Record-high stock markets, geopolitical crises, US political uncertainty, potential rebound in inflation, currency volatility, interest rate uncertainty… we live in “interesting” times. All this uncertainty has led to an increasing number of investors looking to alternative assets to complement and hedge their investment portfolios. Historically, one of the more attractive assets in times of uncertainty is Canadian farmland. The asset class offers low volatility and has a track record of average annual returns of 7.6%(1) over the last 70 years, without meaningful periods of declining value. More recent data shows Canadian farmland prices have increased by an average of 9.1% on average annually over the last decade.(1) But after several years of strong farmland returns, is now still a good time to invest in Canadian farmland, or are we at a “peak”?
Let’s look at some historic data to see if today’s “timing” is good, bad or indifferent to expected farmland returns.
“Timing the Market” Not a Relevant Concern for Farmland
Determining the right time to invest is typical in stock and bond markets, as no one wants to enter at the top of the market. The situation is different for a low-volatility and uncorrelated asset like Canadian farmland. To illustrate the point, imagine you had invested in Canadian farmland each year from 1975 to 2023. You would have had positive returns on each of those investments, with only eight entry years showing negative returns.(1)(2) In contrast, global equities saw negative returns for 17 of the entry years during the same period.(3) This result is unsurprising for fans of farmland investing who are attracted to its low volatility and uncorrelated returns. We have included in Figure 2 below a summary of the historical holding period returns for both asset classes.
What may be surprising even to long-time farmland investors, however, is that investing in Canadian farmland immediately following a year of heightened value appreciation (10% or above) still resulted in strong, long-term returns in line with historical averages. The data suggest that, rather than waiting for a “dip” in the market to invest in farmland, having exposure to the asset and benefitting from its long-term correlation to inflation should support positive investment returns with limited volatility.
Can the Trend Continue?
As seen in the figure above, farmland prices have historically increased at a steady rate. The typical pattern for this asset class is a period of strong growth, generally linked with commodity super cycles, followed by more muted growth. Very rarely have there been absolute decreases in land values, and only temporary ones. This long-term growth history can lead some to question whether ongoing value growth is sustainable. At Bonnefield, we believe that it is, and that there remains significant upside in farmland values.
As a scarce resource, high-quality farmland in regions supported by positive long-term climate and water conditions will increasingly be in demand. Farmland is the base upon which we will continue to meet increasing crop production requirements to satisfy food and alternative energy demands and understanding this, along with the drivers of farmland value (e.g., farm revenues and productivity growth, farmland consolidation, etc.), helps to understand why we believe that farmland provides strong, long-term value appreciation potential.
Now is a Great Time to Invest in Canadian Farmland
Bonnefield expects to continue to see growth in Canadian farmland values supported by farm revenue and productivity growth. Along with the limited price volatility of the asset class, we believe that investing in Canadian farmland offers attractive risk-adjusted returns and that investors can benefit from earlier exposure to the asset class rather than waiting for “the right time” to enter the market.
About Bonnefield Financial
Bonnefield is a leading Canadian farmland and agribusiness investment manager. We provide capital to progressive farmers and agribusiness operators through land-lease financing and non-controlling equity solutions. Bonnefield is dedicated to preserving farmland for farming, and the firm partners with growth-oriented farmers and agribusiness operators to help them grow, reduce debt, and finance retirement and succession. The firm’s investors are individuals and institutional investors who are committed to the long-term sustainable future of Canadian agriculture.
Sources
1. Statistics Canada. Table 32-10-0047-01 Value per Acre of Farm Land and Buildings at July 1, https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3210004701.
2. Holding period returns calculated by varying investment entry and exit years and adding a 2% cash yield (mid-point of the cash yield target of Bonnefield’s farmland strategy). Capital appreciation is assumed to be identical to Statistics Canada’s farmland values dataset as at July 1st of each year.
3. MSCI World Index total return, large and Mid cap, reported in CAD, https://www.msci.com/end-of-day-data-search.
This document is for information purposes only and does not constitute an offer or solicitation to buy or sell any securities in any jurisdiction in which an offer or solicitation is not authorized. Any such offer is made only pursuant to relevant offering documents and subscription agreements. Bonnefield funds (the “Funds”) are currently only open to investors who meet certain eligibility requirements. The Funds will not be approved or disapproved by any securities regulatory authority. Prospective investors should rely solely on the Funds’ offering documents which outline the risk factors in making a decision to invest. No representations or warranties of any kind are intended or should be inferred with respect to the economic return or the tax consequences from an investment in the Funds. The Funds are intended for sophisticated investors who can accept the risks associated with such an investment including a substantial or complete loss of their investment. This communication is for informational purposes only and should not be relied upon for completeness. Any investment performance data outlined in this document should not be used to predict future returns. Any market prices, data, and third-party information are not warranted as to completeness or accuracy and are subject to change without notice. Prospective investors should take appropriate professional advice before making any investment decision. In all cases where historical performance is presented, note that past performance is not indicative of future results, and should not be relied upon as the basis for making an investment decision. There can be no assurance that any unrealized investments will ultimately be realized at the valuations taken into account in calculating the Funds performance presented herein, where applicable. The performance of such investments when ultimately realized may be materially different. This document may not be transmitted, reproduced, or used in whole or in part for any other purpose, nor may it be disclosed or made available, directly or indirectly, in whole or in part, to any other person without Bonnefield’s prior written consent.
