An Introduction to Farmland Investing
Farmland is a fantastic investment! We eat food everyday and it is an important part of our culture. Since food is so in-grained in our lives it only makes sense that it should also be a part of our investment strategy. 😀 Inflation hedging is the main reason why some investors are looking at agriculture. It’s just another way to fight the higher cost of living. But unlike gold, which is also a hedge against inflation, farms have the added benefit to be produce goods and generate income. 😉
My two parcels of farmland which I purchased several years ago have returned over 10% a year so far, which I’ve detailed in previous posts. And Canadian farmers have been doing really well for themselves too. My tenant says many farmers want to sell their land because they need the capital to purchase combines and other machinery which often costs $300,000 and up.
Saskatchewan has the cheapest farmland in all of Canada. That’s where I bought my farm land.
As for investment returns there are 2 ways to make money on a piece of farmland; capital appreciation and income. Capital appreciation means if the value of the land goes up then the investor can sell it for a profit. Income from a farm will either be from cash rent, or crop share. Cash rent is calculated by dollars per cultivated acre. Cheaper farms will generally sell for around $500 an acre, and can expect a cattle farmer to rent it for $20/acre annually. But high quality land with rich clay loam will sell for $2,500 per acre or more on the market. Of course they will also attract grain farmers who would pay up to $100/acre annually to rent. Experienced cereal farmers can be very productive with good soil and can easily generate over $400/acre of output (harvested crops) on top quality farmland. So farmers will generally pay higher rent if they think the land will yield more crops. The alternative to cash rent as mentioned earlier is a crop share, where after the crops are harvested and sold the land owner gets a share of the total sales, usually about 20% to 30%. In most cases crop share makes more money for the landlord, but it’s also more risky. If the farmer has a bad year for whatever reason (locusts, flooding, etc) then the landlord will share the burden. Cash rent on the other hand pushes all these risks onto the farmer because the landlord still gets paid no matter what happens to the crop’s performance. 🙂
If investors have a background in agriculture they may consider doing something else called custom farming. This is when the landowner or investor hires a farmer as a contractor to operate the farm. Depending on the agreement the contractor could perform only certain tasks like swathing and transportation, or operate the entire farming process from seeding to harvesting. The input costs likes seeds and machinery is paid by the owner. The contractor just acts as an employee. The benefit of custom farming for land owners is they receive all the income from sales and have control over the entire farming process. But the disadvantage of custom farming is it puts the financial and management risks completely on the owners.
Farmers in Canada make pretty good money. They have benefited greatly from the rise in soft commodity prices over the years as everyone pays more for food. Farmers also receive benefits from government programs like cheaper gasoline at the pumps, affordable farm insurance, and low financing rates on farm equipment for younger farmers.
Here are the most recent stats I could find on how much money farmers are making. Notice that even during the last recession when other sectors of the economy saw lots of people being laid off, incomes of farming households on average managed to stay steady. 🙂 This tells us that agriculture is a safe investment, and unlike a hot stock or a popular trend we can be pretty certain that farms and farming related services are here to stay.
I already have a condo in Vancouver, but property prices here may not be very stable so investing in farmland gives me the opportunity to diversify my real estate portfolio. And what better place to buy real estate now than in one of the economically fastest growing provinces in Canada. 🙂 Plus, unlike residential real estate, farmland prices are less volatile because you don’t have a building (depreciating asset) to worry about when it comes to annual assessments. Even people from Europe are coming to Canada to buy farmland. In terms of price per productive acres, we have some of the cheapest in the world right now. 😀 The historic returns on farmland is arguably more attractive than the stock market. In the long run diversification is important to me. Nobody knows what will happen 10 years from now, but if our food is going to become more expensive, then it’s relatively safe to assume the lands that produce these food will follow the same way. Ultimately I think having a balance of stocks, fixed income, and alternative investments such as farmland is a good mix to weather the ups and downs of the economy. 😀
How to Directly Invest in Farmland
Farmland investing works the same way as investing in a rental property. You’ll require a realtor, a lender (optional), and a lawyer. Make sure the lawyer you find is from the same province that you’re buying the farmland in because only they have access to the bar in their jurisdiction. Some banks will lend up to 75% of a farmland so make sure you have at least a 25% down payment. If you can’t find a mortgage broker or a bank willing to give you financing for a farm, you can go to Farm Credit Canada. They finance more than half the farms in the country, but personally I’ve found their interest rates are not as competitive as a traditional lender’s.
