Q4 2023 – Cultivating Change with Regenerative Agriculture

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Cultivating Change with Regenerative Agriculture

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:

McCain Foods’ Regenerative Agriculture Principles(7)

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.

Sources:

1. Douglas, L. (2023). Cow Burps, Food Waste in Focus on Agriculture Day. Reuters News.

2. Giller, K. et al. (2021). Regenerative Agriculture: An Agronomic Perspective. Outlook on Agriculture, vol. 50 issue 1 – March 2021.

3. Newton, P. et al. (2020). What is Regenerative Agriculture? A Review of Scholar and Practitioner Definitions Based on Processes and Outcomes. Frontiers in Sustainable Food Systems, volume 4.

4. Lunik, E. et al. (2023). Regenerative Agriculture’s Many Shades of Green: A Review of Current Status and Potential Progress. RaboResearch.

5. McCain Foods. Our Business & Brands.

6. McCain Foods. Regenerative Agriculture at McCain Foods.

7. McCain Foods. McCain’s Regenerative Agriculture Framework.

8. Ritchie, H. (2017, rev. 2022). Yield vs. Land Use: How the Green Revolution Enabled Us to Feed a Growing Population. Our World in Data.

9. United Nations. Global Issues: Population.

10. EIT Food South. (2020). Can Regenerative Agriculture Replace Conventional Farming?. European Institute of Innovation & Technology (A Body of the European Union).

11. Statistics Canada (2022). Canada’s 2021 Census of Agriculture: A Story About the Transformation of the Agriculture Industry and Adaptiveness of Canadian Farmers.

Q3 2023 – Understanding the Impact of Wildfires on Canadian Agriculture

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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.

Sources:

1. NASA Earth Observatory. (August 2023). Relentless Wildfires in Canada.

2. Lowrie, M. (June 2023). Forest Fire Centre Declares 2023 Worst Year Ever for Canadian Wildfires. The Globe & Mail.

3. Natural Resources Canada. (July 2023). National Wildland Fire Situation Report, July 19 2023.

4. Bilefsky, D. and Austen, I. (June 2023). What to Know About Canada’s Exceptional Wildfire Season. The New York Times.

5. Dion, M. (July 2023). Canadian Wildfires Burn a Record 25 Million Acres With No End in Sight. Bloomberg News.

6. Anderson, D. and Syed, F. (June 2023). It Isn’t Arson: Untangling Climate Misinformation around Canada’s Raging Wildfires. The Narwhal.

7. Duhamel, F. and Skrypnek, J. (July 2023). Canadian Military Joins Battle Against Wildfires in B.C. The Globe & Mail.

8. Shingler, B. and Bruce, G. (May 2023). How Wildfires are Changing in Canada. CBC News.

9. Bochove, D. (July 2023). Canada’s Record Wildfire Season Set to Worsen as Heat Builds. Bloomberg News.

10. Erdenesanaa, D. (July 2023). June Was Earth’s Hottest on Record. August May Bring More of the Same. The New York Times.

11. Natural Resources Canada (2022). The State of Canada’s Forests: Annual Report 2022.

12. Natural Resources Canada (2020). Our Natural Resources: Forests and Forestry, Forest Land Ownership.

13. Aziz, S. (July 2021). A Look at Canada’s Wildfires in Numbers and Graphics Over the Decades. Global News.

14. Erni, S. et al. (April 2021). Exposure of the Canadian Wildland-Human Interface and Population to Wildland Fire, Under Current and Future Climate Conditions. Canadian Journal of Forest Research 51(9): 1357-1367.

15. Johnston, L. and Flannigan, M. (December 2018). Mapping Canadian Wildland Fire Interface Areas. International Journal of Wildland Fire 27(1) 1-14.

16. Radeloff, V. et al. (March 2018). Rapid Growth of the US Wildland-Human Interface Raises Wildfire Risk. Proceedings of the National Academy of Sciences of the United States of America (PNAS) 115(13) 3314-3319.

