On February 9, 2017, Bonnefield appeared before the Standing Senate Committee on Agriculture & Forestry. The Committee is undertaking a “Study on the acquisition of farmland in Canada and its potential impact on the farming sector”
A video replay of Bonnefield’s remarks can be viewed by clicking here(beginning at the 9:10:30 mark of the video).
And here is the text to what we had to say:
_______________________________
Thank you, Senators. It is an honor to meet with you this morning.
My name is Tom Eisenhauer and I am the CEO of Bonnefield Financial. I apologize for not being able to join you this morning, however, my friend and colleague Wally Johnston is with you in person. Wally represents the 5th generation of a farm family from there in the Ottawa Valley and he is also our Vice President of Business Development at Bonnefield.
Wally and I, along with our partners at Bonnefield, founded our company back in 2009 out of a sense of frustration. Back in the mid-2000’s one of our sister companies – Manderley Turf Products, Canada’s largest turf grass farm – found itself in a situation that is familiar to many Canadians farmers – we needed to reduce debt and to find additional capital to grow our business.
So we tried to do what many non-agricultural businesses do – we tried to arrange a sale leaseback. Simply put, we wanted to find an investor willing to buy some of our land and to lease it back to us under a secure, long-term lease, so that we could use the sale proceeds to reduce our debts and to finance Manderley’s growth. As you know, sale leasebacks of this sort are common financial arrangements in sectors such as commercial real estate, the hotel industry, manufacturing, airlines and even the Canadian banks themselves sometimes use sale leasebacks to finance their operations. However, to our surprise and great frustration, we could find no investor in this country willing or able to provide sale-leaseback financing on farmland. So we decided to form Bonnefield in 2009 to do just that.
Since that time we have raised over $400 million, entirely from Canadian individuals and Canadian pension funds, and we have used that capital to arrange sale and sale-leaseback transactions with Canadian farm families in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick and Nova Scotia. To date, we have helped over 75 Canadian farm families to:
reduce debt
transition their farm businesses from one generation to another
help young farmers grow their business without heavy reliance on debt; and
provided farmers with long-term secure access to farmland that they had previously leased from others on a short-term, insecure basis.
In the process, we have, so far, secured over 80,000 acres of prime Canadian farmland and ensured that it will remain “farmland for farming” indefinitely and that it will be monitored, maintained and operated in a sustainable and ecologically responsible manner. In short, we have developed a business model that uses capital from Canadian individuals and Canadian pensioners to support Canadian farm families and to protect Canadian farmland.
So our prime reason for meeting with you today is to ask this Committee to advocate for responsible, evidence-based regulations that protect our farmland, while ensuring that farmers have ample access to the capital they need to operate their businesses profitably – including institutional capital.
I would now like to turn to five key points we would like the Senate Committee to consider in its ongoing study.
POINT 1: Farmers, not investors, determine the price of farmland in Canada
This point has been made by previous witnesses who have appeared before this Committee – notably, by JP Gervais, Chief Economist of Farm Credit Canada . JP pointed out that most farmland transactions in Canada are between farmers, and that the small number of investor purchases in Canada are not sufficient to drive farmland prices.
As further evidence, consider this:
Statistics Canada, based on farm census survey data, pegs the total value of farmland in Canada at approximately $400 billion. Bonnefield’s internal estimates, based on actual land mapping rather than survey results, suggests that the total value is likely much higher than that – perhaps as much as $590 billion. Compare these figures with the total amount of dollars invested by institutional and high-net-worth investors in farmland across Canada in the past 10 years – likely in the range of $1 billion in total. So by implication, less than ¼ of 1% of Canadian farmland is likely owned by investors. It is simply not credible to assert that investor purchases of farmland – which we estimate constitute only 0.5% to 1% of total farmland transactions in any given year – could drive prices in a market that may be as large as half a trillion dollars.
I would also like to reiterate a point that was made to this Committee by Michael Hoffort, CEO of Farm Credit Canada: that farm producers are sometimes willing to pay much higher prices than investors – especially when a plot of land becomes available that is in close proximity or fits well with their existing farm business. A rational investor, on the other hand, should be willing to pay no more for a plot of farmland than the capitalized value of the sustainable rent that the farmland can yield. So contrary to popular opinion, investors, particularly disciplined institutional investors, may serve to moderate farmland price increases in some markets.
POINT 2: Recent increases in Farmland prices across Canada have, with very few exceptions, been driven by increases in farm profits and are in line with increased profit levels.
