Canadian farmland is low cost: Agcapita believes Saskatchewan farmland in particular is an undervalued asset. With an average price of $390 per acre, Saskatchewan farmland is some of the least expensive in the world. The prices in Alberta are almost 3 times higher than Saskatchewan at an average of $1,000. During the last commodity bull market in the 1970s, farmland in western Canada went from $100/acre in 1970 to $550 in 1981 – a 550% increase.
Canada has world class farming infrastructure: Unlike investing in farmland in emerging markets such as Argentina, Brazil or Russia, Canadian farmland is supported by first world storage, processing, and shipping infrastructure. This infrastructure is extremely costly to reproduce.
Canada has low political risk: Unlike emerging markets, Canada lacks significant political risk. Canadian farmland owners benefit from a transparent and enforceable title system with no material risk of de jure or, worse yet, de facto expropriation. See recent agriculture export tariffs in Argentina, Indonesia, and Kazakstan.
Strong Global Macro Drivers: Canadian farmland prices are being driven by strong and persistent global market forces.
A decreasing amount of arable land worldwide, proportionate to the increasing population;
An increasing demand for meat calories (as development occurs and standards of living increase) which need more farmland for production than grain calories; and
A commitment by many countries (including Canada) to increase the use of biofuels, which will need farmland for production – current mandates will consume over 400 million acres – 10% of the worlds arable land.
Inflation: Inflation is accelerating across the globe and will also act to drive agriculture commodity and farmland prices much higher. Farmland is a good inflation hedge and outperforms during inflationary periods. So much so that farmland has been described as “gold with a cash yield”. The rate of annual US money supply growth (M3 reconstructed) has actually doubled in the last 2 years – to over 16% - and virtually every major economy in the world is pursuing aggressive monetary policies as they attempt to inflate out of the current credit crisis and/or maintain growth. Money supply growth (M2, M3 and M3 reconstructed pa):
Switzerland - 1%
EU - 12%
Canada - 12%
UK - 13%
US - 16%
China - 19%
India - 20%
Russia - 48%
The equity and bond markets have benefited from a long period of low inflation, but ongoing and massive central bank liquidity injections point to a far less benign environment of elevated inflation ahead. Research by our firm, Agcapita Farmland Investment Partnership (Calgary, Canada based agriculture private equity firm – www.farmlandinvestmentpartnership.com) shows investors must be prepared to rotate into asset classes with different characteristics. During the last commodity bull market & high inflation period in the 1970’s, equities materially underperformed farmland.
- Western Canadian farmland went from around $100/acre to $550/acre (550% total return and 176% in inflation adjusted terms);
- Cash held in a money market account barely kept ahead of inflation (6% inflation adjusted return); and the
- S&P 500 index returned less than 2% per year (a loss of almost 50% in inflation in adjusted terms)
”We believe the world is still in the early stages of this current commodity bull market,” Stephen Johnston said.
When agriculture commodities prices are compared against their previous inflation adjusted highs they are significantly discounted implying scope for further increases:
- Corn is US$ 5/bushel currently compared to US$16/bushel in 1974,
- Wheat is US$ 7/bushel currently compared to US$27/bushel in 1974
- Canadian farmland is C$ 660/acre currently compared to C$1,100/acre in 1981
Diversification: It is very difficult to obtain diversification in the current market with high positive correlations between virtually all asset classes. This is a very unusual state of affairs. There are very few uncorrelated assets classes accessible to the average investor. Farmland has a small negative correlation to stocks and a high correlation to inflation. The challenge is how to cost effectively deploy capital in these areas – private equity partnerships like Agcapita allow diversification at reasonable investment levels and professional management of all the complex operational and legal elements of making a farmland investment.
Returns: Agcapita captures both operating and capital appreciation returns by acquiring a portfolio of farmland which it leases to qualified operators on a cash rent and/or crop sharing basis. Carbon credits are aggregated and marketed to existing exchanges, Stephen Johnston said.
