How do We Strike the Balance Between Farmland and Housing?
Farming and agribusiness are essential parts of Canada’s economy. Canada’s agricultural and agri-food sector is a major economic driver for the country that generates over $100 billion of gross domestic product (GDP) and employs over 2 million people(1). However, while Canada is one of the largest countries in the world with a total land mass of approximately 2.5 billion acres(2), in 2021 only 154 million acres (or 6%) of the country’s land was used for farming(3).
As the global population continues to grow there is a natural stress created in balancing the need for agricultural land to support sustainable food production, and increased urbanization to support housing and industry growth. Over recent months, events in the province of Ontario have offered a glimpse into the competing demands on land and highlighted the importance of well developed, long-term and sustainably minded policies and practices with respect to land use.
Ontario – Home to Many and Continuing to Grow
Though only the fifth largest of Canada’s provinces and territories by land area (representing approximately 10% of the country’s land mass), Ontario is the nation’s most populous province and is home to nearly 40% of the country’s total population(4). As such, the province is a major contributor to Canada’s economy, including Canada’s agricultural sector. In 2021, Ontario had the largest number of farms and farm operators of any province, was the second-largest contributor to Canada’s farm revenues and led other provinces in farming key crops such as soybeans and corn(5). The Ontario Federation of Agriculture (OFA) estimates that agriculture contributes $47 billion annually to the province’s GDP while generating nearly 750,000 jobs(6). Additionally, more than half of the highest-quality farmland in Canada is located within Ontario(7).
Despite already being the nation’s most populous province, Ontario continues to grow. The province’s population grew by 24% from 11.4 million in 2001 to 14.2 million in 2021(8). Current projections indicate that Ontario’s population will grow by more than 35% to surpass 20 million within the next 25 years, with the Greater Toronto Area expected to grow the fastest at a rate of over 40% over that same period(9).
However, Ontario’s population growth in recent years has not been met by a commensurate increase in the supply of housing that is both suitable and affordable; it has been reported that home prices and rents in many Ontario cities are now among the highest in the country, and rental vacancy rates have fallen to near pre-pandemic levels(10). Further, the average price of a house in Ontario reportedly increased by 180% over the course of a decade, whereas incomes grew at just 38%(11).
In December 2021, the Ontario government appointed a new Housing Affordability Task Force to help develop a set of recommendations on measures to address housing supply and affordability(12) and, in February 2022, the Task Force released its summary report detailing more than 50 recommendations to the province(12). The measures outlined in the report centered on creating more housing supply and proposed that Ontario adopt a goal of building 1.5 million new homes over the next decade(12).
Policymakers have been presented with the challenge of balancing the needs of a growing population and protecting valuable natural resources – including some of the richest, most productive farmland in the country. It is clear that more homes, particularly affordable housing options, will be needed to house Ontarians, but it is also true that more food will be needed in order to feed a growing population.
Farmland: A Valuable, but Finite, Resource
Though advancements in technology and practices have improved the efficiency of Canadian farms, thus reducing the total acres required to generate strong crop yields, the continued decline of farmland acreage across the country raises the question of where crops will be grown in the future. According to Statistics Canada’s Census of Agriculture data, the total area of Canadian farms declined by over 13 million acres between 2001 and 2021(13), which is roughly equivalent to losing an average of seven small farms per day over the past two decades(14).
Despite the major role that agriculture plays locally within Ontario, farmland loss has been a notable long-term trend in the province. Total agricultural acreage in Ontario has fallen by nearly 20% over the past 35 years(15), and the OFA estimates that the province’s farmland acreage shrank at a rate of 319 acres per day in 2021 – which is a sharp increase of 80% compared to the 175 acres lost per day just five years prior to that in 2016(16). Even more striking, if the current pace of farmland loss continues, 25% of the farmland that exists today in Ontario could disappear within the next 25 years(17).
Beyond its economic impact, Ontario’s agriculture industry has demonstrated significant progress and leadership in terms of sustainably minded farming practices. The number of Ontario farms reporting renewable energy production (such as through the use of solar panels or wind turbines) increased by more than 60% between 2016 and 2021, and the province had the highest proportion of farms planting winter cover crops – which are beneficial for long-term soil health – as compared to other provinces across Canada(5). Put simply: agriculture is essential to Canada, and Ontario is essential to Canadian agriculture.
Policy Responses Continue to Shift
Starting in 2005, the Ontario government established a series of policies, including the Provincial Policy Statement, the Greenbelt Plan, and the Growth Plan, designed to regulate urban sprawl and protect the province’s sensitive environmental and ecological features, such as wetlands and farmland(18). Though these measures may have slowed the rate of residential and commercial land development that would otherwise have occurred were they not in place, it is still clear that Ontario’s farmland base has diminished significantly in recent decades.
Following the Housing Affordability Task Force’s Summary Report in 2022, Ontario’s provincial government has tabled several bills with the aim of seeing 1.5 million new homes built by 2031. Among these pieces of legislation have been Bill 109: More Homes for Everyone Act, 2022 which was passed in April 2022[xix]; Bill 23: More Homes Built Faster Act, passed in November 2022(20); and, most recently, Bill 97: Helping Homebuyers, Protecting Tenants Act, 2023 was passed in June 2023(21).
These pieces of legislation collectively introduced major changes to the policy framework that governs where, how, when, and how quickly land can be re-developed for residential use, and have been met with mixed feedback from municipalities, environmental groups, and other stakeholders, including several of Ontario’s farming industry organizations.