Slide #3 of the exhibits we provided, compares the change in average Canadian Farmland prices-per-acre (the grey line) with crop revenue per acre (the green line). You can see that farm income has grown dramatically over the last four decades and in the past decade in particular. Between 2005 and 2015, Canadian farm income more than doubled from $6.8 billion to $15 billion. You can also see that farmland prices have risen in lock step with farm incomes. Indeed, farmland prices have remained generally as affordable today (relative to income) as they were a decade ago.
We agree with Mr. Hoffort from the FCC who told this Committee that “strong land values are an indicator of the farm sector’s financial strength, not a warning signal or a threat to farm profitability”.
POINT 3: Farming is a capital-intensive business, and Canadian farmers need access to a broad range of capital sources – including institutional investors – to finance their businesses and to remain internationally competitive.
The agriculture sector in Canada is predominantly made up of businesses run by farm families – large and small. Some of these farm families operate very large sophisticated businesses but, contrary to popular belief, there are very few if any, “Corporate Conglomerates” operating farms in Canada.
Canadian farm families, however, find themselves competing against well-capitalized, low-cost foreign conglomerates when they go to sell their products on world markets and even when they compete against low-cost imports in domestic markets. To become and remain competitive, Canadian farm families need scale, efficiencies and access to capital. But if there is one area where Canadian farmers are at a significant competitive disadvantage, it is their lack of access to a broad range of capital from investors. We hear time and time again, from our farm partners – their number one complaint – is their inability to access capital.
This problem is especially acute for young farmers. We often hear that “there are not enough young farmers in Canada”. I beg to differ. I think there are lots of young people who want to farm, but they don’t want to farm like their mom and dad did – at a small scale, perennially undercapitalized, heavily indebted and financially insecure. Keep in mind, that to be optimally efficient, a canola, wheat and lentil farmer in Western Canada probably needs secure access to 3,000 acres of farmland, maybe more. In Eastern Canada, a young corn and soy farmer likely needs upwards of 1,000 acres or more to optimize a full line of modern farming equipment. The capital required to establish and operate a profitable farm business is often simply out of reach of many young farmers. As a result, young farmers often leave the farms to find employment elsewhere, leaving small towns to the elderly and our farm communities deserted of young, energetic, vibrant business people.
This is why we urge the Senate Committee to promote farmland ownership regulations that balance the protection of farmland for farming, yet encourages new and varying sources of capital to invest in agriculture – especially institutional capital which can bring the size and scale necessary to fill such a large void, in such a large industry. Canada falls well behind countries like the US, Australia and most South American and European countries in the depth and range of financing vehicles available to farmers. Farm Credit Canada and the Chartered Banks do an outstanding job of lending to Canadian farmers. But sale-leaseback businesses like Bonnefield play an important role in providing an alternative to debt. Private equity players are also needed, as are farm sub-debt providers, revenue streaming companies, equipment leasing, cooperatives and other innovative capital providers. In short – farmers should have the same access to investor capital that other Canadian industries have.
POINT 4: The biggest threat to Canadian farmland is not who owns it. the biggest threats are urbanization and re-zoning and the conversion of farmland for real estate development, quarries and industrial uses.
Indeed, our largest transaction to date was our purchase in 2013 of a large tract of mostly class 1 farmland located in Dufferin County, Ontario, from a US-based hedge fund that wanted to convert it into what would have become North America’s largest aggregate quarry. I am proud to say that 3 years after Bonnefield purchased this land with institutional capital, it is now being sustainably farmed by 6 local farm families, and some 30 farm buildings and 24 houses that were mostly vacant and in various states of demolition and depopulation, have been repaired, sold and now house families who contribute to the local tax base and a vibrant and growing local community. We have been proud to support and work with local groups such as Food & Water First and the North Dufferin Agricultural and Community Task Force, who are examples of grass-roots community groups who have been open to institutional investment as a means of protecting and enhancing their local farm communities, and who present a fantastic model of “how to do it right” for other Canadian farm communities faced with similar threats to their farmland and water resources.
Statistics Canada reports that 2.4 million acres – 2.6% of Canada’s arable land – was lost, primarily to urbanization, in the decade between 2001 and 2011. This is a staggering statistic that dwarfs all other threats to Canadian farmland.
