Apr 162014
 

In 2012 I found a farm I liked on the MLS website, and bought it for $150,000 🙂 I was so happy with my purchase I decided to buy another farm in 2013 for $172,500 at an auction. This one is a 150 acre, class F, grain farm. It’s located adjacent to my first farm, and both properties are rented to the same farmer 🙂

But you know what? My second Saskatchewan farm is even more cash flow negative than my first. I’m currently losing money on both properties. But it’s no big deal. I don’t mind because YOLO 😀

I’ve already broken down the numbers of my first farm in a previous post. So today I will share the financial details of my latest purchase.

Breakdown of purchase price.

  • $10,000 Personal savings
  • $10,000 Proceeds from selling stocks
  • $17,500 TD Line of Credit
  • $5,000 CIBC Line of Credit
  • $20,000 HELOC
  • $5,000 Margin account
  • $5,000 Credit Card
  • $100,000 Long term farm loan, amortized over 25 years

Total amount = $172,500

To be honest it was a bit challenging to procure all the financing I needed, but luckily everything worked out. Just like the first farm, I raised $20,000 in cash from savings and selling stocks. The remaining balance of the purchase ($152,500)  was all thanks to using other people’s money as listed in detail above 🙂

13-11-farmb second Saskatchewan farm

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Nov 272013
 

I was watching the Buckner and Griffiths Exchange yesterday. It’s a business show on the CBC that only airs once in awhile. Anyway, they were talking about the booming ag sector in Canada. Apparently farmers are making a killing this year because of the bumper crop.13-11-lolx-crop-receipts

Rudyard Griffiths, a savvy social entrepreneur renowned for wearing his dashing red tie, raises a relevant concern about food affordability. The high growth rate of farmland prices may result in much higher food prices at the grocery store for consumers later down the road.

13-11-lolx-farm-profit

I believe the cause for the steep price appreciation is due to excessive credit and low borrowing costs, which has also manipulated other asset classes. The S&P 500 stock market index, for example, is up 26% year to date 😯 Investors are desperately trying to find real returns and real yields, and farmland is an area where real yields are still relatively attractive. Farmland rent, at least where my farms are located, was roughly $30/acre just 5 years ago. But today they are going for $50/acre. There is no way you can raise your tenant’s rent by 11% every year in the city 😛 But you can on rural property, because there are no city bylaws to thwart free market forces 😉

But what can we do to protect ourselves against the likely trend of growing food prices? As Ms. Buckner mentions in the show, the average age of farmers is 60 years old. And 75% of them don’t have a successor since their children don’t necessarily want to take over after they retire. So I think the answer is obvious. If you want to preserve your purchasing power, go become a farmer! 😀 Farmer’s incomes in 2013 totaled $7.3 billion in Canada, which is 31.7% higher than last year.

Did you get a 30%+ salary increase this year?
No? Neither did I 😕 But the farmers sure did 😉 I think farmers have become the new investment bankers, haha 😀

13-11-farm-celery

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Apr 292013
 

I have good news and bad news! The good news is I bought another farm yay 😀 The bad news is I have to find a way to raise another $25,000 by the end of July for the down payment or I lose my $17,250 deposit forever (O_O) Would anyone be interested to buy some short term, securitized Liquid Independence bonds with farmland being collateral? Lol, just kidding 😛

The property I bought earlier this month at an auction was for 150 acres of grain farmland for $172,500. I had to make a 10% (or $17,250) non refundable deposit. But I didn’t have $17K sitting around. So I used my TD bank’s line of credit at 5% interest rate to basically borrow the entire deposit amount and then transferred the money into the agent’s trust account.

13_04_farm2purchase

Unfortunately I bought this farm before I had time to get my financing in order. All lenders these days require a minimum of 25% down payment. My 10% deposit will of course be part of the down payment, but I need to come up with the remaining 15% of the purchase price, or $25,875. I currently don’t have a lot of cash on hand. Perhaps just enough to cover the closing legal costs plus a little extra. This farm deal is scheduled for completion at the end of July. That gives me 3 months to come up with about $25,000.  I can’t even save that much in an entire year, haha. But where there’s a will, there’s a way, and I have to find a way because my $17,250 depends on it ಠ_ಠ.