Bill 97 & Demand for Ontario Farmland
The most recent example of housing-focused provincial legislation in Ontario is Bill 97. The policy changes encompassed under Bill 97 are wide-ranging and will make it easier for developers to build on agricultural land. Once such policy change will enable municipalities to expand their boundaries outwards and rezone agricultural land for development, without requiring evidence of need, or further environmental studies(22). Bill 97 would also strengthen the use of “Minister’s Zoning Orders” (MZOs), which allow the provincial government to override local municipalities’ existing land zoning rules and planning processes to directly change how specific pieces of land can be used – for example, turning land that is zoned for agriculture into residential or commercial developments(22).
Though Minister’s Zoning Orders have historically been issued by the provincial government in limited, extraordinary circumstances, they have been used more frequently in recent years to expedite residential and industrial development projects across Ontario(23). MZOs are seen by some local governments as a valuable tool when used responsibly and consistently to help support communities’ needs (e.g., to accelerate housing projects that include affordable units), however, it is also worth noting that MZOs do not require public consultation and cannot be appealed(23) In 2021, the Ontario Auditor General found that no formal process exists for interested parties to request MZOs, nor are there established criteria for approval(24). The Auditor General’s 2021 report on Ontario’s land-use planning tools and practices noted that “lack of transparency in issuing MZOs opens the process to criticisms of conflict of interest and unfairness”, and that MZOs are disruptive to land-use planning processes that would otherwise normally require years of consultation and preparation(24).
Bill 97 also initially included a clause that would allow municipalities to divide large farms into smaller land lots, with a view to making it easier to build homes(25). More than a dozen farming organizations including the Ontario Federation of Agriculture issued a joint letter to the Ontario government objecting to the proposed changes relating to farm severances, noting that granting municipalities the ability to split farms could hamper the growth of agricultural businesses such as livestock farming, fragment the agricultural land base, and risk inflating farmland prices due to new demand for land in traditionally farming-centric regions(26). Ultimately, the Ontario government decided not to proceed with the proposed lot severance regulation change but left the rest of Bill 97, including the MZO and municipal expansion proposals, intact.
Balancing Growth and Conservation – a Global Issue
Recent events in Ontario serve as an example of the delicate balance that must be achieved when considering both the protection of valuable natural resources and how municipalities will accommodate growth. However, this is not an issue unique to Ontario.
In June 2023, the State of Arizona implemented restrictions on home-building in the Phoenix area, currently one of the fastest-expanding municipal areas in the United States, in light of concerns over water supply based on groundwater projections over the next 100 years(27). The new restrictions will not affect projects that received permits prior to announcement of the policy but will prevent the construction of new homes that rely on groundwater supply, particularly in suburban areas(28). In a news conference, Arizona Governor Katie Hobbs stated that “this pause will not affect growth within any of our major cities”(29).
Maricopa County, which includes Phoenix and surrounding suburbs, draws more than half of its water supply from groundwater; given it can take thousands of years to replenish groundwater it is effectively a finite resource(28). On the subject of the role that water availability plays in future development, Director of the University of Arizona’s Water Resources Research Center Sharon Megdal noted that “we need to have water supplies in order to grow”(27).
Though it is not clear how Ontario’s growth story will ultimately evolve, increased housing supply and a stable food supply chain – including locally-produced food – will both play critical roles in supporting population growth for the long term. It is also true that, as a major contributor to Canada’s agricultural exports, Ontario’s farming sector will likely become increasingly important in the context of global food supply as the world’s population grows and climatic factors shift where crops can be growth around the globe. As a partner to Canadian farmers and agri-business operators for over a decade, Bonnefield has observed that Ontario’s farmers, along with their counterparts across the country, are resilient, adaptable, and growth minded. Ontario’s agriculture industry will play a major role in supporting the province’s growth, and access to farmland will remain an essential part of ensuring the sector’s success for years to come.
Bonnefield’s Perspective
Bonnefield is a proud, longstanding and supportive partner to Canadian farmers and agri-business operators. We prioritize “farmland for farming” and would like to see future generations of Canadian farmers have access to high quality, productive farmland. Farmland, and premium farmland in particular, is a valuable resource on which our future food production depends. For over a decade, Bonnefield’s farmland sale-leaseback offering has provided farm operators across the country with an alternative source of capital that ensures long-term access to the high-quality farmland that is essential for their operations, while also maintaining and enhancing the land that we invest in through agronomic best practices and strategic property improvements.
We also recognize that farmland represents the largest financial asset for many farm families and that selling land – whether to other farmers, long-term investors, or developers – allows operators to realize some of the long-term value appreciation of their land assets. This in turn provides farm operators with capital to help achieve important goals, such as transitioning toward retirement, or investing in other aspects of their businesses (e.g., equipment, technology, alternative parcels of land that improve operational efficiency).
It is our view that farmers should be able to manage and operate their businesses in a way that allows them to achieve their objectives, and that includes retaining the optionality to maximize the value of their lands by selling to the highest and best users of that land. With that in mind, the recent policy changes related to land-use planning in Ontario may make such decisions more complex for farmers by potentially expanding the competitive universe of parties looking to acquire prime farmland for a variety of uses, which will result in greater competition for farmland. Though this may be a positive for those already considering exiting the farming industry, it will also make it more difficult for young farmers to enter into the industry and for existing farmers to expand, and thus potentially increase the profitability of their businesses.
