Farmland generates attractive returns without the risk and volatility of debt

MCSI recently published their quarterly “Global Quarterly Infrastructure Asset Index” comparing the returns generated by both listed and private infrastructure classes with other asset classes such as bonds, real estate and equities.

The report also provided debt ratios for the components of the private infrastructure index.  Using this information and some conservative assumptions for the debt ratios typical of the other asset classes, we were able to reverse engineer the unlevered returns of these asset classes and compare them to the unlevered returns generated by Bonnefield Canadian Farmland LP I and LP II over the same time periods.

The results (shown in the following chart) demonstrate that Canadian farmland is capable of generating superior returns without the risk and extra volatility that comes with leveraging your investment with debt.

The Loonie flies to the rescue for Canadian farmers

The Royal Canadian Geographical Society has launched an effort to find an official national bird for Canada in time for our country’s sesquicentennial celebrations in 2017.  In voting so far, the Loon is outpacing the Canada Goose by a large margin. And no wonder – Canadian farmers are no doubt voting early and often for the Loon to thank it for helping to protect their profits against world market prices (as illustrated by the following charts).

In the last 18 months, the spot price of corn has fallen 24% in US dollar terms but only 8% in Canadian dollars. Price swings of this magniture are considered pretty typical even in good markets.

Similarily, wheat prices are off 26% in US dollars but just 11% in Canadian dollar terms.  Canadian soy growers are stuggling with a 28% decline in price – a difficulty for sure – but nothing compared to US farmers who have seen a 40% price decline in their own currency.

Canadian canola producers, on the other hand are in great shape.  Canadian dollar denominated prices have actually increased 23% in the last 18 months whereas they have remained essentially flat at +2% in US dollar terms.

But what the loon givith the loon also taketh away.  The prices of many farm inputs and machinery – many of which are produced in the US –  have risen for Canadian farmers.  But farmers have some degree of control over machinery purchases and some inputs as well, whereas crop prices are totally out of a farmer’s control.  So the bottom line is that the profits of Canadian farmers in 2015 are likely to remain relatively stable, especially as compared to their US counterparts, many of whom are struggling in the current crop price environment.

An Open Letter about Saskatchewan Farmland Regulation

As Canada’s largest farmland investment manager and property manager, Bonnefield has had many requests for comment about Saskatchewan’s recently announced review of its farmland ownership rules and the immediate enforcement of tighter regulations pending completion of the review. Rather than respond piecemeal or incompletely, we have outlined our comments in detail below.


An Open Letter about Saskatchewan Farmland Regulation

On April 13th the Saskatchewan government announced a review of its farmland ownership rules, which are already among the most restrictive in Canada.  At the same time it announced additional interim regulations to prevent farmland ownership by pension funds and to prevent farmers – especially new immigrant farmers – from receiving funding from friends and family back home.

No one can fault the government’s intent – ensuring that Saskatchewan’s farmers own and control their land and that they don’t face undue competition from big corporate or foreign interests; laudable goals to be sure. But despite their well-meaning intent, further restrictions on farmland ownership will damage the competitiveness of Saskatchewan agriculture and increase the financial risks faced by the province’s farmers.  The government’s measures hurt the very farmers they are intended to protect.

What problems do these regulations hope to solve?

Saskatchewan’s move to strengthen its farmland ownership rules is based largely on commonly held misperceptions about farming in the province.  There is a belief that corporate farming is squeezing out family farms in Saskatchewan when in fact virtually all attempts at large-scale corporate farming in recent years have failed or gone bankrupt while large family farms have prospered.  There is a common belief that investors have driven up the price of land in Saskatchewan despite data that clearly show farmland investors in the province have paid less than farmers (as a multiple of assessment value) for farmland purchases since 2010. Yes, farmland prices have increased significantly in Saskatchewan in recent years but these price increases have been in lock step with increases in farm profitability. And farmland prices in the province are often well below similarly productive land elsewhere in Canada.