Keep in mind, however, that it is not just institutional and foreign investors who threaten farmland with conversion and redevelopment. There is an old adage that farmers are cash poor but asset rich. As Prof. David Connell from University of Northern British Columbia told this committee in November, farmers sometimes have a perverse incentive – especially those who have made the decision to retire or who live on the fringe of urban centres – to seek rezoning of their land and to sell to it to developers. This is a problem that sale-leaseback financing of the type Bonneield provides, can help solve. With a sale leaseback, a farm family can access some of the equity locked up in their land, without the need to sell it to a developer.
However, preserving and protecting our farmland from the very real threats of urbanization and re-zoning, is remarkably simple. It requires little, if any new regulation. It requires no change in farmland ownership regimes. It does not require Senate Committees to delve deeply into agricultural policy. It is as simple as enforcing existing zoning regulations already on the books of every municipality, in every farming region of Canada.
We believe that rezoning high-quality farmland for non-agricultural use should be expressly prohibited everywhere in Canada. Rezoning applications for farmland should not be the purview of unelected officials (as with the OMB in Ontario) or elected municipal officials who often favor rezoning as a means of increasing their local tax base. We recommend that rezoning applications for high-quality farmland should not be permitted, except with the agreement of elected government officials at the highest levels and only in exceptional circumstances deemed to be in the national interest. Full stop.
POINT 5: Foreign ownership of farmland is not a widespread problem in Canada
As other presenters have repeatedly told this Committee, there are no reliable data on foreign ownership of farmland in this country, and we need to begin collecting and monitoring such data. But what evidence there is, suggests a low level of foreign ownership in most farming regions across Canada.
We have included in your materials, an article by Prof. Brady Deaton Jr. which reports on a survey conducted by the University of Guelph which estimated that non-Canadian ownership of farmland in Ontario (where foreign ownership is not restricted) at approximately 1%. Our experience at Bonnefield supports this conclusion: in the past 6 years we have examined many hundreds of farmland transactions undertaken by ourselves and others, yet we are aware of only a handful of transactions that involved a non-Canadian purchaser – and in these few cases it was typically a non-Canadian who was moving to Canada to become a farmer.
We are aware of, and deplore, isolated purchases of farmland by non-Canadians in places like the lower mainland in BC, where farmland has been taken out of production and where the owners benefit from tax breaks intended for bona fide farmers. But these examples are not reflective of a widespread problem across the Canadian farm sector – and could be easily addressed through local zoning and tax regulations.
In our view, the bigger (and better) question to ask is this: Does it really matter who owns farmland in this country? Unlike other natural resources like oil, water, and minerals, farmland can’t be exported or removed from Canada. And from a farmer’s perspective, if he or she can obtain better terms from non-Canadian investors than from Canadian investors, why shouldn’t they be allowed to access foreign capital just like every other Canadian business owner can?
My bigger concern is not who owns Canadian farmland, but who farms Canadian farmland. We believe that Canadian farmers should farm Canadian farmland. And we’ve put our money where our mouth is: 100% of Bonnefield’s capital has gone to supporting Canadian farm families.
We respect the decisions of provinces like Saskatchewan and Manitoba to restrict farmland ownership to bone fide Canadians and landed residents. We view these regulations as well-intentioned but they are not evidence-based and they are short-sighted because they inadvertently:
restrict the flow of capital to farmers, making them less competitive
force farmers in those provinces to rely more heavily on debt than they otherwise would; and
reduce the value of their farmland below what it would be in a free and open market, and thereby destroy the wealth and nest eggs of many farm families.
If we truly believe that farmland must be protected from foreign ownership – something that we do not see as a problem – there are far better ways of regulating it than by restricting the flow of capital to the sector. Why not follow the example of other industries that Canadians have determined are nationally sensitive – like our broadcast industry and our banking industry? In these cases we have devised ownership regulations that ensure these sectors remain majority controlled by Canadians without unduly restricting capital investment from institutions and non-Canadians. Why not, for example, follow the precedent set in Alberta which has adopted regulations that require farmland to be at least 51% owned by Canadians (including Canadian institutions) and – more importantly – farmed by Canadian farmers?
So to wrap up, we recommend that this Senate Committee advocate for responsible, evidence-based regulation of farmland ownership in Canada; regulation that protects farmland from the larger threats posed by urbanization and re-zoning. But in advocating for responsible regulation, we ask the Committee to consider measures that will not prevent Canadian farmers from accessing the capital that they desperately need – including institutional capital – to compete against global competitors in a capital-intensive industry.
