Farmland finance

A novel place to plant your savings

Given the fickle Canadian climate, farming for a living is often viewed as a risky proposition. Buying farmland, however, is attracting some interest from Calgary investors seeking a hedge against inflation that will also produce goods and generate income.

The two most common ways to make money from farmland are capital appreciation – when the land increases in value - and income. That income can be from cash rent, calculated by dollars per cultivated acre, or a crop share, where the investor receives a share of the total crop sales each year, usually about 20-30 per cent.

"Farmland has been a tremendous investment over the last 10 years," said J.P. Gervais, chief agricultural economist for Farm Credit Canada. "Not only have land values been rising, but returns from farming have been very strong, with farm cash receipts increasing on a national level by an average of $2 billion a year for the past decade."

Adding to its appeal, farmland tends to be a fairly stable asset compared to other options like the stock market, residential real estate and oil.

At the same time, Gervais cautions buyers to have realistic expectations about the next 10 years, projecting good returns, but not the significant gains in farmland value that we've seen recently.

He also stresses that farmland is a very local asset, so regional market conditions will have an impact.

Someone who knows those conditions well as they relate to the Calgary area is Ben Van Dyk, a residential, commercial and agricultural REALTOR® for the past 27 years with the Real Estate Centre.

"Farmland is still a small segment of total land sales, but it can be very lucrative and a great option for people seeking an alternative to assets like gold," said Van Dyk.

While it may have less upside than development land bought for future residential or commercial use, farmland offers the benefits of annual dividends and a smaller initial investment.

"Farmland has been a tremendous investment over the last 10 years." - J.P. Gervais, chief agricultural economist for Farm Credit Canada.

Whether it fits in your portfolio or not depends on your goals.

"Typically, it's not a very liquid investment," said Van Dyk. "It's not a GIC or a house, so you should be looking at an intermediate holding period in the range of 4-10 years."

Around Calgary, Van Dyk sees cropland opportunities in the areas of Strathmore, High River, Okotoks, Carstairs and Olds-Didsbury. Whatever spot you choose, though, he recommends working with a good adviser and exploring all the options before making such a major investment.

Because farmland can be a tricky area for those with limited experience, another route for investors is choosing a farmland fund. That's the advice of Steve Elliott, head of investor relations for AgCapita. Based in Calgary, the company runs Canada's first RRSP-eligible farmland fund.

"We allow investors to add professionally managed farmland to their portfolios without the complex responsibilities of ownership," said Elliott.

As Elliott points out, farmland as an asset class has unique features and very little or no correlation with traditional markets, with the added benefit of lower volatility.

"Since 1954, we've only seen seven negative years in Canadian farmland and the average down year was four per cent, compared to 13 per cent for the Toronto Stock Exchange," said Elliott.

Whether one decides to purchase their own farmland or follow the fund approach, Elliott agrees with Gervais's portrayal of farmland as a suitable choice for those seeking non-liquid investments.

"I would suggest a five-to-six-year hold in general," he said. "Because of its unique financial characteristics, particularly its strong portfolio diversifying effect, I believe everyone should have 5-10 per cent of their portfolio in farmland."