This Dirt Cheap Farmland Will Soar in Value
Jan 20th, 2009 | By Chris Mayer | Category: FeaturedIf you only looked at Saskatchewan, you wouldn’t know there was a global recession going on says Chris Mayer. The Canadian province is rich in relatively cheap arable farmland. And this means the region could be at the start of a multi-year boom as global demand for grains soars in the coming years.
This from Rude Awakening:
Indisputably, a slowdown of sorts now unspools across the markets of the world. But you’d never know it looking at Saskatchewan. What follows is another look at the great boom taking place here and a couple of ways to participate. There are more wrinkles to explore in what is shaping up to be a robust investment idea.
To begin, let’s add a bit of color to this unique story. As far as natural resources go, Fortune has smiled broadly on this land between the 49th and 60th parallels. It is the world’s largest producer of uranium and potash. The former is a critical component in the “nuclear renaissance.” The latter is a key fertilizer that sells for $1,000 per ton, compared with only $300 per ton a year ago. Saskatchewan is the world’s largest exporter of chick peas and lentils. And it is also rich in oil and gas. The U.S., in fact, buys more oil from its northern neighbor than it does from Kuwait.
The riches so far earned stagger the mind. At a time when governments everywhere face gaping budget shortfalls, Saskatchewan is awash in cash. On a budget of only $9.4 billion, the province reports a surplus of $3.1 billion. Of this, some will go toward highway repairs, better hospitals and improved schools. Not needing so much money, the government announced its largest cut in personal income taxes in its history.
It also paid off 40% of its provincial debt. Prudently, the government also decided to sit on a $2 billion cash cushion, just in case.
Many of these notes come courtesy of Brad Farquhar, vice president of Agriculture Development Corp. Hailing from Regina, the capital of the province, Farquhar has a front-row seat. “My house has about tripled in value in the last five years,” he says by way of illustrating the relative immunity of the province to the global ills that chill other markets. No housing bust here. In fact, values are rising for nearly everything, including farmland, which is Farquhar’s metier as an investor. His firm invests in farmland through its investor-owned funds.
Farmland stands to benefit from trends that you are now well familiar with if you’ve been reading this letter for any length of time. Some of the most important points bulls will commit to memory are these:
• World wheat consumption has exceeded production in six out of the past eight years
• World wheat stocks are at a 30-year low.Greater prosperity in China and India lead to shifting diets consisting of more protein – eggs and meat. As reported in Farquhar’s farmland prospectus, to produce 1 pound of meat requires 10 pounds of grain: “Therefore, the dietary shift from grains to meat significantly increases the demand for grains.”
By tradition, China has usually produced and exported large amounts of grain. That is no longer the case. Rapid urban expansion and “desertification” of existing arable lands, along with water shortages, have all led to lower levels of supply. The same is happening in India.
The global urge to produce more biofuel also creates competition for a smaller base of farmland acreage. More acreage devoted to corn for ethanol, for example, means less devoted to soybeans or other crops used for food for people or livestock.
Saskatchewan is in a particularly good spot to gain from these broad trends. Almost half of all the farmland in Canada is found in its golden prairies. Wheat, canola and barley represent three-quarters of the crop acres in the province.
Even the icy-cold fingers of the credit crisis seem stunted here. Canada’s big agricultural lender is backed by the state. Farmers still have access to credit to plan for a big harvest next year.
The primary attraction of Saskatchewan farmland is cheapness. On that front, Farquhar offers the following jigsaw puzzle look at farmland prices in the region. Saskatchewan is the cheapest of the lot, at $405 per acre.
Shortsighted government policy was the main villain. From 1974-2003, you had to be a resident to own farmland. (”During this period, Saskatchewan was also a net exporter of people,” Farquhar’s prospectus points out. “It was a province whose population was in decline.”) Doing away with these restrictive ownership requirements in 2003 unlocked some of the value already. Annual declines in farmland values immediately began to reverse.
Saskatchewan farmland has a lot of ground to make up, though. Only 22 years ago, farmland here was more valuable than in neighboring Manitoba. But today, Manitoba’s farmland is more than 50% higher than Saskatchewan’s, at $668 an acre. The discount is attracting ranchers and grain farmers from neighboring Alberta, as well as immigrants from abroad. The government of Saskatchewan actually has a fast-track program in place to assist immigrants looking to farm in the province.
Statistics compiled by the Canadian government show that the average farmer in Saskatchewan is 52 years old. That leads Farquhar’s team to conclude in its prospectus: “The aging farming population in Saskatchewan has created a buying opportunity that [we] believe may not return for another generation.”
The next generation is less interested in farmland. The older generation will, in many cases, have to sell to folks beyond kith and kin.
For all of these specific reasons – and for the broader global trends affecting the grain markets – I expect that gap between Saskatchewan’s farmland and that of its neighbors to close quickly. Farmland values rose 11% last year in what I think are still the early stages of a multiyear boom.