It is clear that Canada will require a significant increase in housing stock to meet current and future demands for housing. However, a balance must ultimately be achieved between the need for new housing and the need to preserve farmland – a scarce and valuable resource – for future generations. We acknowledge that this will be a significant challenge for policymakers over the years to come but believe that consideration should be given to:
Pursuing new housing through densification in existing urban areas across the country, and
Protecting our most valuable and productive farmland through rigorous and effective long-term zoning regulations.
The Ontario Housing Affordability Task Force’s 2022 report highlighted a need to make better use of land, noting that undeveloped land should be part of the solution “but isn’t nearly enough on its own”, and that “most of the solution must come from densification”(11). Additionally, the Task Force’s report stated that “environmentally sensitive areas must be protected, and farms provide food and food security. Relying too heavily on undeveloped land would whittle away too much of the already small share of land devoted to agriculture”(11). As a leading partner in Canadian agriculture, Bonnefield is aligned with this sentiment; it is our sincere hope that effective collaboration between policymakers and industry stakeholders will help to preserve as much as possible of one of Canada’s most valuable resources – the land that feeds us.
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.
Investors are increasingly realizing the value of private market and alternative assets in their portfolios for their diversification benefits and low correlation to traditional public market equity and fixed income products. The case for alternative investments was clearly highlighted throughout 2022 as public market asset valuations experienced volatile and, in many cases, negative performance.
Institutional and non-institutional investors alike saw their private market and alternative asset allocations account for a greater overall portion of their portfolios through 2022, both as a result of the relative decline in value from public markets (the “denominator effect”) as well as strong performance in select private market asset classes (“the numerator effect”).
However, recent market dynamics have brought two questions to the forefront for private market investors:
“How are my private market assets being valued?”, and
“Can I realize on these values by redeeming my existing positions?”
These topics are important considerations when evaluating the extraordinary variety of investable assets available to investors and are also topics that Bonnefield, one of Canada’s leading farmland and agriculture investment managers, regularly discusses with investors. Our team is keen on ensuring that all investors, irrespective of scale, fully understand and consider the importance of different valuation practices and liquidity features when selecting investments to meet their own investment requirements
Investing in Canadian Farmland – How can you Mark-to-Market?
Across private markets, fund managers use different valuation methodologies and practices to apply to their investment portfolios. Some use their own internal valuations while others rely on third parties. Some strike new values quarterly while others, every 12 months. It is important for potential investors to evaluate these methods and determine their comfort with, and suitability of, the approach with the asset and investment model.
Over its 14+ year history, Bonnefield has developed and refined our farmland valuation practices in a way to provide confidence to investors. We engage third-party, independent, accredited property appraisers to conduct thorough appraisals on our farmland properties, and those appraisals ultimately form the basis of the quarterly Net Asset Values (“NAVs”) of the funds.
Key Considerations
Arm’s-Length, Independent Appraisers
The use of third-party appraisers lends itself very naturally to farmland and we are fortunate in Canada to have a strong roster of qualified, independent professionals able to effectively value Bonnefield’s farmland properties across the country. The Appraisal Institute of Canada (“AIC”) is Canada’s leading real property valuation association and is a self-regulating organization that grants the Accredited Appraiser Canadian Institute (“AACI”) designation to qualified professionals who meet certain educational and experience requirements. These professionals must complete a series of examinations and continuing education requirements(1). As appraisers are held to a professional code of conduct by the AIC and are formally educated in the appropriate methodologies to derive property values, we are confident that the appraisal reports produced by AACI-accredited appraisers reflect the appraisers’ independent views of fair market value based on defined, objective analysis.
Fact-Based Analysis & Results
Professional appraisers rely primarily on quantifiable, observable data points to support their views of property values. Appraisal reports typically include a detailed analysis of relevant comparable property sale transactions that have occurred in the market, and that set of comparable sales transactions is refined based on geographic proximity, inherent land characteristics (e.g., soil types, crop types, topography, water access, drainage), and recency. Determining market values based on actual, tangible data ensures that appraisal values reflect current market conditions and do not consider speculative views as to where values may trend in the future.
Transparency
In private markets, information asymmetries can act as both a benefit and a risk. Bonnefield maintains a robust, proprietary internal database of farmland sale transaction activity across the country. This data set includes transaction dates, prices, and high-level property information that ensures our team is well-informed regarding historical observable farmland transactions. The database is updated on an ongoing basis. Having access to this information also helps to guide the initial stages of our investment process by enabling our team to quickly assess whether the proposed sale price for a potential farmland acquisition is reasonable in the context of the broader market. This database is also valuable when reviewing third-party valuation reports to ensure that no relevant transactions have been overlooked, which can occur in practice.
Timeliness of Data
Bonnefield strikes quarterly NAVs across its open-ended farmland funds and these values are informed by staggered appraisals across its properties. Bonnefield ensures each property is appraised at least once annually and can test its core regions and sub-strategies quarterly with this approach. This cadence matches the realities of the industry whereby a single growing season is unlikely to result in meaningful valuation changes within 12 months. However, to ensure timeliness of data, we continuously monitor comparable sales across the country to identify whether recent activity warrants additional appraisals throughout the year. It is our view that this level of rigour is appropriate for ensuring the most accurate reflection of value and ongoing pricing as possible, given the realities of a private, relatively illiquid market for farmland.
Liquidity Considerations for Investors in Private Markets
The discussion above outlines the approach that Bonnefield takes to valuing our Canadian farmland investment portfolios. The valuation approach is one of the key considerations when evaluating a private markets / real asset manager but, just as important is the question of how an investor can realize on value gains over time.
