Oct 132016
 

Slow and Steady

A reader recently asked for a farmland update. So here’s the latest. I’m collecting $8,500 a year from my tenant who is growing canola on my 310 acres of farmland. He pays me twice a year, half the total amount in the spring and the other half in the fall. Here’s the latest cheque that I deposited into my bank account last week. This amount includes 5% GST.

16-10-farm-rent-final-2016

My farmland loan outstanding is about $193,000. The interest rate is 3.4%. Property tax was about $1,500 this year. No insurance or other cost is necessary for owning farmland. So my total expenses came to $8,100. I’m rounding these numbers to the nearest $100.

Thus I’m able to make a $400 profit on my farmland in 2016. Slowly but surely, the financials are improving each year. 🙂

16-10-farm-update-financials

I think farmland returns are starting to dry up in North America. Commodity prices still haven’t recovered. So unless crop receipts increase by a substantial amount it’s hard to see any reason for the underlying land to become more valuable. Maybe farmland will continue to keep pace with inflation for the foreseeable future so it’s still a good store of wealth, but I don’t see much more appreciation from here.

It’s too bad the Canadian prairies is so cold. Many plants like hemp can’t grow out there. Since marijuana will soon be legalized there will probably be a lot of new cannabis growers by this time next year. Not to be blunt, 😄 but this obviously creates opportunity for investors too. For example, last year I blogged about buying some shares in Canopy Growth Corp, a supplier of medicinal marijuana. So far the stock has doubled in price! Not bad. 😀

Free eBook Download

Maybe I just got lucky with that marijuana stock. You shouldn’t get your investment advice from an amateur finance blog anyway. 😉 But my acquaintance David Chilton, who runs his own financial planning business is more than qualified to offer quality advice. I use the term “acquaintance” loosely because we’ve only corresponded by email a couple of times. 😛 Anyway, he’s teamed up with Tangerine bank to give away the eBook edition of his latest work, The Wealthy Barber Returns. 

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If you’re interested, just go to this Tangerine page and use one of the download links on the right. I’ve read the paperback before and recommend it for anyone who likes personal finance. The book covers a lot of core investing topics like index funds and the stock market. You can download it to your computer, or mobile device. It also supports the Kindle App. Enjoy! 😀

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Aug 082015
 

Profitable Farmland

Sometimes when I run out of topics to write about for the blog I would visit the fabric store to find new material. 😀 But other times, I am inspired by visitors like you! A while ago a reader requested I do a profit and loss statement for my farmland. Great idea! So today’s post is a financial update about my farm’s earnings.

As you might recall when I first bought my farmland I was losing money on it. Well, after a few years I am finally in the black! 2015 represents the first year my farmland is profitable. Yay! 🙂

15-08-farmland-update-profit-loss

Revenue from my farmland comes in the form of rental income. Both farms are leased to the same farmer who grows crops on it every year. Expenses include interest on bank loans and property tax. There are not a lot of costs associated with owning farmland. It’s only land so there’re no buildings or lawns to maintain. Let’s take a closer look at 2015’s numbers.

Revenue is down about $1,500 from the previous year because crop prices are lower. Since the prices of soft commodities like wheat and canola have fallen I’ve agreed to lower the rent for this year. If crop prices rise in the future I will be paid more.

As for expenses, it is dramatically down this year thanks to the lower cost of borrowing. 🙂 Many were hesitant to borrow money last year because they thought when interest rates go up they will have a harder time servicing their debts.

That’s not wrong, but I don’t personally adopt that kind of mindset because timing rate hikes is a fool’s game. The central bank actually lowered rates this year, twice. So now investors like myself, who have already borrowed money, are paying less interest than before. And our investments continue to perform well. Here’s a look at my current farmland loan situation. I only have about $200,000 left to pay off.

15-08-farmland-loan-td-balanace

Prior to now I was paying 3.89% interest rate on my loans. But now it is only 3.43%. 🙂 Both my loans share the same interest rate. The reason I have two loans is because I bought my farms separately – one in late 2012, and the other in 2013.
15-08-farm-loan-details

With my current $200,000 balance, I would only pay $6,860 a year for interest. The total property tax this year is about $1,600. However, I can save about $80 if I pay my property tax before the end of this month, which I plan to do.

15-08-farmland-property-tax-rm-273-2015

So after a few years I am finally making a $100 profit! I can’t wait to spend all that money. But as I wrote back in 2012, most of the gains from farmland investing is from capital appreciation. According to Statistics Canada, from 1981 to 2014, farm asset values have increased by more than 300% to over half a trillion dollars today. Last year Saskatchewan farmland prices experienced the highest average increase at 19%. This represented about 150% return on my investment due to my 8x leverage strategy.

Finding Value in Farmland

Compared to other types of investments farmland is still an attractive long-term hold. To analyse stocks investors often use the price to earnings ratio. The lower the P/E ratio is, the more return on investment the stock should generate over time. This is a useful way to find the best-valued stocks. With farmland, we can evaluate similar metrics by using the price of land relative to its income-earning potential. So instead of using price per share, we can use price per acre of farmland. And instead of using adjusted earnings we can use cash receipts. Farm cash receipts are not the same as net income, but it does a better job at tracking the patterns in farmland values. Below is a chart showing the average P/E ratio in different provinces over time.

15-08-farmland-price-earnings-ratio

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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.

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