Others claim that institutions are buying up huge tracts of the province’s farmland when in fact institutional farmland investors have purchased only 1% of the farmland transacted in Saskatchewan since 2003, versus 99% by farmers themselves.  There are also whispered concerns about “foreigners” buying up the province’s farmland through under-the-counter deals with new immigrants.  This concern smacks of xenophobia or worse.  Saskatchewan – indeed all of Canada – was built by immigrants and if there is one thing the province needs as much as investment capital, it is new Canadians to help build a prosperous, growing and vibrant provincial economy.

The real challenges

Contrasting these myths are some real challenges facing agriculture in Saskatchewan today. The average age of the province’s farmers is 55 and the capital required to help the next generation of young farmers buy out those retirees is enormous.  Average farm sizes are increasing and the technologically advanced equipment required to farm them profitably is prohibitively expensive.  How will the next generation of Saskatchewan farmers buy that equipment and finance their operations?  Saskatchewan government officials have publicly stated that the province needs a $3 billion investment in irrigation infrastructure. Who will make that investment?  Billions more are required in additional storage and transportation infrastructure to prevent the kind of disastrous supply chain bottlenecks that hit Saskatchewan farmers in 2014.  Where will that capital come from if not from institutional investors like pension funds?

At Bonnefield we are staunchly pro-Canadian.  We are proud that 100% of the funds we have raised to date have come from Canadian individuals and Canadian pension funds and that all of that money has gone to provide land lease financing to Canadian farmers.  Yet Saskatchewan’s rules make it difficult for us to help farmers in that province.

In the past year alone, Bonnefield has had requests from Saskatchewan farmers for over $100 million of land lease financing.  But all of these requests have gone unfulfilled because the Saskatchewan regulator takes the position that Canadian pension funds are ineligible to hold farmland in the province (except Canada Pension Plan, which was somehow deemed uniquely eligible to hold farmland in the province before the new rules were announced on April 13th).  Meanwhile, Bonnefield has provided hundreds of millions of dollars to farmers elsewhere in Canada to help them reduce debt, expand operations and finance succession plans – advantages that Saskatchewan farmers are denied under the province’s farmland ownership regulations.  In fact, of some $325 million raised by Bonnefield from Canadian investors since 2010, less than $12 million has gone to Saskatchewan farmers because of that province’s regulations.  The remainder has benefited their peers in Alberta, Manitoba, Ontario, New Brunswick and Nova Scotia.

Saskatchewan’s regulations hurt farmers

The harm to Saskatchewan farmers is real. They cannot freely sell their land, depressing land prices and reducing their net worth – an especially big problem for retiring farmers. With fewer financing options at their disposal, Saskatchewan farmers are more heavily reliant on debt than they would be without regulation.  Indeed, the interim rules announced on April 13th require that farmland purchases can only be financed by licensed banks and no alternative or off-balance sheet financing from non-bank lenders will be permitted.  Lack of access to capital is the biggest barrier preventing young farmers from entering agriculture in Saskatchewan.

High debt levels raise operational risk for Saskatchewan farmers and are especially troublesome in volatile markets like those currently caused by lower crop prices.  This lesson was learned the hard way in Saskatchewan during the farm bust of the early 1980s.  During the 1980s only Saskatchewan farmers were able to own farmland in the province, which severely restricted farmers’ access to capital.  As a result, farmers in Saskatchewan were the most heavily indebted in Canada when the double whammy of high interest rates and low crop prices hit the sector in the early 1980s.  Not only did Saskatchewan farmers suffer more destruction in farmland value than farmers elsewhere in Canada, but it took longer for those values to recover than it did in provinces where farmers had unregulated access to capital. Saskatchewan farm values fell 39% from their 1982 high compared to a decline of 24% in Ontario where no ownership regulations were in force. Moreover, it took a full 25 years for farmland values in Saskatchewan to regain the levels of the early 1980s destroying wealth for an entire generation of farmers.  By comparison it took just 5 years to 7 years for farmland prices to rebound in most other provinces where capital could flow in more easily to recapitalize the sector.