This question has been a particularly ‘hot topic’ given 2022 conditions, which saw private markets meaningfully outperform their public counterparts. Such a differential in performance can lead investors to request redemptions from their private markets fund holdings – a dynamic that was brought to light by reports of funds such as Blackstone’s REIT restricting redemptions in response to a surge in redemption requests. Closer to home, Canadian private mortgage lender Romspen also announced that it was freezing redemptions.
What actually drives these surges in redemption activity?
There is likely no single driver of increased redemption requests but in times of private market outperformance it is possible that investors are looking to realize value in anticipation of a value decline or rebalancing needs in other parts of their portfolio.
They may believe that values have not been adjusted on a timely basis and therefore want to redeem before the “correction” occurs. Or they could mistrust the value and want to realize on gains when possible. Both cases speak to the earlier points discussed with respect to the importance of appropriate valuation timing, transparency, and supporting data. Similarly, more institutional managers often manage their portfolio to pre-defined portfolio allocations and outperformance (or underperformance) in any one allocation can result in a shift away from their optimal mix.
Across Bonnefield’s open-ended farmland funds, we did not see heightened redemption requests through the end of 2022 despite strong performance of the assets. However, this is not unexpected given:
Canadian farmland is expected to outperform in times of high inflation; our investor base was not surprised to see the funds outpace other asset classes in the 2022 inflationary environment.
Farmland is a long-term, low volatility asset, and our investors have a long-term time horizon for their investments.
Our quarterly NAVs are based on third-party independent appraisals that use a comparable sales approach, thus drawing on actual comparable asset performance.
Our funds realize gains on an ongoing basis through regular portfolio management, most often in the form of sales of acreage back to our tenants or local farmers. This can serve as a market-test and enhance investor confidence in the ongoing valuation of the properties.
As Canada’s leading agriculture-focused investment manager, Bonnefield strives to be a strong steward of both the farmland properties that we manage, as well as capital invested by our limited partners. We are proud to be a source of long-term capital for farmers and agricultural operators, backed by investors who are committed to the long-term success of 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.
Bonnefield has always been a strong supporter of Canadian agriculture. For over a decade we have worked with farmers across the country to grow their operations, transition to the next generation, or stabilize and strengthen their balance sheets through a flexible land-based capital solution. Over this time, we have heard from many others interested to understand how Bonnefield could also support their businesses beyond farmland. Not only does this represent a natural extension of our existing farmland investment activities, but it is also in keeping with our commitment to the future of Canadian agriculture to find a way to support these operators. For this reason, we are launching a new investment vehicle, the Bonnefield Integrated Agriculture Fund, with a mandate to invest in agri-businesses and on-farm infrastructure via non-controlling capital for leading operators.
When we think of food production in Canada, the focus is often on primary production, particularly crop and livestock farming, or on the manufacturing and sale of finished products such as baked goods, shelf-stable products, bottled beverages, packaged fresh and frozen produce, and other readily consumable items that are available at most food retailers. However, there are a number of integral steps between primary production and the sale of finished products to consumers. The journey that our food takes from field to plate is complex and, while each part of the agri-business value chain faces unique challenges, we believe that there is significant opportunity and need for investment and growth in this sector.
A Primer on Canada’s Agri-Business Value Chain
Food production begins with primary agriculture, which encompasses the core activities that are performed within the boundaries of farms, nurseries, or greenhouses(1). Primary agriculture can include growing and harvesting crops (e.g., grains, fruits, vegetables), dairy farming, raising livestock and poultry, and aquaculture.
After food leaves the farm, processors transform raw food inputs into products and by-products that are either finished and ready to consume (e.g., milk, meat, packaged fruit and vegetables) or are then used in further value-added processing to create other goods (e.g., oils, flours, extracted proteins). Most of the food that we eat must be processed in some way prior to consumption. To take a simple example: wheat must be grown, harvested, graded (inspected and assessed for quality), cleaned, dried, ground, packaged, and shipped before it can be used to make food products such as bread.
Storage and logistics also play a fundamental role through the entire process, ensuring that food products are held safely, available for use, and able to move efficiently on to the next buyer or consumer. Grain storage and elevators, terminals, warehouses, cold storage and transloading facilities, and third-party transport providers (including trucks and railways) are a few notable examples of additional services and infrastructure that are necessary for food products to ultimately reach end consumers. These functions are essential in ensuring that Canadian food products are able to reliably reach domestic and international end markets. Notably, Canada is a major exporter of food to countries around the world and is expected to play an increasingly major role as climate change continues to affect where food is produced around the world in the coming decades.
Toward the far end of the value chain lies food distribution and retailing, and the foodservice industry. Wholesalers, grocery stores, diversified retailers, convenience stores, specialty retailers, and restaurants represent the most frequent and consistent touchpoints that many Canadians have with the agri-business value chain.
Overview of the Canadian Agri-Business Value Chain
Food Production: A Canadian Economic Powerhouse
Canada’s agriculture and agri-food processing sector is a major driver of our country’s economy in terms of production value, job creation, and international trade. Canada’s most recent Census of Agriculture reported that there were nearly 190,000 farms across the country as of 2021 which collectively employed 241,500 individuals(2). Primary agriculture also generated approximately C$32 billion, or 1.6%, of Canada’s gross domestic product (GDP) for the year(2). The Census also reported that total farm cash receipts reached an astounding C$83.2 billion for the year, of which 57% (C$47.3 billion) was attributed to crops and 36% (C$30.0 billion) was attributed to livestock and livestock products, with the remaining portion comprised of direct payments(3).