17. Public Safety Canada. Canadian Disaster Database, Fort McMurray Fire.

18. Snowdon, W. (January 2017). Fort McMurray Wildfire Costs to Reach Almost $9B, New Report Says. CBC News.

19. Natural Resources Canada. (2021). Fire Management.

20. Rabson, M. (June 2023). Canada-U.S. Shared Wildfire Response Pact Includes Shared Equipment, People. The Canadian Press via Global News.

21. Verma, P. et al. (June 2023). Hazardous Air Quality from Wildfire Smoke Takes a Toll on Outdoor Workers. The Washington Post.

22. Jeschke, M. (August 2021). Is Smoke from Wildfires Affecting Crop Yields? Pioneer.

23. Feldmen, L. (October 2020). I’m Glad You Asked: The Effects of Smoke and Ash on Plants. University of California Botanical Garden at Berkeley.

24.Petrovich, C. (July 2023). Notes of Wildfire? How Some B.C. Winemakers are Grappling with Smoke. CBC News.

Q2 2023 – How do We Strike the Balance Between Farmland and Housing?

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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.

Sources:

1. Agriculture & Agri-Food Canada. Overview of Canada’s Agriculture and Agri-Food Sector.

2. Statistics Canada (2018). Geography.

3. Statistics Canada (2021). Land Use, Census of Agriculture Historical Data.

4. Statistics Canada (2022). Population and Dwelling Counts: Canada, Provinces and Territories.

5. Statistics Canada (2022). Canadian Agriculture at a Glance: Ontario is an agricultural powerhouse that leads in many farming categories.

6. Brackenridge (2022). OFA Viewpoint: Supporting the agri-food sector means economic growth and prosperity for Ontario.

7. Government of Ontario (2023). About Ontario.

8. Statistics Canada (2022). Focus on Geography Series, 2021 Census of Population.

9. Ontario Ministry of Finance (2022). Ontario Population Projections.

10. Lafleur, S. & Filipowicz, J. (2023). Ontario’s Growth Targets Won’t Solve the Province’s Housing Crisis. Institute for Research on Public Policy, Policy Options Magazine.

11. Ontario Ministry of Municipal Affairs and Housing (2022). Report of the Ontario Housing Affordability Task Force.

12. Ontario Ministry of Municipal Affairs & Housing (2021). Ontario Appoints Housing Affordability Task Force.

13. Statistics Canada (2022). Table 32-10-0153-01 – Land Use, Census of Agriculture Historical Data.

14. Brockman, C. (2023) What’s Happening to Canada’s Farmland? CBC News.

15. Ontario Farmland Trust (2022). Farmland Loss.

16. Ontario Federation of Agriculture (2022). Ontario Farmland Under Intense Pressure.

17. Crawley, M. (2023). Farmers Pressure Doug Ford Government to Reverse Course on Housing Plan. CBC.

18. Caldwell, W., & Epp, S. (2022). Farmland Preservation and Urban Expansion: Case Study of Southern Ontario, Canada.

19. Boutis, P. (2022). At the Speed of Lightning, Bill 109: More Homes for Everyone Act, 2022, Receives Royal Assent. Aird Berlis.

20. Blanchard, E., et al. (2022) Bill 23 in Ontario: the More Homes Built Faster Act, 2022 receives Royal Assent. Borden Ladner Gervais.

21. DeClerq, K. (2023) Ontario Bill Giving Cities Power to Expand Boundaries for Housing Passes. CTV News Toronto.

22. McIntosh, E., Syed, F., and Balkissoon, D., (2023) Ontario is Trying to Make it Easier to Convert Land into New Suburbs – Again. The Narwhal.

23. McIntosh, E. (2023) What’s an MZO, Anyway? Ontario’s Obscure Land Zoning Stirs Controversy in Durham Region. The Narwhal.

24. Office of the Auditor General of Ontario (2021). Value-for-Money Audit: Land-Use Planning in the Greater Golden Horseshoe.

25. Butler, C. (2023) Farmers Say Bill 97 Imperils ‘The Future of Agriculture’ in Ontario. CBC News.

26. Jones, A. (2023). Ontario Abandons Proposal to Sever Farmland Lots in Response to Farmer Opposition. Global News.

27. Trotta, D. (2023). Arizona Restricts Phoenix Home Construction Amid Water Shortage. Reuters News.

28. Flavelle, C. and Healy, J. (2023). Arizona Limits Construction Around Phoenix as Its Water Supply Dwindles. The New York Times.