Unfortunately that 10% deposit really did a number on my line of credit account. I’m now using $33K of my $40K credit limit. So there’s not much room to borrow anymore. And they won’t raise my limit, I’ve asked. I could sell some stocks to raise cash or use my credit cards which has a combined limit of over $10K 🙂 Wait, a personal finance blogger is advocating the use of credit card debt? Yup 😀 I don’t believe in good debt or bad debt. Only the cost of capital matters. I would gladly pay the 19% annual interest rate on a $10K credit card balance if it means saving my deposit 🙂 It’s not clear to me yet how I’ll raise the entire $25K, but it will likely be a combination of what’s already been mentioned.

Was it a bad idea to buy a property without getting pre-approved for a loan first? Maybe. 🙂 Was it risky to wire someone $17K knowing that I would lose all of it if I can’t come up with an additional $25K? Okay, yes it is! 😀 But we only live once, and sometimes I like to add a little excitement in my life to spice things up a bit. I am so ready for this challenge \(^_^)/. I bought my first farm last year with $20,000 of my own cash and borrowed the rest to make up the total purchase price of $150,000. Average farmland prices around that area grew by nearly 20% in the last year so today that same farm that I bought is probably worth well over $170,000. I’ve just made over 100% return on that investment and became $20,000 richer. So I just couldn’t pass up another opportunity like that. I’ll keep everyone posted on how this second farm purchase turns out. 🙂

[Update Jun 2013] The seller has kindly changed the closing date of our purchase agreement to sometime in October instead of July. I’ll keep everyone posted 🙂

[Update Sept 2013] Looks like I have successfully accumulated my $25,000 and then some. 🙂 This farm deal can go ahead as planned.

[Update Sept 2014] It’s been a year since I’ve owned this farm now. Looks like it was the right decision to purchase it because the value has gone up by more than 10% so far. 🙂 This farmland is held inside my small business account so I can write off expenses for it. Who knows? Maybe one day I’ll incorporate my company too. In B.C. one can do that with onestop.gov.bc.ca. Further east Ca4it is a company that can help with incorporating in OntarioThere are many choices. I will leave my options open for now.

 

Apr 172013
 

Earlier this week Farm Credit Canada, the leading agriculture lender, released their farmland prices report for spring of 2013. FCC appraisers estimate market value using recent comparable sales. These sales must be arm’s-length transactions. Here’s a summary of the report. During the second half of 2012 Quebec experienced the highest average increase at 19.4%. Saskatchewan, where my farm is located, experienced a 9.7% increase. Remember folks these are not annualized appreciation. The changes were only during the span of 6 months ending December 2012.

13_04_fccreport, farmland prices in 2013

Last year I wrote about my experience buying a farm near Regina, SK and included all the details like working with a tenant, the rental rate, the financing process, etc.  Near the end of that long post I wondered if my new farm would be a good investment or not. Well now we can find out 😀 With this FCC report I can finally adjust the price of my farm to reflect its more current value by taking the average of the FCC report and the inflation rate. This valuation method is designed to keep my net worth less volatile, and curb the effects of false signals such as speculation. Since I bought the farm in October which was right in the middle of this reporting period, it wouldn’t be fair to use the full 9.7% appreciation for Saskatchewan farms. So let’s use 3% instead to stay on the conservative side. Meanwhile inflation (CPI) was about 0.3% during the same Oct to Dec period. Average = 3.3% ÷ 2 = 1.65%

So the farm I purchased last year for $150,000 should be worth at least 1.65%, or roughly $2,500 more at the beginning of this year. Woot! So yes, my farm HAS turned out to be a good investment so far. It feels good when an investment pays off like that!

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13_04_fccvaluereportAnyone who followed me into the exciting world of farmland investing last year probably have also done pretty well, especially if they bought in Quebec haha. $2,500 return in 3 months is not too shabby 😀 This is why I love investing! After making the initial investment I literally did nothing with my new farm except sit back and watch it appreciate. This was the easiest $2,500 I’ve ever made, at least on paper anyway 😉 The stock market had a bad start this week, especially resource companies 🙁 but that’s why it’s important to diversify 😀 When one investment fails to perform it’s good to have others to fall back on.

