Farmland still a hot investment, for better or worse
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What do you do these days if you have more money than you know what to do with?
Forget buying tropical islands, grand houses in hoity-toity neighbourhoods, yachts or other expensive exotic creature comforts.
Apparently, you buy farmland.
At least that’s what some well-heeled athletes in the U.S. are reportedly doing after pooling their funds into a US$125-million account with Patricof Co. (P/Co), an investment platform billed as “leveraging the unique relevance of world-class professional athletes.”
Given the size of their salaries, these athletes are quite likely buying the other stuff too. Cincinnati Bengals quarterback Joe Burrow and longtime NBA player Blake Griffin, reportedly two of the 20 athletes behind this new venture, make US$9 million and US$36 million respectively, according to their online player bios.
P/Co has started buying up farmland across the U.S. corn belt, the Pacific northwest, and northern Minnesota, its website says. “The farms have high soil quality, strong crop yield, and grow row crops which are planted annually, minimizing risk. Farmland has historically provided attractive risk-adjusted returns, stable annual income, and a solid hedge against inflation.”
Exotic it is not. But farmland is a smoking-hot investment these days, which is good news if you already own some, but not so good if your dream in life is to buy a patch of turf so you can grow things for a living.
It’s not just professional athletes investing. Bill Gates, of Microsoft fame, is credited as being the largest single owner of farmland in the U.S. with holdings of 242,000 acres.
In Canada, that title goes to former Winnipeg industrial developer Robert Andjelic, who reportedly owns 225,500 acres in Saskatchewan. He told the Globe and Mail that started buying up farmland in 2009 as a hedge against inflation.
Farm Credit Canada analysis shows land values across Canada rose an average 8.3 per cent in 2021 and another 8.1 per cent during the first six months of 2022, comfortably higher than last year’s inflation rate of 6.8 per cent.
While it would be wrong to assume land prices will never decline, the last time that actually happened dates back 30 years or more. In most years, farmland values rise at high single- and sometimes double-digit rates.
That’s not bad for a hard asset that’s immobile, except when it blows away, and which in these parts, sits idle for six months or more each year.
However, it means land values are increasingly decoupled from the value of what the land produces, which is a good news-bad news scenario for farmers. Farmers who own at least some of their land aren’t solely dependent on their farming prowess to retire wealthy. It’s in their best interest to farm in ways that preserve the value of that asset, which at times could mean decisions that are less focused on yield.
Tenant farmers won’t have land to sell when they retire. There is more incentive to manage in ways that maximize productivity, which if they aren’t careful, could deplete the asset.
Many farmers use a combination of owned and rented land. They rely on annual production to cover their fixed and operating expenses, so those rising land costs are baked into their risk. Couple that with the rise in interest rates and operating margins are getting squeezed.
Canadian laws prevent foreign investors from buying its farmland so don’t expect to see agents for professional U.S. athletes bidding at local sales any time soon. However, domestic competition for farmland is expected to remain high.
As the saying goes, they aren’t making any more of it. In fact, Canada’s prime agricultural land base is shrinking at an alarming rate.
The 2021 Census of Agriculture found that the agricultural land base in Manitoba declined 2.9 per cent since 2016. In Ontario, the loss was around 4.7 per cent and that’s before the provincial government released parts of its protected GreenBelt to urban development.
It’s one thing to see farmland consolidate under non-farming buyers who at least plan to keep it in agriculture. That’s how business works.
It’s quite another to see it diverted to other uses. That’s just plain short-sighted.
Laura Rance is vice-president of content for Glacier FarmMedia. She can be reached at email@example.com
Laura Rance is editorial director at Farm Business Communications.