Better risk adjusted returns than equities.
Institutional investors, including pension funds and endowments, have long recognized farmland as an asset class with attractive investment characteristics. By way of example, TIAA-CREF startedacquiring farmland in 2007, and in 2012, British Columbia Investment Management Corporation and Caisse de dépôt et placement du Québec partnered with TIAA-CREF to create a US $2-billion fund. Canada Pension Plan Investment Board (“CPPIB”) announced its first farmland purchase in Canada in 2013, noting that farmland, “has historically delivered stable, risk-adjusted returns and the global outlook for agriculture in general is positive due to increasing demand for agricultural products.”
Rationale for Farmland
Farmland is a low-risk, low-return asset. Despite this classification, farmland has outperformed Canadian stock and bond indices over the past three-, five-, and ten-year periods. Specifically, farmland in the Province of Ontario has, on average, increased in market value at a compound annual rate of 19.2 percent over the last three years (for which data is available: 2012 – 2014), 15.7 percent over the last five years (2010 – 2014), and 10.3 percent over the last ten years (2005 – 2014).,
In contrast, the S&P/TSX Composite Total Return index has increased in value at a compound annual rate of 10.2 percent, 7.5 percent, and 7.6 percent over the same three-, five-, and ten-year periods, respectively. Meanwhile, the FTSE/TMX Canada Long Term Bond Index has increased in value at a compound annual rate of 5.0 percent, 9.0 percent, and 7.4 percent on a total return basis over the same three-, five-, and ten-year periods.
Based on the Sharpe ratio, farmland has historically generated superior returns for the same amount of risk when compared to equities, and for that matter, most other asset classes.
Historically, the main reason investors have turned to this asset class is that the value of farmland is not correlated with the overall stock market, thereby providing portfolio diversification benefits. Another reason is that farmland has an asymmetric risk curve since farmland values will never drop to zero; unlike stock and bond values. Also, there is no vacancy factor, and furthermore, farmland as an asset class provides inflation protection by positively correlating with rising agriculture commodity prices.
of this “White Paper” report is to outline the rationale behind investing in farmland in general, and in the Province of Ontario specifically, and to highlight AGinvest Properties Canada Inc.’s (“AGinvest”) business model and investment team.
Farmland as an asset class has had a low or negative
correlation with other investment classes as demonstrated by the correlation statistics in Exhibit A below. This characteristic provides diversification benefits to investors who hold farmland in their portfolio.
Exhibit A – Correlation of Asset Returns (1970-1998)
 Source: Farmland Values Report, 2014 Edition, Farm Credit Canada
 In the Spring of 2016, Farm Credit Canada will release farmland value data for 2015.
Source: Marvin J. Painter, Ph.D., University of Saskatchewan
Asymmetric Risk Profile
Farmland is a real, tangible asset with intrinsic value. Farmland is characterized by an asymmetric risk curve, whereby its value can never drop to zero. This differs from the risk profile of financial assets such as stocks and bonds, whose value can drop to zero.
Historical Rates of Return
The returns generated by direct investments in farmland have historically exceeded those of stocks and bonds over the past ten years, as previously mentioned. Indeed, as Exhibit B illustrates, farmland values in Ontario have risen in all but six of the past sixty-four years. Only during the 1981 to 1986 period did values decline. That was a period when interest rates ranged from 9.8 to 21.0 percent. Today’s interest rate environment is starkly different.
Source: Farm Credit Canada, Trading Economics
Generation of Income
Farmland generates income either from rental payments (collected from leasehold farmers) or as a percentage of harvest revenue as a part of a crop sharing arrangement (which is at its core a joint venture between the landowner and the farm operator). Farmland offers almost 100 percent tenant occupancy rates as demand for quality farmland
is consistently high, ensuring that cash income from rental payment remains stable regardless of most market conditions. The level of cash income generated is addressed later under Leasing Farmland.
Hedge for Inflation
The value of farmland is positively correlated with inflation, as a study by Hancock Agricultural Investment Group reveals statistically. (See Exhibit C.) This characteristic makes farmland an effective tool for hedging inflation risk. Farmland is needed to produce foods, and as such has an inelastic demand profile that is capable of producing superior rates of return during inflationary periods. As food prices increase, cash yields that can be generated from the land rise, thereby driving up cash rents and the land’s market value.