Copying, distributing or sharing this document or its contents is expressly prohibited without the express, written consent of Bonnefield.
Beneath the Surface: Canadian Drought Reality & Farmland Resilience
After a year marked by wildfires and continued global concerns over water scarcity, the headlines at the beginning of the 2024 growing season across North America, Europe, and South America have included discussion of drought risk and water availability. As a leading Canadian farmland and agriculture investment manager, Bonnefield is regularly asked whether such headlines signal increasing risks associated with investing in agriculture and farmland. The short answer is – it depends.
Geography and ongoing farmland management practices impact the relative risk that drought and water availability have on a farm’s operations. So, whether thinking about buying a single farm, or investing in a portfolio of pooled farmland assets, it is important to consider these factors in determining the relative risk that water availability has on the future operations of the farm(s) and on their long-term performance.
Geography and Canada’s Water Advantage
While increasing numbers of sophisticated investors are interested in gaining exposure to the attractive attributes of farmland and agriculture, as with everything, there are risks that need to be considered. Water scarcity is a major challenge for agricultural systems around the world and shifting climate patterns along with existing water management practices globally demand our attention. Research suggests that 40% of global croplands have already experienced water scarcity.(1) Agriculture remains one of the largest users of water globally, accounting for 70% of current global water withdrawals.(2)
When evaluating a potential farmland investment, it is important to consider geography, as certain countries are experiencing (and expected to continue to experience) greater water stress than others. For this reason, Bonnefield feels that investment in Canadian farmland entails less water-scarcity risk than investment in other countries, and can also hedge against water risk in a broader investment portfolio.
Canada boasts a significant water resource advantage relative to other parts of the globe, with approximately 20% of the world’s freshwater reserves and 7% of the world’s renewable freshwater, while only representing 0.5% of the global population.(4) Estimates suggest that approximately 11% of existing cropland globally could be vulnerable to lost productivity due to water scarcity by 2050. In contrast, it is thought that only 1% of Canada’s cropland is potentially vulnerable.(5) Additionally, Canadian farmland is largely rainfed with less than 2% of Canadian agriculture reliant on irrigation systems.(6)
While Canada offers less risk to water scarcity than other regions, there are still parts of the country (particularly in Western Canada) that exhibit greater risk and instances of drought, so it is important to consider this when investing in a farmland portfolio. In Bonnefield’s case, we do not avoid these regions but rather, take a risk-adjusted approach when evaluating such opportunities. We also examine the water source and storage capacity of various irrigation districts and utilize climate models to estimate the potential impact of water shortages in each district, ensuring that properties in our portfolio will still receive water allocation in the event of curtailments.
Understanding regional variability in climatic conditions, specifically areas with more or less drought risk, is core to Bonnefield’s investment strategy to appropriately diversify farmland holdings across the country and insulate the portfolio from ever-changing weather patterns.
Employing Practices to Mitigate Water Risk
Despite Canada having relatively reliable access to freshwater resources, extended periods of drought still have the potential to negatively impact crop yields. As such, it is important to be exposed to farmland that is being well-managed with high-quality practices designed to ensure long-term, sustainable production. Through innovative practices, Canadian farmers have successfully enhanced water retention in the soil, mitigating the effects of water scarcity. As of 2021, almost 65% of farms across Canada reported using sustainable farming practices, up from 54% in the previous Census of Agriculture five years prior.(7) At Bonnefield, we work with and seek out farm partners who employ sustainable farming practices and function as long-term stewards of the land on which they operate. Some key strategies employed by Canadian farmers include:
Reduced Tillage: One of the most impactful practices is reduced tillage or no-till farming. No till farming, where the soil is not plowed or turned over before planting, minimizes soil disturbance and enhances water retention. In Canada, no-till farming is most common in the Prairies as higher precipitation volumes in Eastern Canada can make implementing no-till farming difficult.
Improved Irrigation Systems: Canadian farmers have embraced advanced irrigation technologies, such as low-pressure pivot systems, drip irrigation and sub-surface irrigation, to manage water more efficiently. These systems are often combined with soil probes and sensors that allow farmers to apply water at variable rates across fields to maximize crop production per unit of water.
Crop Rotation and Cover Cropping: Crop rotation and cover cropping have been integral parts of Canadian farming systems for decades, contributing to soil health and water retention. Rotating crops helps break pest and disease cycles while improving soil structure. Cover crops protect the soil from erosion, enhance organic matter content, and promote water infiltration.
Drought-Tolerant Crop Selection: Crop varieties optimized for local soil, water, and climate conditions can enhance yields. Specifically, breeding plants to have deeper and longer root networks can enhance resistance to drought and heat.(8) Canadian farmers are turning to more drought-tolerant crops, like barley, which saw an increase in planted acreage of nearly 25% from 2016 to 2021.(9)
Furthermore, Bonnefield’s robust and continuous property-level due diligence sets the stage for transformative investments.
So, Are Droughts and Water Scarcity a Risk in Farmland Investing?
