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Consider these risks when investing in farmland

Whether investing in the agricultural or the future development potential of land, ensure you take steps to cut risk

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As any farmer will tell you, agriculture is not an easy life – and that’s something investors in farming and agri-business need to keep in mind, experts say.

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Everything from climate change to urban sprawl pressures to global trade wars to simple bad weather can affect the fortunes of an agricultural investment.

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This is not to say that farmland can’t have a place in your portfolio as an alternative asset.

“There’s only a finite amount of farmable land in Canada, and there’s absolutely an opportunity for family offices to invest in agriculture,” says David Guthrie, national agribusiness sector leader at KPMG Canada, based in British Columbia’s Fraser Valley.

And with inflation running hot, agricultural land with stable returns has become attractive to institutional, high-net-worth and family office investors.

But it is important to be aware of the complexities of land investment.

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“There are always risks, says Patricia Saputo, chief financial officer of Montreal-based family office firm Placements Italcan Inc. and co-founder of Crysalia, a family business advisory. There is strong evidence that wild storms, floods, fires and drought triggered by climate change is increasing these risks. But even before climate change, farmers survived at the weather’s whim, she says.

“That’s why crop insurance has existed for a long time. It may be more expensive now than it used to be. It’s part of due diligence for investors to ask whether the land they’re investing in is properly insured,” she says.

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However, buying into farmland for agricultural purposes, such as renting to farmers or even participating in operations, offers investors an impact investing opportunity, supporting environmental, social, and governance (ESG) aims.

Investing in farmland to sell to developers

Another way to navigate the investment risk in farmland is to look at land purchase as a long-term investment, says Harsh Pabla, head of commercial realty with Pabla Realtor Group in Vaughan, Ont., part of Royal LePage.

“Investors will buy land with the expectation that eventually it will be developed, but that may be years later and it can be farmed in the meantime. The investors are looking at a long-term gain and in the meantime they can lease the land back to the farmer, freeing up the farmer’s capital and letting the farming go on,” he says.

Investors who buy farmland expecting to develop it or sell it later for development must also consider shifting political and economic pressures that may change the rules on what can happen to the property.

Investment risk in land development

Development rules can shift. For example, developing farmland is restricted on properties that are within Ontario’s 8,094-square-kilometre Greenbelt, roughly the size of Prince Edward Island.

At the same time, Ontario Premier Doug Ford has called for pushing a superhighway through the Greenbelt that critics say would lead to farmland turning into suburbs; this might damage a land investor’s ESG rating, a measurement that is increasingly important to outside investors.

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Trade risk in agricultural investments

International political and trade disputes and supply chain woes can also affect agricultural investors’ holdings, sometimes suddenly. For example, Canada is the world’s largest exporter of pulses, such as lentils, chickpeas and peas. India is one of Canada’s largest export markets for pulses, but the country’s trade tariffs have put Canadian producers on a rollercoaster ride.

Closer to home, Canada’s $16 billion dairy industry faces constant pressure from the United States over Canadian supply management policies, which guarantee dairy prices for farmers. Supply management remains in place in Canada, but if Ottawa ever succumbs to U.S. demands to end it, the value of dairy farms would be affected.

One good reason to invest in agriculture might be simply that you like farms, Pabla says. But investors who actually want to be farmers should not expect it to be easy, he says.

“I feel for farmers. It’s hard, hard work,” he says.

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