And thank goodness for leverage. By using other people’s money, I was able to purchase the farm with just $20,000 of my own money. A subtle 1.65% increase in the value of the land is like a ($2,500/$20,000) 12.5% return on my initial investment! I’m so thankful for people who keep large deposits and emergency funds in their bank accounts instead of investing that money for themselves. These generous people with their rainy day funds deserve more recognition for saving hard every day to keep our financial institutions well capitalized and filled with liquidity so that banks can continue to lend money to investors like myself 😀 TD would have never lent me $130,000 to buy the farm if we didn’t have such a supporting and robust financial system in this country 😉

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Quick updates:
[Edit on Aug 24th, 2013] Just read a news release from last month that Ontario loses about 100 acres of farmland every day. This is part of the reason why agricultural real estate is a great investment right now. When supplies diminish, people are willing to pay more for it. Farmland in other provinces are going through the same trend. Good news for farm owner 🙂 [/edit]

[Edit on Sept 29th, 2013] Just read a recent RE/MAX report on the latest Canadian farmland price trends. The average price of Saskatchewan farmland is now well over $1000 per acre. A huge change compared to previous years.

13-9-farmprice-canada

The location of my farm is in East Central Saskatchewan. According to this report prices in 2013 are 6% to 25% higher in that region than last year. Jumping jellybeans! That’s great news for farmland owners 🙂 You may download the full report in PDF format here. [/edit]

Jan 082013
 

This is a guest post by Peter Thompson. He is the founder of the boutique firm GreenWorld Forestry and Farmland Investments. GreenWorld concentrates on offering “real assets”, and greenworldbvi.com have been particularly popular.

For a small investor with an adversity to risk it is very difficult to find investments that keep up with real inflation.  By real inflation, we don’t mean the inflation reported by government statistics, I mean the inflation we all see when we shop for groceries or when we fill the car and generally the inflation we see are out shopping.

Another concerning aspect for the small investor, one the worries many people about their savings, is the safety of cash on bank term deposit.

What will happen when the next big leg down in the current economic crises occurs, will the banks we have our money in be secure? Will governments be capable of honouring bank guarantees? How safe are the banks in Europe? If there is a major economic collapse, which inevitable, how safe will deposits be? Could a government which is suddenly faced with massive claims on government guaranteed bank deposits schemes, be able to make good such guarantees

These concerns have lead we at GreenWorld – as well as many of our clients – to a favourable view of agricultural land as investments.

Many people have discounted farmland as an investment option due to the inflated prices paid for land in in agriculturally subsidised Europe, the western parts of the European Community. That view changes, however, when people discover the options available of investing in countries which have not suffered from spiraling land prices.

For example, the price of high quality arable land in Africa is extremely low, and the introduction of western farming methods can frequently produce huge returns for investors. Whenever I speak to people about investing in Africa one of the first responses is “how risky is that” or words to that effect. Investors see a possibility of civil war and problems of corruption. These concerns were my own too.

These concerns are real, but in Sierra Leon for example – where one of GreenWorld’s three farmland investments is located – we think they are of acceptably low risk, especially as Sierra Leone has developed extremely close relations with the UK and has made it official government policy to promote and support foreign investors.

In our view, a well run farming project in a small, stable (over the last decade or more) African nation offers more safety than the badly managed and corrupt economic system prevailing across Europe and many Western Countries, where printing money and more debt are the only “solutions”.

Speaking of printing money, as a hard asset, farmland is also an excellent hedge against inflation. Farmland is a “real asset”, and as such, more of it cannot be created or printed into existence by global central banks. With western central banks having already engaged in extensive Quantatative Easing (QE), and likely to engage in further QE as well, investors would be well-advised to consider adding inflation hedges to their portfolios.

Another reason to look at adding farmland to a portfolio is that it is a wonderful way to access a critical, long-term global macro-trend; namely, the combination of a rising global population combined with shrinking arable land. Indeed, as the graph below demonstrates, this trend is very real. It is the most basic rule of economics – if the demand foor something goes up (rising population with more mouths to feed) and the supply of it goes down (shrinking arable land), the investment fundamentals will be very, very favorable.

13_01_farm_guest_population

Finally, many people look at farmland and think it involves purchasing a farm, hiring people to farm it, and other major logistical concerns. What many are not realizing, however, is that there is a new trend in agriculture investing to make farmland available to individuals as a purely passive investment.

Whilst farmland investment has indeed been dominated by larger institutions historically, in just the last several years a number of options have been developed for individuals. The most common is for a project developer to own and operate a large farmland project, and then offer parcels of it to individual investors. Under this model, farmland becomes a purely passive investment, as the he project developer will handle all of the logistics of the project, from the planting to the harvesting to sale of the crops.

The conclusion? If you have never considered investing in farmland previously, it may well be worth taking a look at this asset class now.