Earlier we asked the question whether there is increasing risk associated with investing in agriculture and farmland due to water scarcity. As discussed above, the answer depends on a number of factors, most notably where the farmland is located, the risk mitigation practices, and investments that are made to the properties. By focusing on regions with relatively low water risk and ensuring the farms are operated in a sustainable manner, farmland remains an attractive asset and one that has the potential to offer water-risk hedging characteristics and long-term value in an investment portfolio.
About Bonnefield Financial
Bonnefield is a leading Canadian natural capital investment manager that invests in farmland and agribusinesses. We provide capital to progressive farmers and agribusiness operators through land-lease financing and non-controlling equity solutions. Bonnefield is dedicated to preserving farmland for farming and promoting sustainable production practices. The firm partners with growth-oriented farmers and agribusiness operators to help them grow, reduce debt, and finance retirement and succession. The firm’s investors are individuals and institutional investors who are committed to the long-term future of Canadian agriculture. www.bonnefield.com
Sources
1. Liu, Xingcai, et al, “Global Agricultural Water Scarcity Assessment Incorporating blue and Green Water Availability Under Future Climate Change,” AGU, April 23, 2022.
2. FAO. 2020. The State of Food and Agriculture 2020. Overcoming water challenges in agriculture. Rome. https://doi.org/10.4060/cb1447en
3. World Resources Institute, data August 26, 2015. Projections are based on a business-as-usual scenario using SSP2 and RCP8.5.
4. Environment and Climate Change Canada (2024, March 22). Goal 6: Ensure clean and safe water for all Canadians. Canada.ca. https://www.canada.ca/en/environment-climate-change/services/climate-change/federal-sustainable-development-strategy/goals/clean-water-sanitation.html
5. N. Fitton et al, “The vulnerabilities of agricultural land and food production to future water scarcity”, Global Environmental Change, Volume 58. 2019
6. Food and Agriculture Organization of the United Nations – FAOSTAT Land Use Database (total agriculture land and total land area equipped for irrigation; data as of 2021).
7. Ontario Federation of Agriculture. “Farmers embracing technology, sustainable practices and direct-to-consumer sales” May 19, 2022.
8. Anita, S., Hyat, T., & Wilhelmus, J. PGIM. “Food for Thought: Investment Opportunities Across a Changing Food System” 2023.
9. Ontario Federation of Agriculture. “Farmers embracing technology, sustainable practices and direct-to-consumer sales” May 19, 2022.
This document is for information purposes only and does not constitute an offer or solicitation to buy or sell any securities in any jurisdiction in which an offer or solicitation is not authorized. Any such offer is made only pursuant to relevant offering documents and subscription agreements. Bonnefield funds (the “Funds”) are currently only open to investors who meet certain eligibility requirements. The Funds will not be approved or disapproved by any securities regulatory authority. Prospective investors should rely solely on the Funds’ offering documents which outline the risk factors in making a decision to invest. No representations or warranties of any kind are intended or should be inferred with respect to the economic return or the tax consequences from an investment in the Funds. The Funds are intended for sophisticated investors who can accept the risks associated with such an investment including a substantial or complete loss of their investment.
Opportunity for Investment in Canadian Agribusiness
Sophisticated investors are increasingly looking at Canada’s agricultural industry for attractive, diversified opportunities. In the global context, Canada’s agriculture and agri-food industry punches well above its weight. Despite ranking as the 12th largest OECD nation by population, Canada is the world’s fifth largest agricultural exporter and the fourth largest exporter amongst OECD countries.(1) We take our role in sustainably feeding the world seriously, operating within a robust regulatory framework that upholds best-in-class governance and operating practices. However, despite these dynamics Canadian producers and processors suffer from chronic underinvestment due to a lack of access to capital, hindering growth and leading to industrywide inefficiencies, which creates an attractive environment for investment.
There has been a lot of recent discussion about Canada’s anemic rate of capital investment. According to OECD data, between 2011 to 2015, the rate of investment in Canada was among the bottom third of member nations, placing 37 out of 47. The situation worsened from 2015 to 2023, in which Canada dropped to 44 out of 47 nations. This trend impacts all industries, including agriculture, where Bonnefield has witnessed the pressing need for capital firsthand. For the last 15 years, Bonnefield has forged strong, trusting relationships with Canadian farmers, providing them with alternative financing solutions to enable their continued growth. Through these relationships, Bonnefield has seen the need for capital investment beyond farmland, across the entire agricultural value chain. We recently launched a fund to address this need by providing noncontrolling growth capital to a broader range of agribusiness in
Canada.
Size of the Opportunity
The agriculture and agri-food industries are among the largest sectors of the Canadian economy, accounting for approximately 7% of GDP and employing 2.3 million people in 2022.(3) There are over 8,500 Canadian food and beverage processing companies alone(4), many of which are continuing to expand both domestically and
internationally to meet growing demands. Today approximately half of everything that Canadian agriculture and agri-food produces is exported as either primary commodities or processed food and beverage products.(5) Increasing demand for food products, driven by population growth, underscores the potential for investment in Canadian agribusinesses. The global population is projected to reach nearly 10 billion by 2050, necessitating a substantial increase in food production to meet growing demand, with current projections expecting an increase in global food demand by 35% to 56% between 2010 and 2050.(6) Meeting this increased demand will be especially challenging in the face of climate challenges and declining crop yields, two factors that are competitive advantages for Canada. With our extensive agricultural production and sector expertise, there is potential to unlock outsized growth in Canada and further our position as a globally recognized, trusted agricultural trade partner.
