Oct 052012
 

To become successful investors we have to think like burglars, because we must be constantly looking for windows of opportunity 😀  I saw an interview recently on BNN about alternative investing and how buying a farm can be a wonderful long term investment. Of course as any diligent person would do, I did some more research into this topic to see what other pundits and investors thought about the idea. As it turns out Canadian farms are quite the hot commodity these days. I’ve then decided that this was my opportunity, and I had better act fast before the window closes. There are lots of articles out there explaining the benefits of farmland investing. Even Brett Wilson of Dragons Den fame is a big advocate of it. Multi-billionaire George Soros is on board as well.

So why invest in farmland? Because it’s an inflation protected asset that produces income. It is more stable (less volatile) than the stock market, and unlike houses or apartments they aren’t making any more farms. In fact the supply of farmland has declined over time because of changes in the climate, and urbanization (when cities expand, you have less room to farm.)

It’s the farmers, the producers, who are going to be in the captain’s seat when the prices [of food] go through the roof.” ~Jim Rogers, co-founder of the Quantum Fund

Thanks to Brad Farquhar, co-founder of Assiniboia Capital, we have the following information about farmland performance over the years.

Why Invest in Farmland

We all know that in 2009 the Canadian housing market hit a temporary snag and home prices took a small dip according to the National Bank house price index, and our stock market was also suffering, as did the US market. But as you can see from the chart above farmland in the prairies continued to defy gravity and didn’t break it’s uptrend during the entire recession!  So what is the best province to buy a farm? It depends on who you ask but my best answer is Saskatchewan. For the longest time farm owners in the province could not sell their land to residents outside of Saskatchewan. This artificially kept the price of farmland lower than any other province. Alberta and Manitoba are both right next to Saskatchewan but there was a huge gap in farmland prices. But around 2002 the Saskatchewan government lifted the ban so that any Canadian citizen or resident can buy Saskatchewan farmland  (^_^) Wish I would’ve bought some in 2002 because since then prices in Saskatchewan have been soaring and is showing no signs of stopping 🙂

Why Invest in Farmland

2013 Prices

13-9-farmprice-canada

Because the buyer pool had been restricted for so long the market values for land in Saskatchewan had been depressed, effectively by government intervention, I still see Saskatchewan farmland as a long-term hold – with a limited supply of good, arable farmland and ever-increasing demand for food on a global basis.” ~ Brett Wilson, retired Dragon.

Pretty interesting isn’t it? Wise men have said that farmland is like GOLD, because it doesn’t lose its value over time, but it’s actually even better than gold because you can also generate income from it. Saskatchewan is home to over 40% of the arable land in this country. Its soil is not much different than that in Alberta, Manitoba, North Dakota, or Montana. Yet there is still a price gap between Saskatchewan and its neighbors, so I intend to get in while this arbitrage still exists. The sale price of farmland is usually a multiple of the government assessed value. For example, an assessed value of $50,000 would actually sell for probably $100,000 to $150,000. The 2 to 3 times multiple is because the province values the farm based on an old method to calculate the price based on crop productivity. But just because a farm can produce $50,000 worth of grain a year, doesn’t mean its real market value is that low. However the assessed value is a good way to compare the relative price of each farm. For example, if two farms have different assessed values then the higher assessed farm will likely be worth more.

Here’s a look at the average price of farmland in 2013 across different regions. Click image below to enlarge.

average price of a quarter section of farm land in Saskatchewan and surrounding areas

If you buy an ounce of gold today… a hundred years from now, you’ll have one ounce of gold and it won’t have done anything for you in between. You buy 100 acres of farmland and it will produce for you every year. You can buy more farmland, and all kinds of things, and you still have 100 acres of farmland at the end of 100 years.” ~ Warren Buffett

My plan is to buy some farmland, rent it out to local farmers, and hold it for the long run. So far I’m just looking at farm listings through real estate companies. But I hope to buy one before the end of this year. Of course there are risks associated with investing in farmland like droughts, or flooding, but there are ways to mitigate those risks. Famous investors like George Soros and Jim Rogers are investing in farms. Why not anyone else? Why not me? 😀

Research sources: Agcapita, Re/MaxAssiniboia, Farm Credit Canada

Learn more about investing in farmland:

