenship before accepting clients' cash.
"Combine that with stagnant commodity prices and net migration out of rural communities over the last 15 to 20 years, you can see what's driving low farm prices," Johnston says. "What you've seen in the last year is, all that has reversed."
At least on the prairies, foreign ownership rules could deter sovereign wealth funds – typically connected to national governments, such as those in China or the Gulf Arab states – from coming to huntfor land.
Nations that face the prospect of food shortages are starting to see this as a viable option. Saudi Arabia has said it will invest in farmland and livestock abroad to ensure its food security. Indonesia has expressed its openness on that front. Libya is talking with the Ukraine along these lines. And China's government has a plan to support its domestic companies doing the same in Africa.
If this trend were to extend to Canada, it might begin in Ontario, which has no foreign ownership restrictions.
Whether foreign or Canadian, is a corporate takeover in a farm's – and farmer's – best interest?
Critics question the commitment of these firms and funds to food production despite the profit, to hang tight in both good times and bad.
"If we see the hedge fund operators getting in and getting out," Brinkman says, "what you'll find is investors will try to skim the cream off the returns and make off with them, rather than the committed operator that stays through thick and thin. Maybe it's good for the non-farm investor looking to make a buck, but it's not good for agriculture."
"There's a lot to be said about the value of maintaining the family farm," echoes Neil Currie, general manager of the Ontario Federation of Agriculture. "You're living and working on the land that you own. It creates the rural communities that are, unfortunately, rapidly disappearing.
"We've put out a lot of literature that says farmers are providing a valuable service to environmental stewardship," he adds. "They take care of (the land) for future generations. If it becomes run out of Bay St., who knows?"
Agricapita's Johnston, whose own father is a farmer in Vegreville, Alberta, says funds like his are in it for the long term. "We have a vested interest in maintaining the quality of the land, that the productive capacity is maintained, and to enhance and preserve the land for potential sale."
Of course, private capital could help farmers meet ongoing challenges. Like other funds, Agcapita's goal is to optimize efficiency by consolidating smaller firms into larger units, a trend that's been occurring, slowly, for decades already. Larger firms tend to be more profitable.
Some funds also argue they will improve output through improvements in technology, an important development in a world of food shortages.
Agcapita's model is to buy the land and lease it back to farmers. There are benefits to this for farmers, such as minimizing the financial risk of taking on huge debt. Then they "wouldn't have had all those sleepless nights because the price of grain was too low," Brinkman observes.
Though many experts say institutional investment is still tiny in the grand scheme of agriculture, how big it will get will be determined by one thing that everyone, including farmers, can understand: how much money can be tilled from that good earth.