Today approximately half of everything that Canadian agriculture and agri-food produces is exported as either primary commodities or processed food and beverage products.5 Increasing demand for food products, driven by population growth, underscores the potential for investment in Canadian agribusinesses. The global population is projected to reach nearly 10 billion by 2050, necessitating a substantial increase in food production to meet growing demand, with current projections expecting an increase in global food demand by 35% to 56% between 2010 and 2050.6 Meeting this increased demand will be especially challenging in the face of climate challenges and declining crop yields, two factors that are competitive advantages for Canada. With our extensive agricultural production and sector expertise, there is potential to unlock outsized growth in Canada and further our position as a globally recognized, trusted agricultural trade partner.
How (and Where) to Invest
In 2017, the Canadian federal government’s Advisory Council on Economic Growth released a set of recommendations to improve Canada’s economic growth trajectory. This report, which is commonly referred to as “the Barton Report”, identified agriculture and agri-food as one of the key sectors with potential to drive substantial economic growth and increase exports. Since that time, however, we have seen limited investment in the sector relative to demand from producers and the opportunity for attractive returns. Increasing exports is critical to the future success of Canadian agriculture and agri-food and requires investment to enable expansion of operations and enhancement to storage, transportation, processing, and manufacturing capabilities. This investment will allow Canadian operators to capture a greater share of the value created in the broader value chain. To date, underinvestment has posed challenges for the sector’s ability to grow and meet expanding demand. Investment in the food processing industry as a percentage of revenue decreased by ~50% from 1998 to 2016.(7)As depicted in the graph below, annual capital investment in agricultural equipment and machinery has lagged depreciation (i.e. the investment required just to replace aging equipment) over the last 15 years by a cumulative $12.9 billion(8).
These challenges for Canadian agribusinesses present an opportunity for investors to fill the investment gap and drive growth in the sector. Investing in modernizing agricultural infrastructure, and investments in value-added processing facilities can unlock new opportunities for growth and innovation, and enable producers to tap into growing export demand. By investing in Canadian agribusinesses, investors can not only generate attractive returns but also contribute to the growth, sustainability, and competitiveness of Canada’s agriculture and agri-food sectors, ensuring a prosperous future for Canadian agriculture.
The Bonnefield Agribusiness Fund
With nearly 15 years’ experience supporting Canadian farmers with land-based financing solutions, the team at Bonnefield has seen significant opportunities to support the growth and capital needs of leading agribusiness operators across the value-chain. For this reason, we launched the Bonnefield Agribusiness Fund LP I (“Agribusiness Fund”) in 2023, to invest in established, lower-middlemarket agribusinesses with significant growth opportunities.
Bonnefield’s Agribusiness Fund invests non-controlling capital through structured solutions, including subordinated debt, preferred equity, and/or equity with warrants, as well as facilitating sale-leaseback arrangements on vital agricultural infrastructure. Bonnefield’s approach is to be a customizable capital solution for business owners across the agricultural value chain. We use structured capital to minimize downside risk to investors, while participating in some of the upside from equity value creation. Bonnefield has deep industry roots and expertise in Canadian agriculture, with long-established agricultural operating partners. This experience provides unparalleled access to investment opportunities with agri-business owners who see Bonnefield as a value-add partner that brings more than just capital – our robust network of farm operators and industry experts that we can leverage to support their growth.
We see an attractive opportunity to invest in leading Canadian agribusinesses while providing attractive risk-adjusted returns to our
investors. We are excited to be able to support the long-term growth and expansion of Canada’s agriculture and agri-food global
footprint. The launch of Bonnefield’s Agribusiness Fund reaffirms our dedication to advancing the future of Canadian agriculture.
For information on the Bonnefield Agribusiness Fund please reach out to investors@bonnefield.com
About Bonnefield Financial
Bonnefield is a leading Canadian natural capital investment manager that invests in farmland and agribusinesses. We provide capital to progressive farmers and agribusiness operators through land-lease financing and non-controlling equity solutions. Bonnefield is dedicated to preserving farmland for farming and promoting sustainable production practices. The firm partners with growth-oriented farmers and agribusiness operators to help them grow, reduce debt, and finance retirement and succession. The firm’s investors are individuals and institutional investors who are committed to the long-term future of Canadian agriculture. www.bonnefield.com
Sources
1. The World Bank. United Nations Population Division. World Population Prospects: 2022 Revision.
2. Food and Agriculture Organization of the United Nations. FAO Statistics Division – Total Agricultural Products, excluding fishery and forestry products.
3. Government of Canada. Overview of the Canadian agri-food system.
4. Government of Canada. Overview of the food and beverage processing industry.
5. Canadian Agri-Food Trade Alliance. Agri-Food Exports.
6. van Dijk, M., Morley, T., Rau, M.L. et al. A meta-analysis of projected global food demand and population at risk of hunger for the period 2010–2050. Nat Food 2, 494–501 (2021).
7. Statistics Canada. Table 34-10-0278-01 Historical (real time) releases of capital and repair expenditures, non-residential tangible assets, by industry and geography (x 1,000,000).
8. Statistics Canada. Table 34-10-0036-01 “Capital and repair expenditures, non-residential tangible assets by industry (x 1,000,000)”; Table 32-10-0049-01 ”Farm Operating Expenses and Depreciation Charges (x 1,000).