Intro to Farmland Investing – Page with information regarding basic farmland investment strategies
Farmland Update – I’ve made an offer on a parcel of land in Saskatchewan. Hope I get it!
My First Farmland Purchase – Transaction complete! The offer was accepted after some negotiating and I own a farm now in 2012 😀 Used $20K of my own money, plus took on a big bank loan to cover the rest.
Farmland Price Update – It’s 2013. Prices are way up. My farm is now easily worth at least $20,000 more than my purchase price last year. I’ve made 100% return on my investment so far.
My Second Farmland Purchase – A years after buying my first farm I have decided to buy another! Took out another loan from the bank, but I believe it’s worth it.
Farms Prices Still Soaring – It’s 2014. Farm Credit Canada released its annual report. In 2013 my two farms combined have appreciated more than $50,000 in value! Best investment ever 🙂
Being a Farm Landlord – Rental rates per acre, how cash rent is calculated, investment returns, and other FAQs answered

 

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43 Comments on "Why Invest in Farmland"

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Pauline (@RFIndependence)
Guest

Interesting! I already own cattle and am looking at a farm to buy right now. Buying price is indeed the most important factor, but climate and type of land are also important. How much can the land produce, how many animals can live on one acre… I don’t know Canada but I imagine there is a difference between North and South in terms of climate that can impact the land price too.

Liquid
Admin

Hey cool, a cattle rancher is commenting on my blog (^-^) I only know the price of farmland in the UK, but not familiar with other parts of Europe. I’m searching specifically for grain land, but pasture land is also very popular these days. I guess in the end we’re both looking for the same thing, that is good quality, productive land 😀 Most of the northern part of Canada is either permanent forest or frozen most of the year and can’t be seeded. But there are lots of good land south of 54°N

Pauline (@RFIndependence)
Guest
Pauline (@RFIndependence)

Cattle is a great investment! My deal is I buy the calves when they are weaned and then split profits on resale with the ranch owner who provides pasture, staff and medicines while they gain weight. And a cow can give you a calf every 18 months, so you almost double your investment every 18 months! Not that simple a calculation, but a pretty good business.

D Pease
Guest
D Pease

You better cull that cow that only gives you a calf every 18 months or are you figuring pregnancy rates, abortions and death losses in your calculations?

Rob
Guest
Rob

OK farm land is really out there in forms of alternative investments, I’m assuming that you don’t actually farm it but rent out the land. Also in the UK EU land subsidies can be very very lucrative, you simply buy or rent some land and send in some paperwork and vollia the cheques start rolling in. So much in fact some big hedge are dropping stock investing to go this route.

BTW great graphics again.

Liquid
Admin

I think that’s a good way to go about it. Lease the land to someone who is capable of farming the land properly. This takes the operational risk out of the equation for the investor. Haha, I know nothing about farming :P. I think the agricultural business is a great place to for hedge funds to invest in. To be honest I only grabbed the graphs from multiple websites and just added some arrows and notes to them :).

Vicky
Guest

So glad you did a post on this! I’ve been following your progress, but am not familiar with the concept of investing in farmland. Let me know when you find a good deal! :p Happy Thanksgiving!

Liquid
Admin

I’ll definitely update if anything happens on that front. So far I’ve just been looking and giving offers. It’s similar to buying a house, sometimes you find one right away, other times there just doesn’t seem to be any good ones on the market. Enjoy your Thanksgiving too ^_^

John S @ Frugal Rules
Guest
John S @ Frugal Rules

Nice post. We actually have some farmland in our family and that’s exactly why it’s not been sold. It’s continued to go up in value over the years, plus it has a lot of sentimental value. I was not aware though that there are famland funds you could invest in, I’ll have to check that out.

Liquid
Admin

It’s always nice to have family in the farming business. You can learn a lot about the trade and get discounts on whatever the farm produces. Yeah you can buy farmland funds in the exempt market. Sometimes it requires a minimum investment amount like $5,000 though.

theoutliermodel
Guest

Very informative! I’ve been mulling over it ever since you mentioned it to us at the last blogger get-together. I’ve just sunk another chunk of money into Vancouver real estate though, so it unfortunately won’t happen anytime soon. It’s definitely something I’m going to consider in the future.

Liquid
Admin

Congrats on the real estate deal in Vancouver. There are many ways to reach financial freedom, I think any real property will do very well in the long run :D.

agentfang
Guest

Coming closer to landing a farm yet? 🙂 Definitely a long term investment, but real estate historically have performed well depending on the area of demand especially if there’s income swinging your way!

Liquid
Admin

A little bit closer. I landed an agreement with a seller earlier this week, we both signed the papers, and I even paid the deposit. But in the end, the property has less cultivated acres than it disclosed in the listing details so I had to back out because it was not a good deal. Maybe I’ll get better luck next time :0)

Bernard
Guest
Bernard

Extremely interesting!!!
This is something I’ve been thinking about but don’t know how to do.

