Inflation hedging, the need for food security, and stable returns with protections are just some pieces of the agriculture investment thesis
With more investors wringing their hands over interest rates and inflation risks, interest in farmland has been on the rise. But as one alternative investing leader tells it, that only scratches the surface of Canadian farmland’s appeal as an investment opportunity.
“As a firm, we’ve always had farmland investment opportunities available to our clients,” says Mackenze Orr, director, Corporate Finance at Raintree Financial Solutions. “For over 10 years, it’s been part of the portfolio analysis and considerations.”
According to Orr, farmland has a reputation for being less volatile than other major asset classes, as well as low-to-potentially negative correlations to stock markets, which contributes to its being seen as a “safe haven” investment.
An asset for the world
Boiled down, he says the investment case for farmland is the same as it’s always been: arable land area is expected to decline globally even as the world’s caloric intake increases. The question of food security has also taken on greater urgency against the backdrop of supply chain disruptions and recent geopolitical events.
“The Canadian Prairies continue to be able to provide a good solution to some of these challenges,” Orr says. “Think about Saskatchewan and Alberta in particular and their global share of production of oats, wheat, canola seed, canary seeds, lentils, and so on. … There's a lot more focus on how important the Canadian Prairies are in providing food security, not only just for Canada, and for North America, but also for a lot of our global partners.”
On aggregate, he says the value of nominee farms recognized by Farm Credit Canada has outperformed the TSX, with some potential marginal benefits to be had in terms of fixed income and other potential value adds. With more investors taking an interest, Orr is fielding more questions about how farmland could interact with other parts of a portfolio.
“A client should never have 100% of their net investable assets exposed into just farmland,” Orr cautions. “In the years that maybe the S&P/TSX or S&P 500 underperform, investors may still be able to get a relatively reasonable rate of return through farmland.”
More growth than (income) yield
According to Orr, farmland is most suitable for clients looking for long-term growth. By getting exposure through a fund-like structure, he says clients can diversify their risks across different parcels of land, crops, and operators.
“One mechanism of participation is through direct ownership of farmland, which is leased back to farmers who would operate the land,” he says. “That leasing revenue does provide an income component, but yields from income out of farmland tend to be very low. … Income is often absorbed with the ongoing expenses of managing that investment vehicle, so I think it would not be very realistic to want to pursue investing farmland as a source of income.
The returns from farmland are fairly predictable and consistent, Orr says, which is helped partly by protection from government-backed crop insurance. That protection comes into play in situations where wildfire risk comes up.
“It's such an important asset class, not only just from an investment sphere, but also just coming from a government and from a societal perspective,” he says. “Most if not all forms of crop insurance, provide coverage on accidental fire or if somebody gets hit with a wildfire. That helps protect against some of the downside.”
Some investors may also have broader questions about climate change and the sustainability of agricultural investments. Because of the adaptability of farmers and their good farming practices, he says farmland investments often turn out to be sustainable enterprises.
From homesteads to superfarms
Looking ahead, Orr says scale will matter more than ever to farmland operations, especially to address the increasingly high cost of equipment while trying to generate positive income. With small farmers needing to increase the arable acres they serve and justify their equipment costs, the demand for renting farmland – has also risen.
“We're seeing more and more consolidation of farmers into larger-scale operators, just to make the economics work,” he adds. “Even beyond that, small-sized family farms are declining. … Legacy operators are retiring, and many of the younger generation are deciding not to pursue farming as a career path.”
For those considering an investment in farmland, Orr stresses that it’s important to go beyond the thesis for the asset class, but also examine the management team behind an offering, as well as the financial structure that underpins it.
“There are many different ways to potentially get exposure to the asset class. But make sure it's done with a responsible management team and packaged in a way that respects the provider of capital, provides a risk-adjusted rate of return, and doesn't introduce new risk,” he says. “Due diligence matters. … I wouldn’t just jump into the first farmland opportunity you might see.”