This document is for information purposes only and does not constitute an offer or solicitation to buy or sell any securities in any jurisdiction in which an offer or solicitation is not authorized. Any such offer is made only pursuant to relevant offering documents and subscription agreements. Bonnefield funds (the “Funds”) are currently only open to investors who meet certain eligibility requirements. The Funds will not be approved or disapproved by any securities regulatory authority. Prospective investors should rely solely on the Funds’ offering documents which outline the risk factors in making a decision to invest. No representations or warranties of any kind are intended or should be inferred with respect to the economic return or the tax consequences from an investment in the Funds. The Funds are intended for sophisticated investors who can accept the risks associated with such an investment including a substantial or complete loss of their investment.
Sustainability has become an increasingly prominent theme in many industries, and the same is true of agriculture. Agriculture and agrifood system sustainability has drawn attention from both sector participants as well as policymakers and other stakeholders. As a notable and recent example, a full day of 2023’s UN Climate Change Conference COP28 conference in Dubai was dedicated specifically to food and agriculture, representing a landmark first for any COP.(1)
When we consider where and how the world’s food will be grown for future generations, there is a clear impetus to ensure a sustainable global food system that will provide continuity of supply for a growing global population, while preserving – and improving – the land resources that are required to produce food. Initially coined in the early 1980s by U.S.-based organic research center the RodaleI nstitute, the term “regenerative agriculture” has been in the spotlight in the media, politics, academia, and the global business community in recent years.(2)
This might bring a few questions to our readers’ minds:
How is “regenerative agriculture” defined?
Why is it relevant?
What are the associated challenges and opportunities?
Where does Canada stand compared to its global peers?
Defining Regenerative Agriculture
Despite recent widespread use of the phrase, there is no singular, universally accepted legal or regulatory definition for “regenerative agriculture”.(3) This sets the idea of regenerative agriculture apart from a conceptually similar, but distinct phrase “organic”, and the related descriptive prefixes “bio-” and “eco-”, which are legally defined and protected in Europe, amongst other jurisdictions.(4)
Instead, the term “regenerative” is used to refer to various practices (e.g., the use of cover crops, or reducing or eliminating soil tillage), desired outcomes (e.g., better soil quality, or more biodiversity), or some combination of the two.(3) Despite the lack of consensus as to what exactly regenerative agriculture entails, there is some agreement that the main principles and objectives of regenerative agriculture are to promote a holistic view of the global food system to improve soil health, the broader environment, human health, and economic prosperity.(4)
Similarly, McCain Foods – a Canadian leader in the global food industry that produces one in every four French fries consumed across the world(5) – concisely defines regenerative agriculture as:
“… an ecosystem-based approach to farming that aims to improve farmer resilience, yield, and quality by improving soil health, enhancing biodiversity, and reducing the impact of synthetic inputs.”(6)
Outlined in McCain Foods’ Regenerative Agriculture Framework is a set of six principles that can be applied to growing potatoes. Many of those principles can also be applied in the context of growing crops such as wheat, corn, soy, peas, or higher-value fruits and vegetables:
At a glance, some of these principles may seem different than what many would think are incorporated into conventional farming practices. However, based on Bonnefield’s decade-plus experience managing portfolios of high-quality Canadian farmland properties, we have observed that many Canadian crop farmers have employed practices that align with these concepts for years, and often seek opportunities to further improve. Anecdotally, Canadian farm operators acknowledge that sustainable practices can enhance yields and crop quality, while also enhancing and supporting farmland values and long-term production.
Why is Regenerative Agriculture Important?
Global food production has had to scale significantly to support rapid population growth. In the second half of the 20th century, crop yields increased at an unprecedented pace; cereal yields increased by 207% over the five decades between 1961 and 2021 while the total land area used for cereal production increased by just 14%.(8)
This agricultural intensification – or increased crop production on a relatively similar amount of land – has largely been achieved through the strategic use of chemicals (e.g., fertilizer, pesticides, fungicides, and herbicides), crop irrigation, mechanization and technology (e.g., improved and more-efficient farm machinery, precision agriculture technology), and improved seed genetics that have improved seed genetics that has strengthened plant resilience plants’ resilience to disease, drought, and other material risks.(8)
The global population is expected to reach 8.5 billion by 2030 and grow even further to 9.7 billion 2050(9), meaning that the world’s demand for food will continue to increase. However, this growth also means that land that is currently uninhabited or used for other purposes – like farming – will face additional pressure (and, likely, decline) as cities expand to accommodate more people.
A delicate balance must be struck between the need for sufficient, nutritious food and the need for housing, both at home in Canada and across the world. From an agricultural perspective, this underscores the need to employ practices to increase production, while also supporting the sustainability of this finite resource will be critical over the coming decades.
Opportunities &Challenges
As we consider future demand for crop production in a world with declining arable land, the idea that agricultural practices should shift to incorporate increasingly sustainable practices may seem daunting but necessary. On one hand, it may take several years for farmers that currently rely on less-sustainable farming practices such as sustained mono-cropping (i.e., planting the same crop type for multiple consecutive years) to successfully transition to more regeneratively-minded practices. This transitionary period requires an investment of capital, inputs, and time that will impact crop production for at least one to two growing seasons.(10) However, those with a multi-generational view of farming acknowledge that without sustainable practices, the long-term feasibility of the farm operations will be negatively impacted.