It seems quite risky to me because I have no information whatsoever about it.
Are there books written on this type of thing?

For me anyways, there seems to be way too many unanswered questions for me…
Like…
Who is willing to rent your farmland?
How big does your farm have to be?
How do you choose a farm?
What is good farmland?
Are there maybe farm REITs?

Liquid
Admin
Hey Bernard, thanks for dropping by. Why read books when you can just read my blog? Haha, just kidding 😛 Well I’m not sure if anyone has written a full book about it, but if you Google “how to invest in farmland” you’ll find lots of articles on it. At least, that’s how I started to learn more about it. Answers to your questions: 1) There are many farmers who will rent your land. The trick is to buy good quality land. You can ask your realtor to help you find someone. Many real estate agencies will even draft up a lease agreement with you and the renter. Farmland is more like commercial real estate than residential real estate. That means if the location is good, the land is productive, and the soil is rich, then you will have no problems leasing it out because farmers are always looking for more land to seed. If you buy an office building in the middle of downtown, you will have companies knocking on your to use your building. Farmers are the same way. Farming is a business. Farmers are business men looking for land to grow their business. Wheat, canola, and barley… Read more »
Bernard
Guest
Bernard

Wow! Thanks for all the info.
I always thought it will be cool to own a farm.
Since I am building up my dividend portfolio right now, it will give me time to do some research.
100k for a farmland doesn’t seem so bad:)

Jen
Guest
Jen

Interesting post! While I haven’t given it much thought, I will likely inherit a fraction of a family farm in the midwest. It’s really a fraction of a fraction, as it was my granfather’s farm and has been split many ways. The family does essentially rent out the land each year. I know the yearly profits aren’t large, but the cost of farmland has gone up lately, and it serves as an investment of sorts for the family. I agree that given the dramatic increases in world population, the future value of arable land would seem strong.

Liquid
Admin

Thanks for sharing that. I think a previous commentator also mentioned his family is in the farming business. I guess farmland has always been a pretty significant part of our society. The midwest must be really nice this of year. I have a pal who lives in Missouri. Once I buy a farm maybe I’ll just hold onto it and leave it for my grandchildren eventually (^_-) With all the monetary stimulus being pumped into the US economy I’m not surprised the cost of farmland is going up these days. Hard assets are the way of the future ( ^^)

Harry Campbell (@PFPro1)
Guest

That is actually a good point about the amount of farmland decreasing. There is only so much suitable land for farming. Meanwhile, there is tons of open space where they can put in housing. I mean whenever I fly I notice that the ground is barren for about 90% of the time over land.

Liquid
Admin

That’s right, normally farm land would get annex into a municipality and then rezoned to build houses or other buildings on. Not likely the other way around where existing houses in a city with people living in them would be torn down to make a farm lol.

Michele
Guest
Michele

I own a quarter of land in Saskatchewan and rent it out on a crop share 2/3-1/3rd. The renters would like to go to a rent/lease per acre for approx. $45 per acre. I was wondering if anyone knows what the average is per acre to rent?

Liquid
Admin

I’m trying to do exactly what you’re doing right now. Farms with government assessed values from $40,000 to $60,000 generally can be rented for $30 to $40 per cultivated acre, but there are many exceptions because there are a lot of factors that determine the lease rate including crop insurance rating, soil type, location, and connections. I would say $45 sounds like a pretty good return for you, unless you have a really productive quarter of land :0)

Sandra
Guest
Sandra

I inherited a quarter section plus 80 acres recently. We used to rent it out at a 2/3-1/3 split and then moved to rent per acre model as well. We rent ours out at $50/acre. I think the rent can vary quite a bit. We have really good soil and 99% of our land can be cultivated. Our land is in the RM of Willow Creek. My siblings and I are in the process of trying to sell it. Hard to know what the price should be. We are thinking $1200-$1300 per acre.

Dan
Guest
Dan

Sandra is your quarter in Alberta, south of Calgary? Where in the md of willow creek?