Food and beverage processing was also a major source of production value and Canadian jobs in 2021, having generated C$33 billion, or 1.7%, of Canada’s GDP for the year and employing over 300,000 individuals(2). Food and beverage processing also represented the single largest manufacturing industry in Canada in 2021, accounting for nearly 18% of all manufacturing-related GDP for the year(2). Interestingly, approximately 70% of all processed food and beverage products sold in Canada were manufactured by domestic producers in 2021, with half of the imported products having been manufactured in the U.S. and the remaining imported goods sourced from other countries around the world.
The economic importance of Canadian farming and food processing is further underscored when we look more closely at international trade. In 2020, the total trade value of all of Canada’s exports reached C$370.8 billion dollars, of which C$56.9 billion or 15.3% was attributed to collectively to vegetable products (C$24.5 billion / 6.6%), foodstuffs (16.3 billion / 4.4%), animal products including meat, cheese, eggs, and milk (C$12.5 billion / 3.4%), and animal and vegetable by-products including oils (C$3.5 billon / 0.9%).
As seen above, the aggregate trade value of Canadian food exports rivalled the value of exports from several other natural resource sectors including oil & gas and the extraction of minerals and metals, as well as the export of automobiles, airplanes, and locomotive equipment.
The strength of Canada’s agri-business sector relies on a functional, efficient value chain that extends from primary food production through to distribution, whether to domestic or international end markets. As discussed in Bonnefield’s most recent White Paper exploring the effects of climate change on global agriculture, we believe that Canadian food production will prove to be increasingly important over the near- to mid-term as the effects of climate change begin to affect food production elsewhere in the world.
As Canadian production of certain food products, such as crops, fruit, and vegetables stands to increase due to favourable shifts in climactic conditions over the coming decades, we believe that major investment in increasing processing capacity and technology, along with storage and transportation infrastructure, will also be necessary as we look to the future.
A Need for Capital…
According to a 2018 study conducted by Canada’s Economic Strategy Tables discussing the state and goals of the country’s agri-food sector, Canada had 11,499 food and beverage processing establishments in 2017 of which 94.4% were small operations with fewer than 99 employees(5). Additionally, capital investment in the food processing industry, particularly machinery and equipment, as a percentage of sales dwindled from 2.3% in 1998 to just 1.2% in 2016, and R&D expenditures in the Canadian agri-food sector as a percentage of sales fell by 24% between 2008 and 2016(5). This suggests that there has been a sustained under-investment in Canada’s food and beverage processing industry that needs to be addressed.
Finally, the report indicates that the investments that have been made in food processing innovation were fragmented across educational institutions, food technology centres, research centres and locally focused incubators(5). While these organizations play an essential role in terms of research, their scope in being able to achieve scaled commercialization is intentionally limited(5).
Just as we saw a need for alternative sources of financing in the farming industry over a decade ago, Bonnefield recognizes that Canadian agri-businesses more broadly are also limited in their access to sources of capital. These companies are often operating in manufacturing-related sectors that are capital-intensive. They require machinery, facilities, and technology – any or all of which require significant funds to acquire and implement – to compete successfully and achieve growth. Traditional debt-lending provides meaningful support to these operators but complementary, industry-specific, alternative forms of financing are lacking in the Canadian market.
… and an Attractive Investment Thesis
For those looking to gain exposure to the attractive investment attributes of agriculture, investment in Canadian agri-businesses offers an appealing option. Not only is there demand for increased investment into the sector, but Canada specifically offers unique and attractive dynamics.
Diversification: In terms of crop farming, Canada benefits from a geographic landscape, soil types, and climactic conditions across the country that result in growing conditions that are hospitable for different crop types on a regional and localized basis. For example, farmers in New Brunswick have access to land that can successfully produce potatoes, whereas farmers in the Prairies have farmland and weather conditions that better suited to row crop farming. The same is true of other agricultural products, such as dairy, wild-caught and farmed seafood, and livestock. Given the diversity of agricultural production across the country, there are many unique opportunities for businesses further along the value chain to add value through processing, packaging, storage, and transportation of Canadian farmed products. We believe that this inherent diversification gives rise to a myriad of opportunities for investors looking to deploy capital in the space.
Demand for Canadian Products: Canada’s reputation for outstanding food product safety and quality is world-renowned(5). An increasing consumer focus on food nutrition and safety, combined with a growing global population and a changing climate-driven shift in where the world’s food will be produced in the future provides a strong rationale to support the thesis that demand for Canadian-made food products will likely continue to grow over the coming decades. To meet this demand, the entire value chain – from primary producers to processors and distributors – will need to grow. Naturally, we anticipate that this will create compelling opportunities to invest in Canada’s agri-business sector, particularly around achieving scale and innovating for the future.
Supportive Regulatory Environment: The Canadian agri-business sector also benefits from a regulatory environment that seeks not only to support existing industry participants, but to grow the industry over the long-term. One example of this is the Canadian Agricultural Partnership (“CAP”) – a five-year joint investment program through which Canadian federal, provincial, and territorial governments will invest C$3 billion between 2018 and 2023 to strengthen and growth the agriculture and agri-food sector(6). The CAP encompasses initiatives, program, and funding geared toward growing trade and expanding markets, innovation and sustainable growth, and supporting diversity(6). Though this is one of many examples of Canada’s long-term practice of providing governmental support for the agriculture and agri-business industry, it still stands that the sector has seen a lack of investment in recent decades.