In addition to the costs of transition, some question whether regenerative agricultural practices will allow farmers to maintain current production levels. A three-decade field study conducted by the Rodale Institute found that, following the initial transition period, there is typically little if any difference in crop yields on conventional farms vs. regenerative farms.(10) In addition, the study found that the regenerative fields studied outperformed their conventionally farmed counterparts during stressful conditions, particularly droughts, as the regenerative fields were better able to retain water.(10) Beyond the lack of long-term impact to crop yields and fact that regenerative practices also contribute positively to global climate change initiatives, the potential benefits include:
Reduced costs over time resulting from decreased need for raw inputs
Enhanced soil quality, moisture retention, and nutrient balance which can support strong yields and high-quality crops
Increased on-farm water availability for non-irrigation usage, or an overall reduced need for water
Potential access to financial assistance through grants or other non-governmental programs
How is Canada Positioned?
As consumers and other stakeholders have begun to demand increased sustainability and accountability across the entire agrifood value chain, value-added processors have demonstrated a meaningful desire to work with farmers who are sustainability-minded.
Large processors are already positioning themselves to meet growing demands for sustainably-sourced agrifood products. As one recent example, McCain has made an ambitious commitment to source 100% of its potatoes from regenerative farms by the end of 2030.(7) While definitions of regenerative farming may differ between enterprises, we believe that this approach is broadly reflective of the industry’s overall tone and direction looking ahead. This means that for Canadian farmers to remain competitive, they will likely need to incorporate (or continue to utilize) regenerative farming practices in their operations.
The importance of innovation and the role of regenerative farming practices in ensuring the sustainability of Canada’s agriculture industry is not new to farmers. The most recent Census of Agriculture found that while the area of farms across the country declined by approximately 3% between 2016 and 2021, many Canadian farmers implemented precision technologies designed specifically to enhance efficiency and yields, and nearly 65% of operators reported that they engaged in sustainable farming practices.(11) This data points to farmers’ understanding that leveraging these advancements is crucial and, while the field of regenerative agriculture will keep evolving, we believe that Canadian farm operators will continue to demonstrate the adaptability and resilience for which they have become known.
A Supportive Partner for a Sustainable Future
Recognition of Canadian agriculture’s role in the context of global food security, water scarcity, and climate change has underpinned Bonnefield’s business model since the firm’s founding over a decade ago. This includes playing a role as a supportive, non-controlling, partner to progressive Canadian farmers and agribusiness operators as they consider how best to grow for the future.
As one example of our inherent support for agricultural sustainability practices, Bonnefield’s Standards of Care – a set of agronomic best practices developed in conjunction with industry experts to preserve and enhance farmland through sound land management principles – are an integral part of each of Bonnefield’s farmland lease contracts. This hallmark component of our farmland sale-leaseback model includes parameters that are designed to protect and enhance soil health, ensure responsible resource usage, and to generally promote good land stewardship. At a high level, the Standards of Care align to some of the core principles of regenerative agriculture, with a view to both ensuring the long-term productivity of the farms owned by our funds and their long-term value.
Beyond the Standards of Care, Bonnefield actively contributes to the enhancement of Canada’s agricultural industry and long-term sustainability. We have been active participants in the ongoing development of Canada’s National Index on Agri-Food Performance and in August 2023, Bonnefield joined Farm Credit Canada, Manulife Investment Management, and McCain Foods to launch the Canadian pilot of Leading Harvest – a third-party audited Farmland Management Standard designed to promote sustainable agricultural practices.
It is clear that weaving sustainable principles into the fabric of the industry will be an essential part of Canadian agriculture’s growth story, particularly as it becomes more essential than ever in a global context. As a trusted partner to farmers and agribusiness operators, Bonnefield will continue to support progressive farmers and value chain participants as we build a brighter, and sustainable, future for Canadian agriculture.
About Bonnefield Financial
Bonnefield is a leading Canadian farmland and agriculture investment manager, providing financing to progressive farmers and agricultural operators through land-lease and non-controlling equity solutions. Bonnefield is dedicated to preserving farmland for farming, and the firm partners with growth-oriented operators to help them grow, reduce debt, and finance retirement and succession. The firm’s investors are individuals and institutional investors who are committed to the long-term future of Canadian agriculture. www.bonnefield.com
This document is for information purposes only and does not constitute an offer or solicitation to buy or sell any securities in any jurisdiction in which an offer or solicitation is not authorized. Any such offer is made only pursuant to relevant offering documents and subscription agreements. Bonnefield funds (the “Funds”) are currently only open to investors who meet certain eligibility requirements. The Funds will not be approved or disapproved by any securities regulatory authority. Prospective investors should rely solely on the Funds’ offering documents which outline the risk factors in making a decision to invest. No representations or warranties of any kind are intended or should be inferred with respect to the economic return or the tax consequences from an investment in the Funds. The Funds are intended for sophisticated investors who can accept the risks associated with such an investment including a substantial or complete loss of their investment.
