Farmland Investment: Growing More Scarce and Valuable Every Year

As inflation eats into profits, investors continue to seek out alternatives to typical commercial real estate offerings in the office, retail, multifamily and industrial sectors. Farmland investment, which has historically provided stable annual income, attractive risk-adjusted returns and a solid hedge against inflation, is one of the fastest-growing options on the table today.

Size of the Farmland Investment Market in Canada

Although only 6.2 per cent of Canada’s total land mass (or 62.2 million hectares) is devoted to primary agriculture, it nevertheless contributed $36 billion (1.8 per cent of GDP) to Canada’s economy in 2022.

Already meagre, the amount of farmland in Canada is shrinking. In 2001, 68 million hectares were devoted to farming, supporting almost 250,000 farms. Today, farmers work nine per cent less land on 24 per cent fewer, or 189,000, farms.

Prime farmland in Canada is concentrated across the Prairies, Southern Ontario and Quebec, with the average individual farm size almost doubling over the last 50 years due to consolidation and technological advances.

Benefits of Farmland Investment

Investing in farmland in Canada has many benefits, including:

• Portfolio Diversification
  Adding farmland as an alternative investment can bolster portfolio diversification. Unlike financial assets that change hands in response to various market factors, farmland values are governed by efficiencies gained mostly through innovation and technology. Increases in profitability resulting from better crop yields and higher-value crops accrue to the land and keep farmland drivers distinct from all others. As a result, farmland values in Canada have had zero correlation with financial assets over the past 100 years.With even a modest 5 per cent to 10 per cent allocation to farmland investment, an investor can potentially offset losses that can occur in other areas, including stocks, bonds and other forms of real estate.
• More Returns with Less Volatility
  Comparing farmland returns to those within Canada’s Toronto Stock Exchange (TSX) over the 20 years from 2001 to 2021 shows the stability and consistency of farmland returns.

According to Farm Credit Canada (FCC), farmland showed positive appreciation year-over-year compared to the more volatile TSX, even in the face of two economic downturns during the period. Although the TSX showed more than 25 per cent appreciation in numerous years, three others produced 10 per cent or more significant depreciations, plus two pre-pandemic losses of over 20 per cent. Conversely, farmland consistently appreciated with an average of 9 per cent growth over the same period.