Exhibit C – US Farmland Appreciation versus Inflation (periods ending December 31, 2009)
Source: Hancock Agricultural Investment Group
At the turn of the millennium, global population growth and rapid economic expansion in many emerging economies reached an inflection point that saw global consumption of agricultural goods exceed production in the majority of years. In addition to macroeconomic demand drivers, initiatives to develop alternatives to fossil fuels resulted in much greater proportions of major crops such as corn and sugar cane being used for biofuel production. These fundamental factors produced a trend reversal in agricultural markets from decades of chronic excess supply and falling prices, to a situation where excess demand drove prices of agricultural commodities to record highs in normal terms.
While the world’s population continues to expand, the improvements in agricultural productivity experienced during the “Green Revolution” – a series of technological advancements in agriculture that resulted in dramatic improvements in agricultural yields around the world during the 1960s, ‘70s and ‘80s – have not sustained the same pace due to diminishing marginal returns on production.
Many of the techniques pioneered during the Green Revolution have also contributed to declining productivity and land degradation in some regions, from decades of intensive irrigation and production that strip farmland of vital nutrients, often with lasting effects.
Prospects for increasing supply are limited by the fact that very little additional productive farmland exits to expand the agricultural land base. On the whole, the global supply of arable land continues to decline despite a growing population with ever increasing demands, such that farmland per capita is rapidly declining as shown in Exhibit F on the next page.
Exacerbating the challenge of diminishing margin returns and a finite supply of land, the world’s agricultural land base also faces significant threats from urbanization, climate change, desertification, and water scarcity. These issues have been especially prevalent in the world’s most heavily populated regions, namely India, China, and other parts of South and South East Asia, which has led to far greater reliance on agricultural imports in these countries. The United States, by far the world’s largest agricultural exporter, has also experienced significant production challenges, particularly from an unpredictable climate and difficulty accessing water. These supply challenges have contributed to a cyclical production environment, and as a result higher prices and volatility in agricultural commodity markets have become the new normal. The higher price levels of agricultural commodities signal the need for investment in agricultural productions to develop sustainable solutions to provide for a growing population.
Exhibit F – World Population and Arable Land per Person
Source: World Bank
A now nearly infamous statistic from the United Nations on the agricultural supply and demand relationship estimates that the global population could exceed 9 billion by the year 2050. If that figure is correct, the current global agriculture production will need to increase by at least 70 percent. To summarize, the changes affecting global agriculture are:
- Transition to protein rich diets in emerging market economies;
- The rising proportion of biofuels in the North American gasoline market;
- World population is rising by approximately 120 million per year; and
- Arable land is decreasing by roughly 22 million acres per year.
Factoring in the poverty and food shortages plaguing many nations, the growing scarcity of many natural resources, and climate change, agriculture is facing an uphill battle.
Agriculture in Canada
Canada is a major agricultural exporter, although its ranking amongst exporting countries declined steadily during the twentieth century. Decades of under-investment left some farming operations undercapitalized and disadvantaged relative to their international peers. At the same time, however, Canadian growers have benefited from the country’s natural wealth, namely: its vast tracts of arable land, a favourable climate, abundant fresh water, well-developed trade and transportation infrastructure, and a stable government.
In today’s agricultural environment, growers who operate with a sufficient scale and adopt technology to achieve efficiency of production should continue to earn profits. Canadian growers who execute well will additionally be in a position to grow the size of their crops by acquiring more and more farmland over time.
Canadian agriculture requires capital, however; both to gain scale and efficiency, and to finance the succession of a generation of family farmers. As the adjacent graph shows, 48 percent of farmers in Canada were over 55 years of age in 2011. These farmers are even older today. They are, or will be, looking to retire, and to liquidate or capitalize the wealth they have built up in the land they hold.
The total value of farmland in Canada is estimated at over $531 billion, a large portion of which is controlled by the retiring farmer cohort. This value statistic suggests not only that the pool of farmland available for purchase is large, but that investors and young farmers will together fund the succession of Canada’s farms to the next generation.
 Source: Statistics Canada