Bonnefield’s Role
As Canada’s leading provider of supportive, flexible sale-leaseback financing solutions for Canadian farmers, Bonnefield has heard time and again from our farmers and network of business partners that there is a distinct need for investment in the Canadian agri-business value chain beyond the farm gate. The launch of the Bonnefield Integrated Agriculture Fund is a major milestone for our firm that represents an opportunity to further expand our presence as a partner in agriculture by supporting leading Canadian agri-business operators. We are excited about this evolution and look forward to contributing to the ongoing strengthening and growth of Canada’s agricultural industry.
About Bonnefield Financial
Bonnefield is the foremost provider of land-lease financing for farmers in Canada. Bonnefield is dedicated to preserving farmland for farming, and the firm partners with growth-oriented farmers to provide farmland leasing solutions 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.
Permanent Crops and Canada’s Evolving Agricultural Landscape
As a major agricultural producer and exporter, Canada is a leading supplier of traditional cold-weather crops such as wheat and canola across the globe. However, higher-value permanent crops such as apples, berries and stone fruits are increasingly being grown in Canada as growing conditions continue to become more accommodative as a result of climate and weather shifts.
Bonnefield has been working with blueberry farmers for many years and recently completed its first transaction with a leading British Columbia-based grower of raspberries, as we continue to ensure our farmland portfolios reflect the diversification of the Canadian agricultural landscape. Below we break down some of the key differences between row crops and permanent crops and how changing growing conditions may impact the future economics of agriculture in Canada.
Row Crops vs. Permanent Crops – What’s the Difference?
The terms “row crops” and “permanent crops” may be unfamiliar to some. An easy way to distinguish between the two is to think about a permanent crop as one that does not require annual replanting. Examples of permanent crops in Canada can include apples, blueberries and grapes. In each of these instances, fruit is produced for multiple years on the same plant (biological asset). Row crops, on the other hand, are seeded annually (i.e. wheat, canola, barley, corn, etc.).
The risk profile of permanent and row crops varies due to the fact that permanent crops rely on the biological asset’s survival through the winter months and potentially volatile weather conditions through the entire year, over the course of several years. Permanent crops also tend to be more labour-intensive than row crops, requiring greater inputs from a time and materials perspective.
The demand and end-market profile for row crops and permanent crops also tend to be different. Due to a shorter shelf life a larger percentage of permanent crops are sold into local markets. In addition, demand for permanent crops depends more on consumer preference than demand for row crops does. For example, certain varietals of berries and apples are more popular today than they were a decade ago as end consumers’ size and flavour preferences have changed. Conversely, demand for row crops is driven by a variety of macro-factors such as global production and supply levels for key crops such as wheat and soy, as well as continued global population growth. As row crops are more likely than permanent crops to be processed prior to human consumption – for example, the milling and refining of flour prior to its use in producing baked goods – consumer preferences generally have less of a direct impact on overall demand.
Permanent Crops in Canada
Canada has not historically been known as a major grower of permanent crops. While approximately 34% of all Canadian farms were reported as oilseed and grain farming operations, just 4% were fruit and tree nut farming operations per Statistics Canada’s 2021 Census of Agriculture(1).
However, we are seeing a wider range of cultivars now available as a result of favourable climate impacts on Canadian agriculture. Historically, harsh winters have limited permanent crop production in Canada as permanent crops, which are harvested from trees, shrubs or vines that do not need to be replanted each year, generally require milder conditions to protect the plant through the winter months.
Producers use the Canadian Plant Hardiness Zone Mapping system to predict winter survival rates for their crops and, in 2010, these maps were re-drawn to reflect changing climatic conditions. The updated maps show a substantial northward migration of historical growing regions, and academic studies predict continued northward expansion of land suitable for growing warm weather permanent crops(2)(3). This change is exciting for Canadian farmers as permanent crops that have historically been grown in warmer, more southern parts of North America tend to command higher prices, which drive increased farm revenues and, ultimately, higher farmland values(4).
Bonnefield’s Experience
As previously mentioned, Bonnefield works with a number of leading permanent crop growers across Canada. We currently support apple, blueberry and raspberry producers through our alternative farmland financing solutions, and we continue to evaluate new varietals and growing regions in order to broaden our scope across the industry.
From our perspective, exposure to permanent crops offers valuable diversification that both de-risks our activities and provides us with exposure to farm operators with different and higher cash-flowing economic models than many traditional row croppers. While a single, standalone transaction in a permanent crop farm would likely demonstrate meaningful volatility and thus have a higher overall level of risk compared to a row crop operation, Bonnefield’s ability to complement exposure to permanent crops with a solid base of row crop investments creates an attractive risk/return profile for our holdings overall.
Additionally, our experience working with diversified permanent crop producers in Canada has further highlighted for us the benefit to being in Canada versus other parts of the globe. We all recognize that California has historically been a leading producer of high value permanent crops and a leading agricultural region. However, ongoing water shortages create significant strain on the industry and increasing heat units create risk for harsh growing conditions, and increased pest and disease prevalence. This increases the cost of operating in the region and enhances its volatility profile. Canada, on the other hand, has significant access to water resources and more moderate growing conditions. Our ability to grow varied permanent crop types is increasing which offers Canadian farm operators valuable optionality in their crop choices. Bonnefield is proud to be able to support these farmers throughout their business life cycle as we work towards the common goal of a strong and resilient Canadian agricultural industry.