Saskatchewan’s reputation at risk

The impacts of Saskatchewan’s farmland ownership regulations extend beyond the agricultural sector and beyond Saskatchewan’s borders.  These regulations contribute to the province’s international reputation as a difficult place to invest and do business.  I have had first hand experience of listening to an audience of investors in Boston openly snicker as Saskatchewan’s Deputy Minister of Agriculture declared that the province was “open for business” and a good place to invest in agriculture.  I have personally met with some of the largest natural resource investors in the world in London, Zurich, Geneva and New York and listened to them decry Saskatchewan’s reputation as unfriendly to business as a result of the rejected attempt by BHP to acquire Potash Corp.  I have participated in hearings of Saskatchewan’s Farmland Security Board where staff, openly and on the record, complained about investment in the province’s agricultural sector from Ontario and elsewhere in Canada.

To realize its economic potential, Saskatchewan’s economy needs capital investment from investors across Canada and around the world for a broad range of industries and sectors including agriculture.  The tightening of farmland ownership regulations will be viewed by skeptics as another example of a parochial, business unfriendly atmosphere in the province and runs counter to the Wall government’s worthy efforts to attract international investment to Saskatchewan.

Better ways of regulating farming

Most Canadians would agree that, in the national interest, some industries should be controlled by Canadians.  Our banking and broadcast industries are two such examples. Yet we have found ways of ensuring that Canadians maintain control of other strategically important industries without restricting their access to capital or putting them at a competitive disadvantage.  Alberta requires farmland owners to be majority Canadian controlled but does not care if they are individuals, corporations or pension funds.  Australia recently introduced rules to ensure that farmland acquisitions by foreigners of more than A$15 million are reviewed to ensure they are in the national interest.  Several Canadian governments have used “golden shares” when privatizing assets to protect legitimate national interests.  None of these measures restrict the free flow of capital to the same extent as Saskatchewan’s farmland ownership rules.

Many question whether farmland ownership needs to be regulated at all – BC, Ontario, New Brunswick and Nova Scotia have no such regulations and farmers in those provinces benefit greatly from free access to capital. Saskatchewan’s stance on farmland ownership stands in stark contrast to its relaxation of regulations governing the uranium and potash industries.  But the irony is unmistakable: as with the province’s oil and gas, once the potash and uranium is extracted, it is gone forever – not so with farmland that will always remain in Saskatchewan regardless of who owns it, and will always remain in production as long as there are mouths to feed.

Perhaps it would be more effective to regulate who farms Saskatchewan farmland rather than who owns it or finances it.  Why not require farmland in the province to be operated by Canadian farmers and let them freely decide how best to finance their operations, with whom and whether they would prefer to own land directly or lease some or all of it?

Despite the evidence that its farmland regulations are harming farmers themselves, it is clear that the Saskatchewan government has decided that farmland in the province should be more tightly regulated.  We can only hope that these new regulations do not inadvertently cause even more harm to the very farmers they are intended to protect.

Tom Eisenhauer

President, Bonnefield

April 2015


Bonnefield is Canada’s largest farmland investment management and property management firm.  To date Bonnefield has provided over $300 million in land lease financing to help Canadian farmers grow, reduce debt and finance retirement and succession in Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick and Nova Scotia.