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Chris Mayer is the editor of Capital and Crisis and Mayer's Special Situations. His contrarian essays have appeared on a number of websites and publications including the Mises Institute, the Freeman, GoldEagle.com, LewRockwell.com, FiendBear.com, PrudentBear.com and Individual Investor Magazine.
By way of example of how attractive farmland investing has been during these volatile times, according to BarclayHedge agricultural funds were up 9.5% in 2008, while the S&P 500 index lost 36%.
For a detailed Saskatchewan farmland research report produced by our firm, Agcapita Farmland Investment Partnership go to http://www.farmlandinvestmentpartnership.com/pdfs/Agcapi...
Agcapita is a Calgary, Canada based private equity firm that allows investors to gain direct exposure to a key part of the agriculture commodity bull market story – Canadian farmland. Agcapita manages the only RRSP eligible farmland fund in Canada and is part of a family of three funds with almost $100 million in assets under management.
Agcapita’s investment team has over 40 years private equity and fund management experience and over $1 billion in total career transactions and previously managed a group of emerging market funds with almost C$500 million in assets for one of the largest banks in Europe.
Agcapita’s advisory Board is composed of accomplished agriculture entrepreneurs and academics, high profile political figures and investment experts including the former UK Chancellor of the Exchequer, Rt. Hon. Ken Clarke and Jim Rogers, co-founder of Quantum Fund. Our members bring a deep knowledge of the factors driving agriculture and farmland values – including rapidly growing emerging economy food demand and inflation.
There is good reason farmland is cheaper here than Manitoba and Alberta.
1. Crop insurance levels do not even cover 2/3rds of crop costs.
2. crop yeilds in general are much lower. Lower precip and less irrigation.
3. Freight rates are the highest in western Canada.
4.Sask is much more prone to frost, and droughts.
5.Taxes are higher or have been
Do not get me wrong, I love farming and still think Sask has a bright future, but there is always a reason for things.
The land is getting currently way overvalued in some areas compared to it's economic output- this is the key. Now more so than ever as input prices are high and crop prices have dropped by 60%. I know 2 Albertan's you came here 5 years ago, and they are leaving as we speak because of their inability to make a long term profit in relation to the returns. Southern Alberta gets at least $1/bus more for barley – Add that up on a 100bus crop in Alberta and a 70 bus crop in Sask – like I said there is reasons.These land investors will be out of buisness in time as their investments will not make a return for them or the farmer – time will tell.
I agree 100% what Dwayne says in his comment. I used to farm in Germany, went to Alberta 1996 and started a farming operation in the milk and honey corridor of the province (Hwy2). The land more than doubled since we bought it. But the reason for that is the proximity to the 2 big cities the booming economy and with that non farmers purchasing land for acreages and other developments. Even the fairly productive soils in this region are , if you look at it from a farming perspective, maybe 1000-1200 $/acre worth. Farming in Alberta is a fairly high risk but the crop insurance is good because of the yields that have been achieved over the last decades. Not so in Sask. We purchased two years ago irrigated farmland in Saskatchewan because of the higher risk ofdryland- farming and a bigger variety of crops that can be grown under irrigation. We also farm/rent dryland in sask and run the farm in Alberta.
continOverall it has been working and I'm glad we only own irrigated land because the weather and insect risk on dryland is immense. We still think it's been a good idea but saskatchewan faces other problems as well. For example is the work force in the rural areas very limited and aging. The younger generation keeps moving to cities which is understandable. Alcohol and drugs is in my opinion a big concern. Saskatchewan wants to attract more people and desperatly needs to have people move but house prices are at a level in Saskatoon its completely insane. This will work against Sask.for sure. Saskatchewan has potential but there is a lot of uncertainty involved and when I see investment companies buying land because investors can't make a buck anymore on the stock market I really wonder. Even watching business news these days and "experts" talking about agriculture….not to long ago the same people didn't even know what agriculture is. But perhaps there is an investor out there who would like to buy our land, irrigated quarters in Taber run between 600,000 and 850,000$. I might sell my irrigated land in Sask for 240,000$…….so it's undervalued…a bargain or not?ued…..the comment was too long
THANK YOU DWAYNE!!! Yes I agree 100% with what you said. Some people just don't understand how farm business works! Land is one of the minor costs! You still need a return to pay for "cheap land"
We have neighbors that came from another country to farm such "cheap land" and they were shocked after the frost in 2004 that the government didn't just step forward and pay their bills basically.
As rolls swell in the recession, workers find firms are contesting claims by alleging wrongdoing or quitting in a bid to not pay benefits.
cont….What is the average leasing rate per acre in the area also, where to go for financing the project ministry of agriculture or private bank. Is there any possibility that the land leasing money can pay for its mortgage, say we put down 25% money.
Are there any subsidies in SAS in farming