Thank you for your time and attention.
Wally and I would now be happy to answer any questions you have.
US farmland prices, particularly in the Mid-West, are moderating and in some places actually declining modestly from their peak in 2013/14. US farmers have faced headwinds from a strong US dollar, soft USD-denominated commodity prices (particularly for soy and corn) and a continuing drought in some parts of the country. In contrast, the outlook for Canadian farmers continues to be bright. Farm Credit Canada recently forecast that farm cash receipts will increase by 5.8% in 2016 and increase further by 3.8% in 2017. Moreover, in a report released in September, FCC further highlighted the current financial strength of the Canadian farm sector relative to historical trends:
liquidity is strong with a current ratio of 2.40, in line with the sector’s 15-year average;
historically low debt-to-asset ratio of 15.5% vs a 15-year average of 16.7%; and
return on assets of 2.3%, not far off the 15-year average of 2.6%
Why is the outlook for US farmers so different than for Canadian farmers? And how likely is it that soft or declining farmland prices in the US will lead to a similar trend in Canada?
In previous blog posts I’ve discussed the primary reasons for continued optimism for Canadian agriculture, despite the difficulties faced by the US sector, such as: stabilizing crop prices, a favorable and stable USD/CAD exchange rate, and robust export demand for a broad range of crops produced by Canadian farmers (especially canola and lentils) and the strong financial position of Canadian farmers.
In addition to these factors, there are structural differences between the Canadian and US agriculture sectors that tend to insulate Canadian farmers (and, therefore, Canadian farmland prices) from declining corn and soy prices that are the primary cause of US farmer’s current difficulties. At Bonnefield, we frequently point out the competitive advantages of Canadian farmland in terms of access to water, a more benign outlook for climate change and less degradation of soils.
However, a less-well understood advantage of the Canadian farm sector is its broad diversification. Canadian farmers are far less leveraged to corn and soy prices than their US counterparts. A staggering 178 million acres, or some 55% of all US crop land, is seeded to either corn or soy. That’s a significantly larger land mass than the entire country of France, devoted to the production of only two crops. In contrast, only about 13% of all Canadian farmland is used to grow corn and soy. Phrased differently, the entire Canadian corn and soy crop, covers only 5% of the land mass used to grow these crops in the US, an area much smaller than the Province of Nova Scotia. This fact is the single biggest reason why US farmland prices are so much more heavily levered to corn and soy prices than Canadian farmland.
The charts above illustrate the greater diversification of the Canadian agricultural sector. Indeed, if the US acres devoted to cotton production (a crop not grown in Canada) were removed from these figures, it would illustrate even more dramatically how leveraged US farmland prices are to the market prices of corn and soy.
An additional factor that exacerbates US farmers’ vulnerability to declining corn and soy prices is the prevalence of mono-cropping in the US corn and soy sectors. A combination of unique climate and agrological factors enable some large-scale US farmers – particularly in the Mid-West – to avoid traditional crop rotations and pursue mono-cropping of a single crop year after year. This practice is virtually non-existent in Canada. Mono-cropping puts additional stress on soils and requires intensive farming techniques involving significantly higher use of fertilizers, herbicides and pesticides in order to achieve consistently high yields year after year. The higher costs involved in these intensive farming techniques are not much of a concern in times of high and rising crop prices. But in a soft price environment, higher costs contribute to tighter margins and less financial resilience – a trend we are currently seeing in much of the US farm sector.
So are softening US farmland prices a leading indicator of what could happen to Canadian farmland prices? Potentially, but not likely. US farmers are far more exposed to soft corn and soy prices than Canadian farmers. Canadian farmers benefit from (i) greater crop diversification, (ii) strong demand, high prices and less international competition for leading Canadian crops like canola and lentils, (iii) a favorable US/CDN exchange rate, (iv) strong financial fundamentals of the Canadian farm sector, and (v) a bright outlook for continued farm profitability. In our view, any softness in Canadian farmland prices would likely be short lived and represent a buying opportunity.
A more likely scenario is that Canadian farmland appreciation rates will revert to long-term norms after several years of outsized growth in the 2010-2014 period.
Water is a central component of the Canadian farmland investment thesis – indeed Canadian farmland (as distinct from US or other farmland) might be seen as a proxy for investing in water itself for several reasons:
Because the impacts of water shortages, droughts and climate change are anticipated to be less in Canada than in most other major Ag exporting countries, it stands to reason that Canadian farmland should, over time, attract premium values as compared to farmland that is more subject to these risks.