About Bonnefield Financial
Bonnefield is the foremost provider of land-lease financing for farmers in Canada. Bonnefield is dedicated to preserving farmland for farming, and the firm partners with growth-oriented farmers to provide farmland leasing solutions 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.
Surging agriculture input costs, especially the prices of fertilizer and fuel, have been top of mind for many Canadian farmers as they kick off the 2022 seeding season. Fertilizer prices reached multi-year highs in Q4 2021, and the emergent conflict in Ukraine in early 2022 has only exacerbated the already-strong upward pressure on market prices.
According to Bloomberg’s Green Markets Fertilizer Price Index – which tracks North American fertilizer prices over time – fertilizer prices have more than tripled since early 2020.(1)
Green Markets Fertilizer Price Index (Nov. 2019-May 2022)
Source: Green Markets, a Bloomberg LP Company
The global supply chain has been massively disrupted since the onset of the global COVID-19 pandemic, as logistical bottlenecks built up at the world’s largest shipping ports while nations experienced labour shortages due to lockdowns, and dislocations affected shipping routes, air cargo, ground transport lines, and railways(2).
As countries around the world began to loosen pandemic-related restrictions through late 2021 and 2022, commodity prices have soared as result of pent-up demand and supply constraints, with fuel prices rising significantly. In addition, several recent events have further restricted the supply of fertilizer chemicals, such as ammonium phosphates, nitrogen, potash, and urea, resulting in continued upward pressure on prices:
Extreme Weather in the U.S.: Hurricane Ida hit the U.S. Gulf Coast in September 2021, effectively shutting down production and causing serious shipping delays and logistical challenges in New Orleans – the U.S.’s main trading hub for fertilizers(3);
Chinese Export Policy: China, one of the world’s key suppliers of urea, sulphate, and phosphate, imposed new customs regulations in October 2021 that included enhanced inspection requirements and new export certificates on a wide variety of export products, including urea and ammonium nitrate, that effectively curbed the export of fertilizers from the country. This move followed a September 2021 circular from China’s National Development and Reform Commission, the country’s economic planning body, calling for stability in fertilizer prices in the domestic market(4);
Russian Trade Restrictions: Russia temporarily halted the export of fertilizers from the country in March 2022, citing a lack of logistical connectivity and lack of transport ship arrivals in Russian ports after commencing an attack on Ukraine that continues to occur as at time of writing. Notably, Russia is also a major producer of potash, phosphate, and nitrogen-based fertilizers, and many countries have implemented sanctions against Russia as well as tariffs on Russian goods(5).
Fertilizer exports from the U.S., China, and Russia have historically reached differing end markets, with the main destinations for U.S. fertilizers being Canada, Brazil, and Mexico, whereas some of the key markets for Chinese and Russian fertilizers include Brazil, India, Australia, and Estonia(6). That said, the developments highlighted above collectively have led to an unprecedented strain on the global supply of fertilizer chemicals, thus impacting farmers and food prices across the world.
Global Fertilizer Trade
Fertilizers represent one of the world’s most heavily traded product types and, as shown below, the largest exporters in 2020 were Russia, China, and Canada
Largest Global Exporters of Fertilizers – Share of Global Export Trade Value by Country (2020)
Source: Observatory of Economic Complexity.
As noted, Russia and China have recently implemented increasingly isolationist-style export policies and, in 2020, the two countries accounted for ~23% of fertilizer exports globally(6). With these two major exporters limiting outbound trade of fertilizers, as well as the war in Ukraine and its trade implications (e.g., sanctions affecting the ability import of Russian goods), countries around the globe have directly felt the impact of supply limitations. Brazil and India stand to bear the brunt of the immediate supply shock, with Brazil and India having sourced ~26% and ~31% of their fertilizer imports from Russia and China collectively(6).
In Brazil’s case, there are concerns that the uncertainty and extremely elevated costs associated with sourcing fertilizer could hinder crop yields, resulting in a smaller harvest and even higher global food prices higher given the country’s importance in global crop markets. This is in addition to existing concerns around Brazil’s 2022 yields due to the possibility of extreme weather, like the severe drought experienced during the 2021 growing season(7). Brazilian farmers are considering various strategies of dealing with the shortage; SLC Agricola SA, one of the country’s largest producers of soybeans, corn, and cotton, is planning to reduce fertilizer usage by up to 25% in the coming year(8). On the supply side, major fertilizer producers are exploring ways to ramp up production, but doing so will take time and is thus not an immediate possibility. Canada’s largest potash producer, Nutrien, has committed to increasing its potash production by almost 1 million tonnes this year – the ramped-up production is expected in the second half of 2022(9), which is after the Northern Hemisphere’s seeding season. In summary, while major food and chemical producers alike are employing their best efforts to stabilize prices and ensure continuity of supply for both fertilizers and food, it could take months (or longer) before the impact of those efforts is seen.
A Canadian Perspective
Canada is the world’s third-largest exporter of fertilizers and has historically imported significantly less fertilizer in aggregate than it has exported(6). In 2020, the total trade value of fertilizers exported from Canada totalled approximately US$5.5 billion (C$7 billion(10)), whereas the total trade value of imported fertilizers was approximately US$1.4 billion (C$1.8 billion(10))(6). Notably, Canada is the largest global producer and exporter of potash, which refers to a group of chemicals and minerals that contain potassium (such as potassium chloride) that are most commonly used in fertilizers(11). Canada exported 22 million tonnes (“MT”) of potash in 2020, accounting for approximately 39% of the world’s total exports(11).
