Agricultural Land: Another Way to Score Big
You might think that $1 million would buy you a lot of land. Well, it turns out that it really depends on where you are looking. In Vancouver, you can spend more than that to get just a building lot that is 33 feet wide, on the city’s west side. In urban parts of Manitoba, that might get you an acre of commercial land. In Fort McMurray, that’s about what an acre of industrial property will cost you.
But if you’re willing to look out in the country — say, out in Saskatchewan — you can pick up 1,000 acres (or even more) of farmland for that same $1 million. Those 1,000 acres would come from some of the world’s most fertile land, too. This is one of the reasons why hedge funds, limited partnerships and other investment groups are looking at farmland as one of the newest ways to invest money and bring in big returns.
Over the past 12 months, farmland in Saskatchewan has increased in price about 11.6 percent, higher than in any other Canadian province. The two years before that, values went up 2.7 and 2.9 percent, respectively. Prices began growing in 2003, when the province altered the rules so that Canadians could own as much farmland as they wanted. Before that, if you didn’t live in Saskatchewan, you couldn’t by more than 320 acres (and those limits still apply to people outside Canada). Since 2003, the average price of farmland in Saskatchewan has basically doubled.
Why is the land going up in value? One reason is that the prices had been artificially low because of the ownership restriction, which depressed demand for the land. Given the fact that the global demand for food is not going to decrease in the foreseeable future, owning quality, arable farmland is a smart long-term hold for investors. Farmland syndicates are looking for land to invest in throughout western Canada, but Saskatchewan is the focus right now, which is another prices are going up especially high right now.
Investment syndicates are buying farmland in Saskatchewan for an average of about $550 per acre, and then they are renting it out to farmers for about $33 an acre. Prime areas have seen prices and rents go between two and three times higher than that, though.
So why Canadian farmland?
The volatility is low. In general, farmland prices don’t move very much — particularly in comparison with investments in the equities market.
Despite the low volatility, farmland generally brings in better absolute returns than equities that are listed on the Toronto Stock Exchange, no matter what the measurement period is.
The practice of cash renting (renting the land to farmers and asking for 100% cash up front rather than operating the land themselves), lets the investor have a reliable stream of cash coming in without taking any of the risks that come with actually operating the farm. Cash rent also tends to follow land values with a lag, which means that it is a cash flow that hedges inflation too.
With regard to Saskatchewan, farmland has been trading at a discount in comparison with global averages. Taking a look at the period between 2007 and the present, excluding rents, Saskatchewan farmland has brought in returns equivalent to 11.4% annually.
People thinking about investing in farmland should track three metrics: interest rates, the momentum effect and crop receipts. Interest rates are currently at historically low levels, and while there are no guarantees, all signs point to those staying low in the near future. Crop receipts are projected to go down, though, as there has been a drought in much of western Saskatchewan and eastern Alberta. The fact that grain and oilseed prices have dropped worldwide will also impact receipts, so that they may hit their lowest level since 2011 according to Agriculture and Agri-Food Canada. The fact that the Canadian dollar is on the decline, though, means that export sales will increase in value.
When it comes to the momentum effect, that is more a function of the human element throughout the farmland market. The fact that oil prices continue to drop is one example of the momentum effect. However, Saskatchewan and Quebec are projected to see modest gains in farmland value in the next year. Alberta’s projections are not as optimistic, which dovetails with the smaller projections of crop yield.
Farmland in other parts of the country is going for a lot more than $550 an acre, though, so you’ll want to consider why you’re investing in the land in the first place before making your choice. Ontario farmland that is just north of Greater Toronto has been scheduled for redevelopment. With an eye toward the improvements coming, those property values are going up to $54,000 per acre, which is about twice what producing land in Ontario is bringing. One hot area in the province has been Chatham-Kent, down in the southwest corner. Prices rose by 40 percent in 2013, and are now up at about $25,000 an acre. These values caused some families who had wanted to buy more land to increase the size of their farms to move out of the region altogether to find something more affordable.
In Kitchener-Waterloo, a part of Ontario, most buyers were rich people from the city who wanted a farm as a hobby. These properties ranged between 15 and 50 acres and cost around $1 million. Professional farmers were having to go further from Toronto to find affordable land for expanding their own operations. Farmland in Manitoba is headed up as well — so you have plenty of options throughout Canada.
The blueberry-growing area in British Columbia, which is mostly in the Fraser Valley near Vancouver, is also garnering a great deal of interest from purchasers. The solid blueberry crop in 2014 was a factor in prices for an acre going up from about $60,000 to about $63,000 — a modest increase of about 5 percent.
No matter which part of Canada draws your interest, it’s worth considering the benefits of farmland as an investment vehicle. You’re not going to get the huge quick returns that you can sometimes get in the stock market, but you also don’t stand to lose a ton of money in one downward turn at the exchange. The returns are more gradual with farmland — but they are also more reliable. Don’t let the market keep going up without you!