With the advent of the internet it is very easy for the average Joe to make a real estate transaction. You can buy a farm without ever leaving your city. For example when I bought my first farm my real estate agent drafted up an offer for me to sign. I printed it out to sign, then scanned it, and emailed him back the signed copies. The seller then did the same on his end and both the seller and myself (the buyer) each got a copy of the purchase agreement. Piece of cake. 😀 After signing some additional legal documents with a lawyer, the land became mine.
Here’s a simple example just for demonstration purposes.
Step 1: Find a farm listing you like. For example, the following one I found on popular site realtor.ca.
Step 2: Do your due diligence. Every farmland listing will have a “legal description” which represents its location in the province. The legal description is essentially the farm’s address. You can use a free service such as prairielocator.com to translate this description into coordinates that you can then plug into Google Maps to see what the farm looks like. This allows you to get an aerial look at the terrain. Below is an example of how to analyze farmland using Google Maps. Each square represents 160 acres of farmland, which is one property title.
Step 3: Call up the real estate company or selling agent. Tell the agent you’re looking to invest in farmland. He or she will answer any questions you have about the listing and send you papers to sign if you decide to make an offer. Alternatively if you have your own realtor, get him or her to get in touch with the listing agent instead.
Step 4: If you’re like me and don’t have enough savings to buy the farm outright you’ll need to get a loan. Call your local Farm Credit Canada representative and ask them to finance your purchase. Alternatively you can call your bank and get a long term farm loan like I did. I bank with TD Canada Trust and applied for something called a “Long term farm loan.” Other banks may have similar options.Step 5: Contact a lawyer. I found a law firm called Andrews Benko in Regina by searching through a phone book. They are by no means the cheapest or best lawyers, but I don’t live in Regina so I just went with the best out of 3 random offices I cold called. Tell your lawyer you’re buying farmland.
Step 6: Tell your lender to send the mortgage instructions to your lawyer if you require a loan. Otherwise, your lawyer just needs you to sign some legal papers.
Congrats! You now know how to buy a farm 🙂 Easy right? Just like buying a house. I’ve left out some of the details but I’m sure you understand the high-level process now. Please see the 8 steps under “How to Directly Invest in Real Estate” under the Real Estate Investing page for further details on buying property in general.
However there are restrictions to keep in mind for foreign investors. (source: gowlings.com.)
- British Columbia – No restriction on foreign ownership.
- Alberta – Non-residents can own up to 20 acres of farmland.
- Saskatchewan – Non-residents can own up to 10 acres of farmland. Entities that are partially foreign-owned but controlled by Saskatchewan residents or their farming corporations can own up to 320 acres.
- Manitoba – Non-residents can own up to 40 acres of farmland.
- Ontario – No restriction on foreign ownership.
- Quebec – Non-residents must get permission to buy more than 4 hectares (about 10 acres) of farmland from the Commission de la protection du territoire agricole du Québec.
BC and Ontario are the only provinces that allow unrestricted foreign investment from non Canadians. Not surprisingly their farmland prices are also the most expensive in the country. This is why I purchased Saskatchewan farmland despite living in Vancouver. A farm in B.C. is easily ten to twenty times more expensive than a same sized farm in Saskatchewan.
Indirect Ways to Invest in Farmland
Here are some other ways to invest in the agricultural space without directly buying farms.