• Farmland Investment as a Hedge Against Inflation
  One of the most critical investment considerations today is inflation. Rising prices drive interest rates higher, stoking more price increases and even higher interest rates in an ever-upward-rising inflationary spiral. But because the three “F’s” – food, animal feed and fuel derived from agricultural products – represent essential purchases, they’re eventually bought regardless of the price.Evidence of farmland’s value as an inflationary hedge can be seen by comparing inflation in Canada over the past 20 years with the appreciation in farmland values during the same period. Based on data from Farm Credit Canada, between 2000 and 2020, the cumulative inflation in Canada was 39 per cent, while the cumulative appreciation in the value of farmland was 168.4 per cent.And in the past two years alone, while the value of other investments plummeted, farmland values across Canada rose by an average of 8.3 per cent in 2021 and 12.3 per cent in 2022 – higher than both 2021’s (3.4 per cent) and 2022’s (6.8 per cent) inflation rates.
• Capital Appreciation
  As population numbers rise and urban sprawl increases, arable land becomes increasingly scarce. Because of its scarcity, the value of arable land in Canada seldom declines. Instead, in most years, farmland values rise at high single- and sometimes double-digit rates.According to Statistics Canada, the average per-hectare price of farmland in Canada in 2001 was $349. In 2022, the average per-hectare price exceeded $1,800.
• Farmland as a Source of Passive Income
  Farming requires specialized skills, experience and technological innovation for success.By buying land from farmers and leasing it back to them, investors free up capital so farmers can do what they do best, i.e. use innovation and technology to increase crop yields and respond to changing needs with new crop rotations.When investors buy and then re-lease land to farmers, tenants typically pay rent in one of two ways:
  • Cash Rent
    Cash rent is the most common agreement because of its simplicity. In this type of contract, the rent price is fixed for at least one year, giving certainty to both the producer and landowner. The farm operator bears all risks and receives all gains regardless of changing inputs, outputs, yields and prices.
  • Crop Share Agreement
    Although the percentage can change depending on the local rental market and the type of rental contract, crop share agreements are traditionally based on a one-third/two-thirds or one-quarter/three-quarters split of the crop between the landlord and the producer. In this case, however, the landlord contributes the land and a portion of the crop inputs (e.g., seed, fertilizer, chemicals and crop insurance), while the producer supplies all the machinery, labour and remaining inputs.
• Positive Prospects Driven by Population and Economic Growth
  Because the demand for food, feed and fuel derived from agricultural products grows as populations increase, farmland investments grow along with it.
• Positive Prospects Driven by Innovation
  Farm technology use correlates with higher profit margins. Farmers use technology to reduce labour costs, improve farming efficiencies, and ultimately, increase profitability.Automated guidance steering systems (auto-steer), Geographic Information System mapping (GIS), Variable-Rate Technology (VRT), fully robotic milkers, robotic greenhouse equipment – and, of course, artificial intelligence – are just some of the technologies helping farmers increase crop yield today.Another significant area of agricultural innovation meant to increase the hectares available for growing crops is indoor or vertical farming. In these operations, crops are grown year-round, indoors, using soilless hydroponic, aquaponic or aeroponic nutrient delivery, along with artificial lighting and climate controls to enhance plant health and vitality.
• Sustainability
  Investors intent on adding opportunities with elevated environmental, social and governance (ESG) scores to their holdings naturally gravitate towards farmland investments that utilize organic and zero-tillage practices, as they lead to more sustainable operations that can heighten long-term value. For example, zero-till farming can capture material amounts of carbon between 0.1 and 0.2 tonnes per hectare, depending on the soil type.
• Multiple Investment Vehicles
  Aside from buying land, investors interested in adding to their agricultural commodity holdings can choose from Canadian REITs, ETFs, investment platforms and crowdfunding options.
• Canadian Farmland Tax Benefits
  Because farming is a business, farmers can deduct a variety of business expenses from their farming income. But farmers can also claim deductions that other companies can’t, such as the cost of fertilizers, veterinary medicine, breeding fees and even fence repairs. Interest on loans and part of the premium paid for Canada’s Crop Insurance Program are also deductible.Farm businesses with a valid Farm Business Registration number earning more than $7,000 per year in gross farm income can save 75 per cent off the municipal residential tax rate, while startup farms may be eligible for the same program under certain conditions.There are capital gains advantages for farms as well, with the Lifetime Capital Gains Exemption (LCGE) on qualifying Canadian farm property totalling $1 million per individual.
• Eligibility for Canadian Government Assistance
  Numerous grants, contributions, subsidies and loan guarantees are available for farmland owners in Canada.
• Farmland Investment Helps Canada’s Farmers
  Last but not least, investing in farmland helps farmers expand operations so they can continue to supply food to Canadians and the rest of the world.

Risks of Farmland Investment

Investing in farmland is not without risks, including:

• Volatile Weather
  While climate change may extend Canada’s growing season for gains, the heightened weather, fire, pest, fungal and bacterial risks that come along for the ride are significant hazards for farmland investment of all types.
• Water Scarcity
  The agricultural sector is by far the biggest user of freshwater. With water availability an issue globally, sustained profitability of farmland investments depends on better data inputs and better management of Canada’s hydrological resources.
• Soil Erosion
  Although few ever consider it, Canada’s soil has significant economic value. When soil decreases in quantity and quality, replacing the lost agricultural and overall environmental and health benefits incurs a financial cost. According to the Soil Conservation Council of Canada, soil erosion’s toll on Canadians is a staggering $3 billion annually.
• Lack of Farm Turnover and Succession Planning
  According to the most recent Canadian Census, the average age of farmers in Canada is 56. In 2021, those 55 or older accounted for 60.5 per cent of Canadian farmers – a six-per-cent increase from the previous census in 2016 – while the proportion of young farmers has fallen steadily, year-over-year, for the past 20 years.To make matters worse, only 12 per cent of Canadian farms have a written succession plan. With up to 50 per cent of the farmland value in Canada expected to change hands over the next decade and farming success heavily dependent on experience and the ability to raise capital, these statistics are a cause for concern.

Grow Your Portfolio with the Help of an Expert in Agricultural Real Estate

Farmland investment represents a solid opportunity, with demand for agricultural products set to rise steadily for decades to come. Add a real estate expert with agricultural expertise to your farm team and get ready to grow your portfolio with returns from farmland investment that give Canadian farmers access to the capital they need to succeed.