Recent news about troubling long-term trends supports Canada farmland investment thesis

A number of recent reports about population growth, climate change, decreasing crop yields, droughts and farmland loss suggest that these problems are getting worse, not better.  These long-term trends suggest that the farmland investment thesis for Canada is still very much intact:

  • Population growth – a recent report by the United Nations warned that global population could reach 11 billion by the end of the century, significantly above previous estimates of potential maximum global population of 9 billion.
  • Increasing food demand – the USDA recently predicted that the world must grow an additional 50 million acres of corn, soy and wheat in the next decade to meet worldwide demand.
  • Declining crop yields – The University of Nebraska recently released a studythat found soy yields in the US to be 30% lower than they should be due to climate change impacts.
  • Water shortages and drought – despite the current el Nino weather pattern (that typically brings additional moisture to the US west), drought conditions remain extreme in California, the US southwest and parts of Brazil and Australia.
  • Farmland loss – Statistics Canada recently reported that nearly one million hectares of dependable Canadian agricultural land has disappeared from cultivation in the past 10 years – much of this loss was due to urban expansion and much of that urban expansion occurred on some of the best farmland in Canada – located near urban areas of the GTA in southern Ontario.

Much has been written recently about the potential impact that current low crop prices may have on farmland investment returns, however, none of these long-term trends are reversed by the current short-term crop price environment that resulted primarily from two consecutive years of back-to-back record harvests in the United States (2013 and 2014).  And it is helpful to keep in mind just how rare the current environment is: according to USDA statistics, the bumper crops of 2013 and 2014 were the first such back-to-back record harvests in the US in more than 30 years.

So while it is indeed likely that farmland investment returns will cool somewhat from the outsized gains recorded in recent years, the long-term outlook for Canadian farmland remains bright – in contrast to the dark picture painted by worsening global trends.

2015 is “International Year of Soils”…. really??

Believe it or not 2015 has been named “International Year of Soils” by the Food and Agriculture Organization of the United Nations (“UNFAO”).  Surely the UN must have something better to do?

Before you roll your eyes consider that, according to a German organization called the Institute for Advanced Sustainability Studies (IASS), the world loses something like 24 billion tonnes of fertile soil every year through misuse, pollution, erosion and urbanization.  The UN predicts that the world will reach the limits of ecologically sustainable land use by 2020 – that’s just 6 years from now.  With only 1.4 billion hectares of arable land at the world’s disposal, each person will have to make do with just 2,000 square meters – less that one-third the size of a soccer pitch.

For the last three years the IASS has organized a “Global Soil Week” each April to promote better understanding, research and management practices related to soil protection.  They have produced a Global Soil Atlas to illustrate the worldwide significance and threats to soil and agriculture.  The recently released 2015 Global Soil Atlas makes very compelling reading – not only for its outstanding use of graphics, but especially for the sad story it conveys.  Some of its findings:

  • The world is a big place – but we are rapidly running out of room to grow our food and we are using it in the wrong way.
  • Soils face threats from pollution, desertification and drought, deforestation, soil degradation, loss of species, erosion, scarcity, flooding and rising sea levels and water shortages. On almost all of these measures, Canadian soils are under less threat when compared to the rest of the world.
  • Poor agricultural management is the biggest contributor to soil loss worldwide, especially the improper use of fertilizers.
  • Soil loss and degradation have serious implications for climate change and vice versa – climate change degrades soils and degraded soils are less able to capture and hold carbon, thereby accelerating climate change.
  • Not only does urbanization pave over useful soils, it leads to additional soil problems by increasing rain runoff and evapotranspiration, and all that pavement prevents moisture from penetrating back into the ground to replenish groundwater reserves.

And while Canada ranks better (or suffers less) from many of the soil problems faced by the rest of the world, we face or our own troubling issues. In a survey of Canadian agriculture released by Statistics Canada in late 2014, it was pointed out that nearly one million hectares of dependable Canadian agricultural land has disappeared from cultivation in the past 10 years. Much of this loss was due to urban expansion and much of that urban expansion occurred on some of the best farmland in Canada – located near urban areas of the GTA in southern Ontario.  This stunning loss appears all the more tragic after reading the Global Soil Atlas and realizing that those lost Canadian soils were some of the best the world had to offer.  And now they are gone forever.

So maybe the UN doesn’t have better things to do after all.