Assiniboia Capital Corporation and AgCapita are companies that sell farmland funds to individual investors. AgCapita operates like a hedge fund. They pool investor’s money to purchase assets (farmland) and then rent it out to local farmers. Their revenue model comes from capital gains, rent, and other operating incomes. They use the standard two and twenty system. So managers charge a flat 2% annual fee of the total asset value, plus an additional 20% on any profits, so the more money they make for investors the more money they make for themselves. Funds are sold through their 3rd party exempt market partners. Recommended minimum investment in these funds are usually $10,000. If you have deeper pockets companies like MaxCorp will let you buy farmland directly and lend up to 50% of the value of the land. Good farmland can be anywhere between $100K to $400K per quarter depending on location and soil quality. A quick Google search will give you more information about each of those companies but I’m not affiliated with any of them.
Another way to invest in the greater agricultural space is to buy shares of publicly traded companies that supply the farm industry. Some examples are Deere (farm equipment manufacturer,) Monsanto (largest seed provider in Canada,) Potash Corp (fertilizer producer.) The average return these companies have returned to their shareholders over the last 10 years is over 700%. These are just some examples of large names in ag space, but there are many other companies we can invest in that are also very profitable like Agrium, Mosaic, CF Industries, etc. Research these stocks on your own before buying any of them. A popular way to reduce risk in a portfolio is to diversify, so if you wanted to invest $5,000 for example, then you can consider choosing 2 of these agricultural related companies and invest $2,500 into each.
My Personal Experience with Farmland Investing
In the beginning of 2012 I saw an analyst on BNN talking about farmland investing. After doing some research I realized that successful investors like Jim Rogers are very bullish on farms. The more I thought about it the more the investment idea made sense. It became clear to me that I had to get a piece of farmland before it’s too late. In October of 2012 I made an offer on a farm for $150,000 in Saskatchewan. It is 160 acres or a quarter mile square. That’s about 804 meters by 804 meters. The down payment necessary to buy the land was 25% which is $37,500. However I only had $20,000 of cash at the time so I borrowed the remaining $17,500 on a line of credit to meet the minimum down payment requirement. I currently have a tenant working on the farm. He grows his wheat and sells it on the open market while paying me cash rent at roughly $5,000 a year. Meanwhile the cost of owning the farmland for me costs about $5,800 (interest on loan, property tax, etc) Which means I have a net loss of $800 a year running this farm. But I’m not concerned about negative cash flow because all I need to break even is for the farm to appreciate at least 0.5% each year. It’s a simple matter of sacrificing income for capital appreciation.
In 2013 I bought another piece of farm. The rent is paid twice a year. Half the annual amount in April, and the other half in October just like the first one. Each farm rent is paid separately. My total rental income is now roughly $10K per year.
I bought my first farm in 2012 for about $900 per acre. And in the spring of 2013 I purchased my second farm, which is located adjacent to my first one, for about $1,100 per acre. In 2014, the values of both my farms are worth at least $1200 to $1500 per acre. So in the last short while I’ve been very lucky 🙂 Click map below to make large.
Here is more complete data about the change in farmland values across Canada.
I also own some Potash and Deere stocks as an indirect play on the agriculture industry. The risk to farmland investing is that farm prices could drop in the future. But with agricultural land areas diminishing in Canada due to expanding cities and climate change, as well as continued population growth in not only this country but also many other countries that Canada exports our foods to, I have a feeling the demand for Canadian farmland will continue to stay strong over the long term.
More Articles and information on Farmland Investing: (Best to read in chronological order)
Why Invest in Farmland (An introduction to why so many investors are looking at farmland.)
Trip Across Western Canada (I travelled to the Canadian prairies to do some farmland investing research.)
Farmland Update (I decided to look at buying farmland myself after doing some research, and made my first offer.)
My New Saskatchewan Farm (I share my experience buying my first farm in 2012, including my financial details, rental rate, loan process, etc.)
My Second Farmland (I bought another farm in 2013. 🙂 Once again using the power of leverage I bought a $172K farm with just $20K of my own savings.)
FAQ About Being a Landlord (Rental rate, investment returns, rent per acre, farmland income, lease agreement templates, everything you need to know about being a farm landlord.)
Fiscal Update April 2014 (Saskatchewan farmland values increased 28% in 2013, which means in a relatively short amount of time my farms gained over $50,000 in value.)