Ag-centric: How investors are seeking exposure to farmland

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Canadian farmland offers a unique investment opportunity. More than simply appreciating in value, farmland can create a steady stream of income through leasing to farmers, sharecroppers and even wind energy projects.

Scott vanEngen, financial planning specialist with the Family Office Services team at RBC Dominion Securities, came to the financial services industry through bona fide credentials in agriculture. He grew up on a family farm outside Brantford, Ontario and earned a BSc in agriculture from the University of Guelph, followed by a CPA designation. Through his years in the accounting and banking fields, he frequently worked with family farms on succession and estate planning as well as agricultural lending.

“When family offices are considering investing in farmland, they should be looking for stable, long-term, fixed assets with some cash flow attached to the assets,” he says. “They may even be looking at rural vacation properties with income potential, and it’s often a 10- to 20-year play. Owners of farmland should have little difficulty leasing the land they acquire to farming operations in the area. It’s typically a matter of who approaches them first to come to a satisfactory agreement.”

Farmers may grow a range of crops on the leased farmland or use the property as part of a nutrient management plan, returning manure to the soil and producing field crops for livestock. However, the lease price of the land is rarely dependent on the success of bringing profitable crops to market as the farmers assume the production risk.

vanEngen notes that farmers generally make excellent stewards of the land, employing sophisticated techniques such as low-till farming, or precision application of fertilizer and fungicides via GPS to lower environmental footprints while increasing yields. Leasing arrangements renewed year to year with the same farmers facilitate improved land management through crop rotation and other methods.

In vanEngen’s experience, farmland has generally continued to increase in value over decades, with some interest-rate sensitivity.

“We saw some price pullback in the late 1980s and early 1990s with high interest rates forcing certain farmers to sell their land due to liquidity issues,” he says. “But even in the higher interest rate environment of today, we’re only seeing a minimal amount of tempering. If larger farm operations have capital that they want to invest, they’re still likely to pull the trigger on purchasing farmland.”

The price of farmland varies significantly from province to province and area to area. However, according to the 2022 FCC Farmland Values Report, the overall price of Canadian farmland increased by 5.4 per cent in 2020, 8.3 per cent in 2021 and 12.8 per cent in 2022.

Farmland values also have low correlation to equities, vanEngen says. They’re more tied to underlying economic conditions over the long term than news from Bay Street.

“In my experience, if there’s a 10 per cent correction in the equity markets, we’re probably not seeing the same thing happening in farmland,” he says. “If farmland is $45,000 an acre today, it will be $45,000 an acre next week. Farmland prices are more likely to be influenced over the short term by the price another neighbouring farmer was offered.”

Family offices can engage or partner with farmer tenants to manage farmland, sub-contract farm management to organizations that specialize in the service or invest with companies that offer farm management as part of their value proposition. They can also take a hands-off approach to investing in agricultural land through farmland REITs

“Farmland REITs are a way for like-minded individuals to raise the capital to invest in farmland on the expectation of capital growth with some cash flow,” he says. “You’re not worried about where the land is, or who’s cropping it and taking a more passive approach to investing. I’ve seen larger operations selling their land to those organizations and then continuing to produce on that land under long-term agreements.”

Family offices can also play an important role in encouraging the efforts of next-generation young farmers who may otherwise be discouraged by the high capital cost of acquiring land.

“These farmers can’t offer $45,000 an acre to buy farmland right now, but maybe they can work with a family office who wants to lease it to them for a reasonable amount,” vanEngen says. “The family office generates yearly cash flow while the land appreciates in value. At the same time, a young farmer who’s potentially getting their feet wet in the industry can start to acquire some expertise and equity. It’s not only about owning the land anymore. It’s about having access to the land to farm it. I think that’s going to be a much bigger trend going forward.”

This story was created by Content Works, Postmedia’s commercial content division, on behalf of RBC Investor Services, which is a member and content provider of this publication.