As relative yields suffer and/or even decline in other parts of the world, it is anticipated that yields will increase in Canada (along with Brazil and potentially Russia). We are already seeing this trend in a significant shift in the corn belt north and west into Ontario and Manitoba.
Some Canadian farming regions like Temiskaming and Grand Prairie should benefit disproportionately as compared to other countries and other regions that face climate, water and drought pressures.
It is becoming apparent that China has adopted a policy of effectively “importing water” from countries like Canada by increasing imports of water-intensive products like soy and corn and concentrating domestic production on more less water-intensive crops due to the serious drought and water pollution issues they face at home. This trend will benefit Canadian farmland disproportionately as compared to farmland in water-stressed regions.
We here at Bonnefield view water as a key competitive advantage of Canadian farmland as compared to farmland in many other parts of the world. This is not to say that farmland in some parts of Canada will be immune from periods of drought as climate change progresses. But drought-related risks in Canada tend to be location and property specific. It could be argued that for Canada as a whole, the bigger water-related risk over time will be too much water as opposed to too little, since much of Canada is expected to see increased precipitation as a result of climate change rather than less. The risk of excess water is as important a consideration as too little water, when Bonnefield invests in farmland. Do the soils have natural drainage characteristics or can excess moisture be mitigated through tile drainage and surface shaping? Conversely it may be best to avoid investment in properties and regions that face a significant drought risk that can not be mitigated through some combination of irrigation or high-quality, moisture-retaining soils, etc.
Overall, Canada can expect to suffer less stress from climate-induced water shortages than many other parts of the world. Canadian farmers will certainly face increasing challenges in some parts of the country from both drought and excess moisture, but on the whole, these risks should be manageable through careful farming techniques and proper risk mitigation.
Two back-to-back seasons of high crop yields in 2013 and 2014 increased world stockpiles of several important commodities – particularly corn and soy. Harvests in 2015 were uneven in different parts of the world, but were sufficient to maintain relatively high global stock levels. As a result, corn and soy prices have not rebounded to the highs of 2012. Is this a new norm? Not likely.
As we have pointed out in previous research, the 2013-2014 worldwide bumper crops were the first such back-to-back occurrence since 1991 – 1992; a once-in-a-generation event. And while current corn stockpiles are roughly in line with those experienced in the late 1980’s, worldwide consumption has more than doubled since that period, so on the more important measure of stocks-to-use, worldwide supplies are still at the levels of the early 2000’s and remain susceptible to supply disruptions (source USDA data).
It is also important to keep in mind that the weakening Canadian dollar has helped to insulate Canadian growers from declining world market prices that are quoted in US dollars. As we pointed out in our previous blog post, as at the end of Q3, corn prices were off only 8% in Canadian dollar terms since May 2014 (versus 24% in USD), wheat was off 11% (versus 26% in USD) and Canola was actually up 23% (versus 2% in USD). Canadian dollar price swings of these magnitudes are considered fairly standard intra-season volatility. The only major crop to experience a significant decline in Canadian dollar terms was soy (off 28% in CDN vs 40% in USD).
It is also important to recognize that corn and soy prices impact only a portion of the Canadian farm sector’s overall profitability. Prices for pork, dairy, vegetables and specialty crops all remain very strong and beef prices are at all time highs. So the net impact of lower corn and soy prices on Canadian farm financials is expected to be modest. FCC is predicting robust farm profits again this year only slightly below the records set in 2013 and 2014.
The current crop price outlook is analogous to the the difference between local weather conditions and a warming climate. Weather conditions are becoming more volatile – with extremes of both heat and cold – but our climate is inextricably warming with serious implications for agriculture worldwide. So too, future crop prices will be volatile – both up and down – around a steadily increasing trend driven by climate change, water shortages, changing diets and population growth.
So we view current grain prices as a temporary fluctuation around a steadily increasing long-term trend.
MCSI recently published their quarterly “Global Quarterly Infrastructure Asset Index” comparing the returns generated by both listed and private infrastructure classes with other asset classes such as bonds, real estate and equities.
The report also provided debt ratios for the components of the private infrastructure index. Using this information and some conservative assumptions for the debt ratios typical of the other asset classes, we were able to reverse engineer the unlevered returns of these asset classes and compare them to the unlevered returns generated by Bonnefield Canadian Farmland LP I and LP II over the same time periods.