From this perspective, it may seem that Canadian farmers would be well-positioned to rely extensively on domestically produced fertilizer in operating their farms. However, it is important to note that successful crop growth requires a variety of different soil nutrients, some of which are not naturally occurring in soil and must be added through fertilizer application; as such, farmers cannot rely solely on Canadian-produced potash to grow their crops.
Canadian fertilizer production is very heavily concentrated toward potash, with 23 million MT having been produced between July 2020 and June 2021. In contrast, during the same period Canada produced approximately 4.8 million MT of ammonia, 4.5 million MT of urea (a form of nitrogen fertilizer), 1.5 million MT of urea ammonium nitrate (“UAN”), 1.3 million MT of ammonium sulphate, and less than 1 million MT each of ammonium nitrate and other fertilizer products(12).
We can also look to the Fertilizer Shipments Survey conducted by Statistics Canada on behalf of Agriculture and Agri-Food Canada for data on what types of fertilizer are shipped by manufacturers, wholesale distributors, and retailers to destinations within Canada to provide context on what types of fertilizers are used in Canadian farming(13). Between July 2020 and June 2021, the most-shipped fertilizer chemicals were urea (3.5 million MT of shipments within Canada reported), urea ammonium nitrate (1.4 million MT); and monoammonium phosphate (“MAP”; 1.5 million MT)(14). In addition to being a widely used fertilizer in Canada, MAP is water-soluble, contains the highest concentration of phosphorus of any common solid fertilizer, and has good storage and handling properties(15).
While Canada’s domestic production of both urea and UAN exceeded the total amount shipped to destinations within the country over that period, the same is not true for MAP(12)(13). In 2020, Brazil, Canada and Australia were the world’s largest importers of MAP, accounting for approximately 32%, 12%, and 7% of global trade value respectively, whereas the top exporters of MAP were Morocco (25% of global trade value), the U.S., (20%), China (19%), and Russia (16%)(6). The specific example of global MAP trade highlights that Canadian farmers do have to rely to some extent on importing certain fertilizer chemicals to generate strong crop yields while ensuring that the soil on their farmland remains in good health. Historically, the majority of Canada’s fertilizer imports have been sourced from the United States, with only a small fraction having been imported from Russia and China(6). With that said, Eastern Canada relies more heavily on Russian imported chemicals than does the rest of the country as there is essentially no local production of nitrogen, phosphorus, or potash in the region(16).
Fertilizer supply contracts are typically put in place by larger, more sophisticated Canadian farmers well in advance to ensure access to supply and allow for long lead times associated with production and shipping, with many of the contracts for 2022 having been established in 2021. That said, the 35% tariff on virtually all Russian imports implemented by the Canadian government in March 2022 went into effect as shipments were already en route to Canada from overseas destinations including Russia(10), which has resulted wholesalers and importers passing the tariff-related costs along to the end purchasers, including farmers(17).
As a result, Canadian farmers are currently in a position where they are reassessing whether they can apply smaller amounts of fertilizer and still achieve strong crop yields, or if alternatives (such as manure) present a viable option to minimize costs. Another unique aspect of Canadian farming is that many producers have some degree of optionality as to what crops they plant. For example, if the fertilizer specifically required to grow corn is not readily available, growers are able to switch to a crop that may need less fertilizer, or to a crop requiring fertilizer that their dealer can reliably source.
While input costs are on the rise, so too are the food commodity prices that drive farm incomes. Canadian farm cash receipts came in at an all-time high in 2021, marking a 9% increase over 2020, due primarily to record commodity prices(18). The strong growth in 2021 farm cash receipts was on the back of an already strong year in 2020, which had seen a 15% increase over the previous year(12). Higher revenue as result of food prices largely keeping pace with increasing input costs has provided some comfort for Canadian farmers with respect to their abilities to tolerate those cost increases over at least the near- to mid-term.
How Does This Affect Bonnefield’s Farmers?
Bonnefield’s farmers, who are progressive, well-established operators and have strong community ties, continue to be agile in their handling of the uncertainty around supply availability and costs. Many of our farmer tenants were very proactive ahead of the 2022 growing season, purchasing fertilizer well ahead of time. In addition, many of our farmers purchase seeds that already contain fertilizer which provides some flexibility as to the timing of fertilizer application should shipping delays occur. This are just some of the many examples of the resilience and business savvy that our farmers have demonstrated over the years.
Our team has heard in recent weeks that farmers’ main concerns aside from input costs remain primarily local for the time being and include domestic supply chain issues such as rail strikes, rising interest rates, and the possibility of unfavourable weather. The continued strength in food commodity prices has led to optimism that 2022 will be another year of strong farm incomes, which are a key driver of Canadian farmland values. Bonnefield offers our farmers long-term leases that are not immediately impacted by rising interest rates, and we act as a supportive partner to our farmers by investing in property improvements that might otherwise be delayed or forgone as result of other unforeseen expenses that strain farmers’ cash positions. As we have since our inception over a decade ago, Bonnefield remains committed to supporting our farmers through all conditions as a true partner in Canadian agriculture.
About Bonnefield Financial
Bonnefield is the foremost provider of land-lease financing for farmers in Canada. Bonnefield is dedicated to preserving farmland for farming, and the firm partners with growth-oriented farmers to provide farmland leasing solutions 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.
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