29. Vigliotti, J. (2023). Arizona to Halt Some New Home Construction due to Water Supply Issues. CBS News.

 

Q1 2023 – Valuing Private Assets in Tumultuous Markets

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Valuing Private Assets in Tumultuous Markets

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:

  1. “How are my private market assets being valued?”, and
  2. “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:

  1. 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.
  2. Farmland is a long-term, low volatility asset, and our investors have a long-term time horizon for their investments.
  3. Our quarterly NAVs are based on third-party independent appraisals that use a comparable sales approach, thus drawing on actual comparable asset performance.
  4. 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

Sources:

(1) Appraisal Institute of Canada – Path to AIC Designation

 

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.

Q4 2022 – Investing in Canadian Agri-Business

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Investing in Canadian Agri-Business

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%).

Canadian Exports by Product Type, 2020(4)

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

Sources:

(1) Agriculture & Agri-Food Canada. Overview of Canada’s Agriculture & Agri-Food Sector
(2) Agriculture & Agri-Food Canada (2022) Overview of the Sector
(3) Statistics Canada (2022). Table 32-10-0045-01 Farm Cash Receipts, Annual (x 1,000)
(4) Observatory of Economic Complexity (2022). Country Profiles: Canada, Exports (2020)
(5) Government of Canada via Innovation and Economic Development Canada (2018) Report of Canada’s Economic Strategy Tables: Agri-food
(6) Agriculture & Agri-Food Canada. Canadian Agricultural Partnership Overview

 

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.

Q3 2022 – Permanent Crops and Canada’s Evolving Agricultural Landscape

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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

 

Contributing Authors:

Christian Eisenhauer
Associate

Jaime Gentles, CFA
Senior Principal

Lauren Michell
Senior Principal

Sources:

(1) Statistics Canada. Table 32-10-0166-01 Farms classified by farm type, Census of Agriculture historical data
(2) Rochette, P. (2004) Climate Change and Winter Damage to Fruit Trees in Eastern Canada, Canadian Journal of Plant Science
(3) McKenney, D. (2014). Change and Evolution in the Plant Hardiness Zones of Canada, Oxford BioScience
(4) Mailvaganam, S. (2017) Area, Production and Farm Value of Specified Commercial Fruit Crops, Ontario 2015-2016, Ontario Ministry of Agriculture, Food and Rural Affairs
(5) (2021) Plant Hardiness Zones, Natural Resources Canada
(6) (2022) Canadian Plant Hardiness Zones, Upper Canada Growers

 

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.

Q2 2022 – Fertilizer Costs on the Rise

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Fertilizer Costs on the Rise

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

 

Contributing Authors:

Bhushan Chiniah
Senior Principal

Cameron deGooyer
Prinicpal

Lauren Michell
Senior Principal

Sources:

(1) Green Markets, A Bloomberg Company – Green Markets Weekly North America Fertilizer Price Index (May 2022)
(2) Forbes Magazine – No End In Sight For The COVID-Led Global Supply Chain Disruption (September 3, 2021)
(3) Bloomberg News – U.S. Fertilizer Prices Soar as Storms Roil Industry Hub (September 15, 2021)
(4) Bloomberg News – China’s Curbs on Fertilizer Exports to Worsen Global Price Shock (October 19, 2021); Government of China – Notice of the National Development and Reform Commission and other departments on ensuring the supply and price of domestic chemical fertilizers for a period of time in the future (September 22, 2021)
(5) Reuters News – Russian Ministry Recommends Fertiliser Producers Halt Exports (March 4, 2022)
(6) Observatory of Economic Complexity Data Visualization Tool – Fertilizers (retrieved May 2022; data reported as of 2020, latest available at time of writing)
(7) NASA Earth Observatory – Brazil Battered by Drought (June 17, 2021)
(8) BNN Bloomberg – Major Brazil Soybean Grower to Cut Fertilizer Use Amid Shortage (April 28, 2022)
(9) Financial Post – Nutrien to Boost Potash Production by 1 million Tonnes Amid Worries about Food Security (March 17, 2022)
(10) Canadian dollar equivalent calculated based on the prevailing CAD/USD spot foreign exchange rate of 1.2808 as at December 31, 2020 per the Bank of Canada
(11) Government of Canada; Natural Resources Canada – Potash Facts (February 3, 2022)
(12) Statistics Canada – Table 32-10-0037-01, Canadian Fertilizer Production by Product Type and Fertilizer Year, Cumulative Data (x 1,000); data for the period between July 2020 and June 2021.
(13) Statistics Canada – Surveys and Statistical Programs, Fertilizer Shipments Survey; Detailed Information for the Second Quarter of the Fertilizer Year 2021/2022
(14) Statistics Canada – Table 32-10-0038-01, Fertilizer Shipments to Canadian Agriculture and Export Markets by Product Type and Fertilizer Year, Cumulative Data (x 1,000); data for the period between July 2020 and June 2021.
(15) The Mosaic Company – Monoammonium Phosphate (retrieved May 2022)
(16) Toronto Star – Island Farmers Told Ukraine War Threatens Canada’s Food Supply Chain (April 6, 2022)
(17) Global News – Critics Say Federal Support for Canadian Farmers puts “Water on a Grease Fire” (May 6, 2022)
(18) Statistics Canada – Table 32-10-0045-01, Farm Cash Receipts, annual (x 1,000). Data noted reflects the year-over-year increase in Total Crop Receipts.

 

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.

Q1 2022 – Interest Rate Increases on the Horizon

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Interest Rate Increases on the Horizon

We are seeing it at the grocery store and the gas pump – prices are rising. The topic of inflation is receiving a lot of attention as observers wait to see how governments will act to address those rising prices. With central banks around the world either considering or already increasing interest rates in 2022 to combat inflation, we are reminded that the prolonged low interest rate environment that has prevailed in Canada for more than a decade is atypical in the context of long-term monetary policy and is unlikely to persist  indefinitely. In January 2022, Bank of Canada Governor Tiff Macklem noted in an interview during the same week that, “the message is pretty clear. We’re on a rising path.” (1).

More recently, on March 2nd 2022, Bank of Canada’s target for the overnight lending rate (a key benchmark for lending rates in Canada) was raised to 0.50% from 0.25% (2), marking the first time rates have changed since the COVID-19 pandemic in early 2020. In an accompanying statement, the Bank of Canada noted the emergence of conflict in Ukraine has led to increased uncertainty in global markets and has also caused prices for oil and other commodities to rise sharply in recent weeks, which will increase inflationary pressure above what was initially anticipated in January 2022 (2).

As a source of alternative financing for Canadian farmers, and a manager of a diversified portfolio of Canadian farmland, Bonnefield is often asked what impact rising rates may have on farm operators and farmland values in Canada. We’ve provided some thoughts on this complex relationship in the following sections.

A Recent History of Inflation and Interest Rates in Canada

As of February 2022, the Canadian Consumer Price Index (“CPI”; index of all goods including gasoline) rose again to 5.7%, remaining above the Bank of Canada’s target normalized range of 1-3% reaching its highest level since August 1991 (3). Generally, prices begin to increase when the demand for goods and services outpaces the supply of those goods and services in the economy. Price inflation in turn reduces the purchasing power of individuals, which can have a significant impact on the overall standard of living.

When faced with increasing levels of price inflation, central banks have few policy options to cool price increases and to alleviate the financial strain caused by elevated prices for goods and services. A gradual increase in key lending rates, such as the Bank of Canada’s target overnight rate, can help to reduce spending, thus tempering the demand side of the equation and slowly reducing inflationary pressures. Despite a now-lengthy cycle of low rates and the continued effects of the COVID-19 pandemic, it is very apparent that increased interest rates are on the horizon. When asked about the timing of target rate hikes, Tiff Macklem responded to reporters in January 2022, “How far and how fast? Those are decisions we’ll take at each meeting, depending on economic developments, depending on our outlook for inflation, and what we judge is needed to bring inflation back to target.” (1)

Canadian Consumer Price Index (CPI) Monthly 12-Month Percentage Change Data (2016-2022)

Source: Bank of Canada, Statistics Canada.