The results (shown in the following chart) demonstrate that Canadian farmland is capable of generating superior returns without the risk and extra volatility that comes with leveraging your investment with debt.
As Canada’s largest farmland investment manager and property manager, Bonnefield has had many requests for comment about Saskatchewan’s recently announced review of its farmland ownership rules and the immediate enforcement of tighter regulations pending completion of the review. Rather than respond piecemeal or incompletely, we have outlined our comments in detail below.
An Open Letter about Saskatchewan Farmland Regulation
On April 13th the Saskatchewan government announced a review of its farmland ownership rules, which are already among the most restrictive in Canada. At the same time it announced additional interim regulations to prevent farmland ownership by pension funds and to prevent farmers – especially new immigrant farmers – from receiving funding from friends and family back home.
No one can fault the government’s intent – ensuring that Saskatchewan’s farmers own and control their land and that they don’t face undue competition from big corporate or foreign interests; laudable goals to be sure. But despite their well-meaning intent, further restrictions on farmland ownership will damage the competitiveness of Saskatchewan agriculture and increase the financial risks faced by the province’s farmers. The government’s measures hurt the very farmers they are intended to protect.
What problems do these regulations hope to solve?
Saskatchewan’s move to strengthen its farmland ownership rules is based largely on commonly held misperceptions about farming in the province. There is a belief that corporate farming is squeezing out family farms in Saskatchewan when in fact virtually all attempts at large-scale corporate farming in recent years have failed or gone bankrupt while large family farms have prospered. There is a common belief that investors have driven up the price of land in Saskatchewan despite data that clearly show farmland investors in the province have paid less than farmers (as a multiple of assessment value) for farmland purchases since 2010. Yes, farmland prices have increased significantly in Saskatchewan in recent years but these price increases have been in lock step with increases in farm profitability. And farmland prices in the province are often well below similarly productive land elsewhere in Canada.
Others claim that institutions are buying up huge tracts of the province’s farmland when in fact institutional farmland investors have purchased only 1% of the farmland transacted in Saskatchewan since 2003, versus 99% by farmers themselves. There are also whispered concerns about “foreigners” buying up the province’s farmland through under-the-counter deals with new immigrants. This concern smacks of xenophobia or worse. Saskatchewan – indeed all of Canada – was built by immigrants and if there is one thing the province needs as much as investment capital, it is new Canadians to help build a prosperous, growing and vibrant provincial economy.
The real challenges
Contrasting these myths are some real challenges facing agriculture in Saskatchewan today. The average age of the province’s farmers is 55 and the capital required to help the next generation of young farmers buy out those retirees is enormous. Average farm sizes are increasing and the technologically advanced equipment required to farm them profitably is prohibitively expensive. How will the next generation of Saskatchewan farmers buy that equipment and finance their operations? Saskatchewan government officials have publicly stated that the province needs a $3 billion investment in irrigation infrastructure. Who will make that investment? Billions more are required in additional storage and transportation infrastructure to prevent the kind of disastrous supply chain bottlenecks that hit Saskatchewan farmers in 2014. Where will that capital come from if not from institutional investors like pension funds?
At Bonnefield we are staunchly pro-Canadian. We are proud that 100% of the funds we have raised to date have come from Canadian individuals and Canadian pension funds and that all of that money has gone to provide land lease financing to Canadian farmers. Yet Saskatchewan’s rules make it difficult for us to help farmers in that province.
In the past year alone, Bonnefield has had requests from Saskatchewan farmers for over $100 million of land lease financing. But all of these requests have gone unfulfilled because the Saskatchewan regulator takes the position that Canadian pension funds are ineligible to hold farmland in the province (except Canada Pension Plan, which was somehow deemed uniquely eligible to hold farmland in the province before the new rules were announced on April 13th). Meanwhile, Bonnefield has provided hundreds of millions of dollars to farmers elsewhere in Canada to help them reduce debt, expand operations and finance succession plans – advantages that Saskatchewan farmers are denied under the province’s farmland ownership regulations. In fact, of some $325 million raised by Bonnefield from Canadian investors since 2010, less than $12 million has gone to Saskatchewan farmers because of that province’s regulations. The remainder has benefited their peers in Alberta, Manitoba, Ontario, New Brunswick and Nova Scotia.