Understanding the Impact of Wildfires on Canadian Agriculture
2023 has so far proved to be Canada’s most intense wildfire season in history. At the time of writing, approximately 135,000 square kilometres of forest and other land has been burned by wildfires and forest fires (collectively referred to as “wildland fires”) since the beginning of the year(1). This amount surpasses the previous record for area burned in a single year, which was set in 1989 when 75,596 square kilometres of land across Canada was affected by fires(2). The total amount of land burned to date in 2023 is more than seven times the average area burned per year over the past decade(3).
While there have been numerous evacuation orders across Canada in recent months due to fires, we are relieved and thankful to report there has been no direct impact to any of Bonnefield’s farms as of the time writing. It is important to note that Canadians living and working in rural areas – including farmers and agribusiness operators, as well as the communities of which they are a part – are most directly impacted by these events.
As Canada is home to expansive forests and grasslands, fires are not an unusual occurrence in summer months. Wildfires and forest fires typically occur beginning in May and through to September, with most fires occurring in remote areas(4). However, the intensity of wildfires in 2023 begs the question “why did this year’s wildfire season eclipse prior years so significantly, and what is the potential impact to Canada’s agricultural sector?”
An Unusually Intense Fire Season
For context, the Canadian Interagency Forest Fire Centre reported that there were approximately 900 active wildfires as of mid-July, most of which were considered uncontrolled burns(5). Through May and June, wildfires persisted in Northern Alberta and Northern British Columbia, and forest fires in Northern Quebec led to unprecedented levels of wildfire smoke and poor air quality across Quebec and Ontario as well as parts of the Northeast United States(4). By late June the total amount of Canadian land burned by wildfires in 2023 surpassed the total area burned in 2016, 2019, 2020, and 2022 combined(6) and, in mid-July the federal government mobilized the Canadian Armed Forces and the Canadian Coast Guard to assist with firefighting efforts in British Columbia(7).
There are three key factors that lead to wildfires and forest fires: 1) ignition (either lightning or due to human activity), 2) hot and dry weather, and 3) vegetation (trees, shrubs, and brush) which is made drier and more flammable by arid weather conditions(8). It is believed potential cumulative effects of climate change, along with woodland management practices, have increased the risk of fires starting and rapidly spreading(9). More specifically, drought conditions, high temperatures, and increased frequency of lightning strikes – which start roughly half of Canada’s fires – are thought to be the main climate change-related effects that are contributing to heightened wildfire risk(9).
This summer has been exceptionally hot with record-breaking high temperatures observed globally. In fact, the U.S. National Oceanic and Atmospheric Administration recently reported that June 2023 was the warmest June since global temperature record-keeping commenced in 1850, and the European Union’s Copernicus Climate Change Service indicated that the first two weeks of July 2023 likely represented the warmest two weeks in the planet’s history(10).
In a recent briefing, Northern Forestry Centre at the Canadian Forest Service director general Michael Norton discussed the impact that continued unusually warm and arid conditions across Canada through the summer months will likely have through the rest of the season, stating that “expected warm and dry conditions will increase wildfire risk from British Columbia and the Yukon across the country right to Western Labrador”, and that “it is anticipated that many parts of Canada will continue to see above normal fire activity”(9).
Where do Fires Occur, and How Are They Managed?
Canada is home to the third-largest forest area in the world with over 3.6 million square kilometers of forests, representing approximately 40% of the country’s total land base(11). Only 6% of Canada’s forests are privately owned by non-governmental entities such as forest companies and private owners (e.g., family-owned forests and woodlots), with provincial and territorial governments owning 90% and the federal government owning the remaining 4%(12). The primary areas that experience “normal course” wildland fire activity are southern British Columbia, and across the boreal forest that extends from Alaska across the northern parts of British Columbia, the Prairies, Ontario, Quebec, and the Maritimes(13).
Much of the country’s forested land is remote and sparsely inhabited; however, approximately 17% of that land is considered part of Canada’s wildland-urban interface (WUI)(14), where homes and community structures, commercial and industrial activity, and infrastructure such as roads and railways meet or intermingle with forested areas(15). Wildfires pose a significant risk to WUI areas due to their proximity to the natural vegetation that serves as fuel for wildfires. Researchers have also noted that in these areas, there is also an increased risk of fires being started due to human ignition(16). Moreover, the threat posed to WUI areas by wildfires is growing both in Canada and elsewhere as urban areas continue to expand into wildlands and existing rural areas experience population growth.
The 2016 Horse River Wildfire in Northern Alberta serves as a particularly significant example of wildfire risk in Canada’s WUI. Though firefighters attempted to suppress the blaze that began southwest of the town of Fort McMurray, Alberta, the fire grew extremely quickly as result of hot and dry weather; ultimately, 80,000 people were evacuated from the area and more than 2,400 man-made structures were lost as result of fire(17). The estimated total economic impact of the Horse River Wildfire was nearly $9 billion, and the event represents the most expensive insured natural disaster in Canadian history(18). While it is an extreme example, the Horse River Wildfire illustrates just how quickly wildfires can evolve into large-scale disasters with significant detrimental impacts.
Given the toll that Canadian wildland fires can take in a given year, it is important to consider where responsibility lies for fire management and how fires are managed. As noted, the majority of Canada’s forests are owned by provincial and territorial governments, which also have responsibility for wildland fire management in their respective jurisdictions(19). Federal government agencies are responsible for wildland fire management in select areas including national parks and military bases(19), and Canada has also entered into agreements with other countries, such as the United States, to share firefighting resources and expertise(20).
