Leases replace ownership as farm model
By John Dietz
A third model of farmland ownership and management is quickly emerging in western Canada, and replacing wholly owned or owned/rented land business structures.
A third model of farmland ownership and management is quickly emerging in western Canada, and replacing wholly owned or owned/rented land business structures. This third type of land ownership/operating structure is evolving, as three investment companies are buying prime cropland and leasing it out to growers.
|Investment companies are buying up lots of land to lease back to farmers. Photo courtesy of Bruce Barker.|
Brad Farquhar, vice president, Agriculture Development Corporation (ADC) in Regina, can trace it back to 2003. A Regina investment entrepreneur, Doug Emsley wanted to give his sons a place for four-wheeled recreation in the country.
Farquhar says, “A friend said to Doug, there are five quarters for sale next to our farm. We’d love to farm it, but we don’t have the money right now. You could buy it, rent it to me, and your boys would have a place to play.”
Less than two years later, Emsley and Farquhar were setting up ADC with a new business model. They raised investment money from people they knew and soon had a 25,000 acre portfolio. “Our business model was to buy land, collect rent, pay tax, bills and management costs, then distribute surplus benefits to investors. Our projection was to distribute about one percent of the original investment on an annual basis,” Farquhar says.“In reality, after that first year, we distributed five percent, and we realized we were onto something. We had an investment product based in farmland that could provide a good distribution to investors, similar to yields on other stocks. Five percent was very attractive, plus it had the upside potential of capital appreciation.”
The model continues to work, and ADC is no longer alone. ADC expects to own approximately 100,000 acres in Saskatchewan as of spring 2009. They have offered a new annual investment product since 2005.“We expect we’ll stay on a schedule like that, raising money, purchasing land, renting it out. We purchase all over Saskatchewan and only Saskatchewan, because that’s the market we know,” he says.
ADC has security requirements. In the offer to purchase, they keep the deal open until they find a qualified renter. They deliberately search for “top-shelf” growers to rent the land, and look for three-to-five-year arrangements. So far, they have a zero vacancy rate.
About 80 percent of the leases are on a cash rent basis, with half payable in spring and half in fall. A second option is crop-share. A third option is cash rent plus a component that fluctuates with commodity prices.
PMG management Calgary-based Pike Management Group (PMG) adopted its own land management model in 2005. PMG investors today own “well over” 100,000 acres of farmland in all four western provinces. Most is in Saskatchewan. PMG solicits investors to contribute capital and actively works with clients to help them find land to rent, says Dallas Pike, chief operating officer.Moving into land management ventures was a natural growth for PMG, one of the larger private, farmer-owned, network-management/consulting groups in North America. Its goal is to represent six million acres of land and one million head of cattle.
Maximum efficiency, least-cost grain production has been the bread-and-butter for PMG since 1988. Many clients needed to farm more land to gain efficiency with machinery and inputs, but they did not need to own it. “They’re saying, we’re not a real estate company, we’re a grain growing company. We’ll have a small base at home and then work off of leased land,” Pike says.It is now common for PMG clients to ask for help in finding land to rent, and PMG is able to provide that help. Often, they will take the client into another area, for a lease, to reduce risk exposure due to weather. As well, PMG actively seeks land to purchase and later lease to clients.
The PMG lease is on a cash-rent basis for three to five years. Pike says, “We’ve looked at variable rent models but we haven’t found one that we can have both the investor and the lessee accept.”
The newest and most aggressive land management company in western Canada is Agcapita Farmland Investment Partnership in Calgary.
Agcapita is a private equity firm with three partners and is part of a family of funds with more than $100 million in assets under management. It has a network of seven field reps looking for investment opportunities Prairie-wide and has a $20 million acquisition program currently underway. “We take freehold of farmland and lease it back to either the vendor or to an alternate cash renter,” says Stephen Johnston, an Agcapita partner. “Saskatchewan farmland is extremely compelling. All of our investments to date have been in Saskatchewan. The renters are all owner-operator farmers, either the person who sold the land or his neighbours or someone he knows in the community who’s looking to scale up.”
Agcapita has a credentials-packed advisory board with global commodity investment experience, experience in large-scale farms, PhDs in agriculture, patents in plant genetics and senior government positions in Saskatchewan.
Key figures include former UK Chancellor of the Exchequer, the Rt. Hon. Ken Clarke, and Jim Rogers, co-founder of Quantum Fund. Partner Stephen Johnston previously managed a $500 million emerging market fund in London, England, for Societe Generale. “Our view is that the bull market is intact and clearly, commodity prices are going to go up. That is going to expand operating margins for farmers, drive up cash rents and drive up the value of land,” Johnston says.
Western Canada’s farmland is under-valued and under-financed, Johnston believes. Using inflation-adjusted values from the 1970s, he sees potential for the new long-term bull market in commodities to bring wheat to $24 a bushel and land to around $1100 an acre. “To use a simplistic metaphor, it’s like going up an escalator and playing with a yo-yo. Sometimes the yo-yo is down, sometimes the yo-yo is up, but overall the trend is up.
That’s how this market for agricultural commodities is developing.” The new farm model makes a lot of sense, Johnston says. “You want to deploy your capital where you can make the best returns. We have such good farm operators in western Canada, they can make an extremely good operating margin by dedicating their capital to the operational side of the business.” The typical Saskatchewan farm today covers 1500 acres. However, for efficiency, a modern farm with one seeding and harvesting system needs to manage about 5000 acres.
In the third model, land management companies are there to make a profit for long-term investors and to enable farm managers to focus on the most efficient grain production in the world.