Saskatchewan’s regulations hurt farmers
The harm to Saskatchewan farmers is real. They cannot freely sell their land, depressing land prices and reducing their net worth – an especially big problem for retiring farmers. With fewer financing options at their disposal, Saskatchewan farmers are more heavily reliant on debt than they would be without regulation. Indeed, the interim rules announced on April 13th require that farmland purchases can only be financed by licensed banks and no alternative or off-balance sheet financing from non-bank lenders will be permitted. Lack of access to capital is the biggest barrier preventing young farmers from entering agriculture in Saskatchewan.
High debt levels raise operational risk for Saskatchewan farmers and are especially troublesome in volatile markets like those currently caused by lower crop prices. This lesson was learned the hard way in Saskatchewan during the farm bust of the early 1980s. During the 1980s only Saskatchewan farmers were able to own farmland in the province, which severely restricted farmers’ access to capital. As a result, farmers in Saskatchewan were the most heavily indebted in Canada when the double whammy of high interest rates and low crop prices hit the sector in the early 1980s. Not only did Saskatchewan farmers suffer more destruction in farmland value than farmers elsewhere in Canada, but it took longer for those values to recover than it did in provinces where farmers had unregulated access to capital. Saskatchewan farm values fell 39% from their 1982 high compared to a decline of 24% in Ontario where no ownership regulations were in force. Moreover, it took a full 25 years for farmland values in Saskatchewan to regain the levels of the early 1980s destroying wealth for an entire generation of farmers. By comparison it took just 5 years to 7 years for farmland prices to rebound in most other provinces where capital could flow in more easily to recapitalize the sector.
Saskatchewan’s reputation at risk
The impacts of Saskatchewan’s farmland ownership regulations extend beyond the agricultural sector and beyond Saskatchewan’s borders. These regulations contribute to the province’s international reputation as a difficult place to invest and do business. I have had first hand experience of listening to an audience of investors in Boston openly snicker as Saskatchewan’s Deputy Minister of Agriculture declared that the province was “open for business” and a good place to invest in agriculture. I have personally met with some of the largest natural resource investors in the world in London, Zurich, Geneva and New York and listened to them decry Saskatchewan’s reputation as unfriendly to business as a result of the rejected attempt by BHP to acquire Potash Corp. I have participated in hearings of Saskatchewan’s Farmland Security Board where staff, openly and on the record, complained about investment in the province’s agricultural sector from Ontario and elsewhere in Canada.
To realize its economic potential, Saskatchewan’s economy needs capital investment from investors across Canada and around the world for a broad range of industries and sectors including agriculture. The tightening of farmland ownership regulations will be viewed by skeptics as another example of a parochial, business unfriendly atmosphere in the province and runs counter to the Wall government’s worthy efforts to attract international investment to Saskatchewan.
Better ways of regulating farming
Most Canadians would agree that, in the national interest, some industries should be controlled by Canadians. Our banking and broadcast industries are two such examples. Yet we have found ways of ensuring that Canadians maintain control of other strategically important industries without restricting their access to capital or putting them at a competitive disadvantage. Alberta requires farmland owners to be majority Canadian controlled but does not care if they are individuals, corporations or pension funds. Australia recently introduced rules to ensure that farmland acquisitions by foreigners of more than A$15 million are reviewed to ensure they are in the national interest. Several Canadian governments have used “golden shares” when privatizing assets to protect legitimate national interests. None of these measures restrict the free flow of capital to the same extent as Saskatchewan’s farmland ownership rules.
Many question whether farmland ownership needs to be regulated at all – BC, Ontario, New Brunswick and Nova Scotia have no such regulations and farmers in those provinces benefit greatly from free access to capital. Saskatchewan’s stance on farmland ownership stands in stark contrast to its relaxation of regulations governing the uranium and potash industries. But the irony is unmistakable: as with the province’s oil and gas, once the potash and uranium is extracted, it is gone forever – not so with farmland that will always remain in Saskatchewan regardless of who owns it, and will always remain in production as long as there are mouths to feed.
Perhaps it would be more effective to regulate who farms Saskatchewan farmland rather than who owns it or finances it. Why not require farmland in the province to be operated by Canadian farmers and let them freely decide how best to finance their operations, with whom and whether they would prefer to own land directly or lease some or all of it?
Despite the evidence that its farmland regulations are harming farmers themselves, it is clear that the Saskatchewan government has decided that farmland in the province should be more tightly regulated. We can only hope that these new regulations do not inadvertently cause even more harm to the very farmers they are intended to protect.
