Agcapita Fund III - Research on Farmland Characteristics

Oct. 8, 2011 - PRLog -- Calgary based agriculture private equity firm Agcapita, allows investors to cost effectively allocate a portion of their portfolios to Canadian farmland without the need to take on the complex legal and operational responsibilities of farmland ownership via its professionally managed Agcapita Farmland Fund III.

Stephen Johnston, CIO and founder of Agcapita, stated "Farmland has some unique and increasingly useful financial characteristics – it is an effective inflation hedge, increases portfolio diversification, has a strong commodity price linkage and has high absolute returns with lower risk than equities."

Agcapita's research shows that farmland is an:

Inflation Hedge: The equity and bond markets have benefited from a long period of low inflation, but ongoing and massive central bank liquidity injections point to a far less benign environment of elevated inflation ahead. During the last commodity bull market & high inflation period in the 1970’s, equities materially underperformed farmland. Western Canadian farmland went from around $100/acre to $550/acre (550% total return and 176% in inflation adjusted terms), cash held in a money market account barely kept ahead of inflation (6% inflation adjusted return) and the S&P 500 index returned less than 2% per year (a loss of almost 50% in inflation in adjusted terms).

Diversification Tool: It has become more difficult to obtain diversification in the current market with high positive correlations between virtually all asset classes. This is a very unusual state of affairs. There are very few uncorrelated assets classes accessible to the average investor. Farmland has a small negative correlation to stocks and a high correlation to inflation.

Commodity Price Linkage: Over the medium to long term, farmland returns are directly tied to commodity returns and operating margin expansion at the farm level. We believe the world is still in the early stages of this current commodity bull market. When agriculture commodities prices are compared against their previous inflation adjusted highs they are significantly discounted implying scope for further increases.

High Absolute Returns with Lower Risk than Equities: Return data for US and Canadian farmland shows absolute returns that exceed the S&P 500 index but with around 60% less volatility. This combination of good absolute returns with low volatility (risk) is challenging to find in most assets classes.

The Canadian farmland investment premise is driven by several key points:

1.   Canadian farmland is high quality: Canada is the third largest wheat exporter in the world and in aggregate one of the largest agricultural producers in the world.  The three western Canadian provinces alone have approximately 135 million acres of farmland and produce approximately 20 million tons of wheat a year.

2.   Canadian farmland is low cost:  Agcapita believes Saskatchewan farmland in particular is an undervalued asset. With an average price of $450 per acre, Saskatchewan farmland is some of the least expensive in the world. The prices in Alberta are almost 3 times higher than Saskatchewan at an average of $1,100.  

3.   Canada has world class farming infrastructure:  Unlike investing in farmland in emerging markets such as Argentina, Brazil or Russia, Canadian farmland is supported by first world storage, processing, and shipping infrastructure.   This infrastructure is extremely costly to reproduce.

4.   Canada has low political risk: Unlike emerging markets, Canada lacks significant political risk.   Canadian farmland owners benefit from a transparent and enforceable title system with no material risk of de jure or, worse yet, de facto expropriation.

5.   Strong Global Macro Drivers:  Canadian farmland prices are being driven by strong and persistent global market forces.
•   A decreasing amount of arable land worldwide, proportionate to the increasing population;
•   An increasing demand for meat calories (as development occurs and standards of living increase) which need more farmland for production than grain calories; and
•   A commitment by many countries (including Canada) to increase the use of biofuels, which will need farmland for production.

6.   Inflation:  Even Inflation is accelerating across the globe and will also act to drive agriculture commodity and farmland prices much higher. Farmland is a good inflation hedge and outperforms during inflationary periods.  So much so that farmland has been described as “gold with a cash yield”.  

7.   Returns:  Agcapita captures both operating and capital appreciation returns by acquiring a portfolio of farmland which it leases to qualified operators on a cash rent basis.

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Agcapita is Canada's only RRSP eligible farmland fund. Agcapita believes farmland is a safe investment, that supply is shrinking and that unprecedented demand for "food, feed and fuel" will continue to move crop prices higher over the long-term.