It is worth noting that Canada’s approach to wildfire management has shifted over time. Fire suppression (fully putting out fires) was historically the primary goal of wildfire management strategies until the 1970s when recognition of fire’s ecological benefits to forests began to grow(19). The current approach to wildfire management across the country involves various levels of fire suppression ranging from complete extinguishment to limited (or no) intervention, and the decision as to whether to fight a fire or let it burn out naturally is made by the government agency responsible for fire management in the area where the fire is occurring, based on that agency’s hierarchy of fire management priorities(19). While many fires are left to burn out naturally, active fire suppression generally takes place within the southern parts of the boreal forest where human activities such as forest harvesting, mining, urban developments, and agriculture are more concentrated(14).
Fire’s Impacts on Canadian Agriculture
Wildfires present numerous risks to people, property and economic activity, though some may be less immediately apparent than others. In addition to the direct risk to human life and property, poor air quality as result of lingering fire smoke can have serious adverse health effects, such as respiratory illnesses and psychological distress(21).
From an agricultural perspective, crop yields may also be impacted by fire smoke due to reduced sunlight levels that can impact the photosynthesis process necessary for plant maturation, as well as increased ground-level ozone that can be damaging to plant tissue(22). As it is impractical for scientists to conduct controlled experiments involving wildfire smoke and thus difficult to specifically isolate the effects of smoke from other factors that ultimately determine crop yields, the direct impact that wildfire smoke has on crop production is unknown; however, this remains an active area of research, and scientists often focus on measuring the effects of smoke events as they occur(22).
Additionally, it has been reported that prolonged exposure to smoke can affect the taste of fruits and vegetables(23). As one example, following the wildfires that affected British Columbia’s Okanagan Valley in 2021, winemakers in the region conducted lab tests on their grapes and found that high levels of airborne smoke molecules had been absorbed by the fruit(24). Ultimately, this led to wines that were bottled in the region that year being affected by “smoke taint”, or an ashy flavour profile that many winemakers view as a negative impact to the quality of the wine that can reduce the end product’s appeal and affect the marketability of a wine vintage(24). Smoke taint may be less of a concern for farm operators who primarily grow row crops that are more commodity-like in nature and are often processed into higher value products such as seed oils. However, the economic impacts of smoke on higher-value crops including fruits and vegetables may become a greater concern for some Canadian farmers over time as wildfires become more frequent and more intense.
Understanding & Managing Investment Risks
As a leading Canadian farmland and agriculture investment manager, we believe that it is necessary to understand the risks associated with investing in Canadian farmland to the fullest extent possible. Since inception, Bonnefield’s investment process has considered regional risk factors that can impact farming including regional soil types, typical area weather patterns, water availability, as well as investment-specific characteristics such as topography, drainage, and other similar attributes.
Though some risks (such as large-scale wildfires, or intense droughts or floods) are difficult to predict and quantify, Bonnefield has contemplated environmental risks as part of our investment process since the firm’s inception and our team has continued to enhance our analysis of these risks over time. A few examples of how our team has integrated major environmental risks into the investment process include:
Collaboration with our extensive network of farmer partners and industry participants, such as agrologists, appraisers, and brokers, to understand and determine specific nuances of environmental risks (e.g., flooding, hail) that affect a particular region;
Leveraging satellite imagery and historical environmental data to better understand both long-term and recent climatic trends and conditions; and
Using underwriting models that include multiple scenarios (e.g., different levels of crop yields) and risk premiums appropriate for a farmland property in a specific region.
As we look ahead to the remaining summer months and beyond, it seems clear that wildfires, along with other major climate and weather events, will continue to be a major theme. However, we are heartened knowing that Bonnefield properties have not to date been directly impacted by this year’s fire activity. We also recognize that a single year of increased wildland fire activity, while notable, is not enough to draw meaningful conclusions from, or change our current practices. Indeed, a year like 2023 provides valuable insight and data to refine our understanding of climate and other risks facing the agricultural industry in Canada. Bonnefield will continue to monitor developments and use this information to support both our farm partners and our investors.
About Bonnefield Financial
Bonnefield is a leading Canadian farmland and agriculture investment manager, providing financing to progressive farmers and agricultural operators through land-lease and non-controlling equity solutions. Bonnefield is dedicated to preserving farmland for farming, and the firm partners with growth-oriented operators to help them grow, reduce debt, and finance retirement and succession. The firm’s investors are individuals and institutional investors who are committed to the long-term future of Canadian agriculture. www.bonnefield.com
This document is for information purposes only and does not constitute an offer or solicitation to buy or sell any securities in any jurisdiction in which an offer or solicitation is not authorized. Any such offer is made only pursuant to relevant offering documents and subscription agreements. Bonnefield funds (the “Funds”) are currently only open to investors who meet certain eligibility requirements. The Funds will not be approved or disapproved by any securities regulatory authority. Prospective investors should rely solely on the Funds’ offering documents which outline the risk factors in making a decision to invest. No representations or warranties of any kind are intended or should be inferred with respect to the economic return or the tax consequences from an investment in the Funds. The Funds are intended for sophisticated investors who can accept the risks associated with such an investment including a substantial or complete loss of their investment.
English 
French