Tom Eisenhauer
President, Bonnefield
April 2015
Bonnefield is Canada’s largest farmland investment management and property management firm. To date Bonnefield has provided over $300 million in land lease financing to help Canadian farmers grow, reduce debt and finance retirement and succession in Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick and Nova Scotia.
A number of recent reports about population growth, climate change, decreasing crop yields, droughts and farmland loss suggest that these problems are getting worse, not better. These long-term trends suggest that the farmland investment thesis for Canada is still very much intact:
Population growth – a recent report by the United Nations warned that global population could reach 11 billion by the end of the century, significantly above previous estimates of potential maximum global population of 9 billion.
Increasing food demand – the USDA recently predicted that the world must grow an additional 50 million acres of corn, soy and wheat in the next decade to meet worldwide demand.
Declining crop yields – The University of Nebraska recently released a studythat found soy yields in the US to be 30% lower than they should be due to climate change impacts.
Water shortages and drought – despite the current el Nino weather pattern (that typically brings additional moisture to the US west), drought conditions remain extreme in California, the US southwest and parts of Brazil and Australia.
Farmland loss – Statistics Canada recently reported that nearly one million hectares of dependable Canadian agricultural land has disappeared from cultivation in the past 10 years – much of this loss was due to urban expansion and much of that urban expansion occurred on some of the best farmland in Canada – located near urban areas of the GTA in southern Ontario.
Much has been written recently about the potential impact that current low crop prices may have on farmland investment returns, however, none of these long-term trends are reversed by the current short-term crop price environment that resulted primarily from two consecutive years of back-to-back record harvests in the United States (2013 and 2014). And it is helpful to keep in mind just how rare the current environment is: according to USDA statistics, the bumper crops of 2013 and 2014 were the first such back-to-back record harvests in the US in more than 30 years.
So while it is indeed likely that farmland investment returns will cool somewhat from the outsized gains recorded in recent years, the long-term outlook for Canadian farmland remains bright – in contrast to the dark picture painted by worsening global trends.
Believe it or not 2015 has been named “International Year of Soils” by the Food and Agriculture Organization of the United Nations (“UNFAO”). Surely the UN must have something better to do?
Before you roll your eyes consider that, according to a German organization called the Institute for Advanced Sustainability Studies (IASS), the world loses something like 24 billion tonnes of fertile soil every year through misuse, pollution, erosion and urbanization. The UN predicts that the world will reach the limits of ecologically sustainable land use by 2020 – that’s just 6 years from now. With only 1.4 billion hectares of arable land at the world’s disposal, each person will have to make do with just 2,000 square meters – less that one-third the size of a soccer pitch.
For the last three years the IASS has organized a “Global Soil Week” each April to promote better understanding, research and management practices related to soil protection. They have produced a Global Soil Atlas to illustrate the worldwide significance and threats to soil and agriculture. The recently released 2015 Global Soil Atlas makes very compelling reading – not only for its outstanding use of graphics, but especially for the sad story it conveys. Some of its findings:
The world is a big place – but we are rapidly running out of room to grow our food and we are using it in the wrong way.
Soils face threats from pollution, desertification and drought, deforestation, soil degradation, loss of species, erosion, scarcity, flooding and rising sea levels and water shortages. On almost all of these measures, Canadian soils are under less threat when compared to the rest of the world.
Poor agricultural management is the biggest contributor to soil loss worldwide, especially the improper use of fertilizers.
Soil loss and degradation have serious implications for climate change and vice versa – climate change degrades soils and degraded soils are less able to capture and hold carbon, thereby accelerating climate change.
Not only does urbanization pave over useful soils, it leads to additional soil problems by increasing rain runoff and evapotranspiration, and all that pavement prevents moisture from penetrating back into the ground to replenish groundwater reserves.
And while Canada ranks better (or suffers less) from many of the soil problems faced by the rest of the world, we face or our own troubling issues. In a survey of Canadian agriculture released by Statistics Canada in late 2014, it was pointed out that nearly one million hectares of dependable Canadian agricultural land has disappeared from cultivation in the past 10 years. Much of this loss was due to urban expansion and much of that urban expansion occurred on some of the best farmland in Canada – located near urban areas of the GTA in southern Ontario. This stunning loss appears all the more tragic after reading the Global Soil Atlas and realizing that those lost Canadian soils were some of the best the world had to offer. And now they are gone forever.
So maybe the UN doesn’t have better things to do after all.
English 
French 