Interest Rates on Farm Balance Sheets

From a balance sheet perspective, while the principal amount of a loan is not directly affected by a change in borrowing costs, the total amount of capital that must be repaid to lenders over time increases when rates rise. In turn, this increases the overall financial riskiness of farmers’ balance sheets and leads operators to carefully consider whether certain expenditures and investments are necessary.

From a profitability standpoint, the rates charged by financial institutions on traditional loans can represent a substantial expense for farm operators that primarily use debt to fund their operations, much like many other businesses. Interest rate increases are typically used by central banks as a tool to help temper rising inflation, and inflation also causes the cost of key inputs for farming operations (such as fertilizer, seeds, fuel, and equipment) to rise. Combined, an increase in borrowing rates coupled with elevated input costs can put significant pressure on farm profitability. However, as inflationary pressure also affects the market prices for key food commodities, some of that input cost pressure can be offset by increases in farm revenues and incomes.

Interest Rates and Farmland Values

Given the relationship between inflation and interest rates, and farmland’s demonstrated inflation-hedging  characteristics, Bonnefield’s investment thesis is that in times of high inflation, Canadian farmland values perform strongly. Historically, farm incomes have increased during inflationary periods and strong farm incomes lead to rising farmland prices.

When valuing farmland, one of the most widely accepted approaches to establishing property values is to divide the rental income that can be generated by a property by a discount rate, which is based on an adjusted “risk-free” interest rate (often a Government of Canada bond yield or, more recently, the Canadian Overnight Repo Rate Average, “CORRA”). This equation, referred to as the capitalization method of valuation, effectively assesses the present value of potential future income generated by a property. Interest rates are a central part of the valuation equation and a higher discount rate (denominator) with no change to the rental income component would decrease the resulting value.

With that said, farm incomes are the single strongest direct drivers of farmland values, and the momentum in market prices for key commodities observed in 2021, and so far in 2022, suggests that incomes will remain healthy in the near-term. Further, while interest rate increases are coming more clearly into view, the overall cost of borrowing is still low compared to historic levels.

Over the years, Bonnefield has observed that when lending is relatively inexpensive and farm incomes are strong, farm operators have been eager to borrow funds to acquire additional land. In 2021, we also saw a high level of transaction activity in the market for Canadian farmland driven by both farmers having ample cash on-hand, as well as pent-up demand after relatively depressed activity in 2020 from the COVID-19 pandemic.

How Could Rising Interest Rates Impact Bonnefield’s Farmland Holdings?

Bonnefield’s core strategy is to invest in a diversified portfolio of prime Canadian farmland on a long-term, fully unlevered basis. We expect that rising interest rates will have a minimal impact on the value of farmland held by our investment partnerships or on the funds’ profitability. Further, as the leading provider of sale leaseback financing to Canadian farmers, Bonnefield’s partnership-based approach to providing an alternative source of capital to the agricultural community has helped many of our farm partners to strengthen their balance sheets by reducing debt. As such, we anticipate that our farmers will weather rising interest rates well. As always, we remain prepared to assist strong Canadian farmers who may have become over-levered by entering into long-term sale leaseback arrangements that allow operators to free up capital, clean up and stabilize their balance sheets, and invest in their businesses.

Having been a trusted partner of farm operators for over 12 years, Bonnefield has seen a number of economic conditions. One thing we know is that farmers are creative and resilient, able to adjust to a wide variety of market conditions in order to maximize the value of their operations. We are confident that this period of inflation and increased interest rates will prove to be no different and Bonnefield is available to support these operators through economic cycles.

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

 

Contributing Authors:

Andrea Gruza
Managing Partner

Lauren Michell
Senior Principal

Sources:

(1) Reuters News, January 26th, 2022
(2) Bank of Canada, March 2nd, 2022
(3) Statistics Canada, March 16th, 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.