Lyndon Lisitza
Guest
Lyndon Lisitza
Hi all, I have been following this thread and I find your comments and feedback to be very enlightening. If you do invest in farmland, one thing that you will find out about the farmland rental market is that it is relatively opaque. As a landowner, there is little price discovery and even less market transparency. The value of rental land is not only determined by the quality of the asset, but by a host of other factors. These can include weather risk, size of farmers in an area, proximity of land to farmers of sufficient size and whether your land is a ‘one off’ quarter section or is made up of multiple contiguous quarter sections. Many of the landowners I deal with are unfamiliar with the market, may be located outside of the market and are not 100 per cent knowledgeable on commodity trends and prices (including input costs). These information asymmetries can prevent landowners from achieving full market value for their land. To solve some of these problems, I have designed an online farmland rental auction website (www.renterra.ca). As a landowner, you can enter the legal land description(s) (LLD) of your land. Your land is then made available… Read more »
MDN
Guest
MDN
I really found all of the enthusiasm and interest in farmland on this blog a little concerning. The repeated statements that imply farmland investment is a ‘sure’ thing to make you lots of money makes me laugh. Sure, in Saskatchewan, farmland has increased in values in tremendously in the past five years, but for twenty years, land prices were not only stagnant, but margins on producing grain and livestock were extremely slim and often negative. Before you invest in farmland as ‘sure things’ read the history of farming from about 1985 – 2005, in Saskatchewan. Commodity prices that never seemed to venture high enough to produce high amounts of return. Right now, agriculture has been in the spotlight as the sector to invest for a few years, especially in Saskatchewan, but due to different factors. Farm values have increased due to a break-out in higher commodity prices, coupled together with generally good growing conditions, good production, and (to a much smaller extent, but something worth mentioning) change in political involvement and control over grain marketing for some commodities. Today, the risk that agriculture producers take to grow crops has increased by proportions unthinkable only five years ago. The opportunity to… Read more »
R.J.(Bob) Evans
Guest
R.J.(Bob) Evans

SK Farmer said it more politely than I would have. Those of us who have lived all our life in SK have seen all this before. The smart money has stopped buying this time around. In fact the really smart money stopped buying sometime in 2012. We need a round of low commodity prices with a par or above par Canadian dollar to sort this all out real quick. Should be fun to watch. And there will be lots of opportunities on the other side.

Ontario_Farmer
Guest
Ontario_Farmer

I enjoyed reading your blog re: farmland investments. Here is a website concerning farmland investing in Ontario (which includes links to informative articles and studies): http://www.pryield.com/ . (full disclosure, I am married to one of the owners of the site). I would also like to echo MDN and Bob Evans above, anyone who decides to invest in farmland needs to look at it as a long term investment strategy, not as a quick ‘in and out’ scheme.

Sunil
Guest
Sunil

Wow enjoyed your blog thoroughly especially the comparison with other equity optionsm
As you have already experienced on farmland investment is it possible to discuss in more details over skype

Ontario_Farmer
Guest
Ontario_Farmer

Hello Sunil, I’m sure one of owners of Pryield would be happy to discuss in more detail. Just go to the contact page at http://www.pryield.com, and send a direct message – be sure to include your contact information. All the best!

Ontario_Farmer
Guest
Ontario_Farmer

Whoops, just realized your question was probably directed to Liquid Independence … my apologies.

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[…] have it I decided to buy some Sask farmland a few years ago. Back then I had blogged about why land in Saskatchewan was the bee’s knees because of how undervalued it was compared to other provinces and neighboring […]

Anonymous
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Anonymous
I started buying Saskatchewan farmland in 2006, partly for the measure of security to be had with a real asset, and partly because my grandfather homesteaded it, I grew up there and I wanted to keep it in the family. Prices werent all that high then, and neither were rents. There was a bit of a family price involved but not far off fair market value. I was able to make a 7% return on investment after land taxes while maintaining the hope of a capital gains pay-off down the road. The only problem was due to location that chunk of dirt just wasn’t any fun. A friend had a tiny property close to our homes and the recreational side was appealling. Hmmm, best be buying something to play/ hunt on, while having a trickle of income and some gravel deposits that should be developed one of these days.It even came with 1/2 mile of lake frontage and I build a private 1/2 mile rifle range on it. Emboldened by that, and cheered by having my cake and eating it too another property was acquired more for the recreational potential than anything. A young farmer offered to rent most of… Read more »
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[…] people who are doing slightly quirky things like buying farmland as an investment (Freedom 35) […]

sask redneck
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sask redneck

I just sold a 3 quarter parcel of partially cultivated land this week. Its not particularly good land, average assessment $73,000. Bought it, had the renter break hayland back to crop, had it declared organic, and collected 4 years of rent at 12,000 a year. Bought it for 191,000 and sold it for $610,000. (2.77 X assessment) Heck, that’s easier than falling down a well. 😉 Lucky timing of course, but that doesn’t change that I still have 9 quarters left with a average assessment of 107,500.

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