Navigating the complexities of investing in agriculture
Benefits Canada | 11 April 2017
Navigating the complexities of investing in agriculture
by Glenn Kauth
While a recommendation that the government reverse course on maintaining the retirement age at 65 was one of the headline suggestions to come out of the recent report from the federal advisory council on economic growth, a key focus was on four sectors the group felt have a high potential for growth in Canada. One of the four sectors was agriculture.
With US$26.1 billion in agricultural exports in 2015, Canada is already the world’s fifth-largest exporter in that sector, the report noted. The growth of the global middle class signals further growth potential, with worldwide demand expected to rise by 70 per cent by 2050. In his recent budget, Finance Minister Bill Morneau embraced the call to focus on agriculture. As part of the budget’s innovation and skills plan, the government is targeting a rise in exports in the agricultural and food category to $75 billion a year by 2025.
But while J.P. Gervais, vice-president and chief agricultural economist at Farm Credit Canada, says recent years “have been great” for agriculture in Canada, he notes predictions are for a decline of up to four per cent for farm cash receipts in 2016. The reasons, according to Gervais, include weather issues in some regions that have led to poor yields for certain crops. And while falling commodity prices have put a damper on the U.S. agricultural sector, Gervais says the decline of the Canadian dollar has helped to shield Canadian farmers from some of the pressures. “Anything but cereals is generally doing well,” he says, noting crops such as oilseeds and canola are doing better.
Focus on farmland
While Canadian agriculture shows some promise, institutional investors have been active on the global front, particularly when it comes to farmland. The activity started to pick up in 2012, when the Caisse de dépôt et placement du Québec and the British Columbia Investment Management Corp. both invested in an agricultural company launched by the U.S.-based Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA-CREF). The company, TIAA-CREF Global Agriculture LLC, included $2 billion in commitments to invest in farmland in the United States, Australia and Brazil.
The move followed an investment in 2011 by the Alberta Investment Management Corp. in timberland assets owned by Australia’s Great Southern Plantations. The Alberta fund’s plan is to boost its investment in part by converting some of the land to a higher use, such as agriculture. More recent moves by Canadian plans include the Public Sector Pension Investment Board’s 2015 investment in cattle properties through Queensland-based Hewitt Cattle Australia.
Australia, in fact, seems to be a key focus for Canadian pension funds’ agricultural interests. In 2014, the Ontario Teachers’ Pension Plan invested in Aroona Farms, a grower of almonds that operates two properties in the states of Victoria and South Australia. The plan owns a 99 per cent stake in Aroona Farms.
“As part of our natural resources, we have an agriculture strategy,” said Bjarne Graven Larsen, executive vice-president and chief investment officer at the Teachers’ plan, during an announcement in March of the organization’s annual results for 2016. “And we like that a lot because it diversifies. It gives us, at least to some extent, exposure to inflation in food prices and land as well.”
While farm values have been on a long-term upswing, they’ve been on a recent downturn in one key market, the U.S. Midwest. The overall decline in U.S. farm values in 2016 was just 0.3 per cent, according to the U.S. Department of Agriculture. The declines were higher, however, in the midwestern states. Karen Dolenec, global head of real assets at Willis Towers Watson in London, England, notes Australia has generally been attractive for agricultural investments, while South America has good potential for boosting properties to higher uses.
When it comes to the merits of various crops, Dolenec emphasizes diversification. Options include investing in annual row crops that require planting every year, versus permanent ones, such as vineyards, orchards and nuts. Permanent crops, says Dolenec, can require higher upfront and ongoing investments but they do offer an investor the opportunity to add value.
At the Ontario Teachers’ plan, Graven Larsen says the focus is on slower-growing crops. “We like almond, avocado, something of the not-so-fast crop, so far,” he said last month.
How to invest is one of the key questions when it comes to deciding whether to acquire farmland as a landlord renting out the property to farmers or with more of an active role. For Canadian pension plans, the typical approach has been to be a landlord, as is the case with investments like the TIAA-CREF funds. But in Canada, a smaller player on the scene, Area One Farms Ltd., offers what president and chief executive officer Joelle Faulkner describes as a joint venture that’s “more like private equity in that we’re equity partners with the farmer.”
“They put in equity and we put in equity and they co-own,” says Faulkner, noting both owners share in the profits, with an extra portion going to the farmer for running the operation.
Investors get access to higher-quality land that often isn’t available on the open market, according to Faulkner. The idea, she adds, is to boost farm productivity. “We do upgrade about half of our portfolio.”
Faulkner expects Area One Farms, which started in 2012, to close the deal on its third fund soon and she says it’s now seeing some institutional interest. While it targets a return of 15 per cent to investors, Faulkner admits that’s largely on the capital appreciation side. The balance would be from a targeted three to five per cent from crop income.
On the other side, Justin Ourso, managing director and portfolio manager at TIAA Investments, says renting out farmland can be very “fixed income-like.” Investors, he notes, can remove themselves from the volatility of farming and avoid production risks.
While rising farmland values are good news for investors already in the area, they can be a challenge for those looking to buy now, an issue Dolenec acknowledges is a concern but one she says is true of all real assets.
And then there are the legal difficulties. Many governments are protective about foreign investment in farmland. Saskatchewan, for example, prohibits foreigners and publicly traded entities from owning more than four hectares of land. According to Faulkner, the rules initially limited pension fund involvement in Saskatchewan farmland to the Canada Pension Plan Investment Board, which in 2013 acquired the assets of Assiniboia Farmland LP. The transaction, which involved a portfolio of more than 45,000 hectares of farmland, included an initial equity investment of about $120 million. The board then bought 12 more farms for $33.7 million.
While the board had been planning additional investments in Canadian farmland, the Saskatchewan government, amid concerns about the impact of inflated farm prices, put a halt to further purchases in 2015. Asked about the board’s investments in agriculture, spokesman Dan Madge declined to comment. “Agriculture isn’t something we’re focused on right now,” he told Benefits Canada.
Pension fund involvement is even more controversial in countries like Brazil. Canadian groups, including several unions and non-profit organizations, have taken investors like the Caisse and bcIMC to task for their involvement in Brazil through TIAA-CREF Global Agriculture LLC and demanded they refrain from further investments in its funds. The controversies centre on concerns about violence and land conflicts in areas where the fund has been acquiring farms.
Asked about the allegations, Ourso questions their accuracy and says the TIAA-CREF fund has worked to address the concerns. “We take those allegations quite seriously,” he says.
“We don’t believe that they are accurate.”
The actions the fund has taken include title searches to verify ownership for a minimum of 20 years and an assessment of legal, civil, tax or criminal matters related to the seller of the land. In Brazil, it reviews licences permitting land conversion to agriculture and satellite images to assess historical uses.
Devlin Kuyek, a researcher at Grain, a non-profiit organization that has criticized farmland investments by pension plans in Brazil, acknowledges that TIAA-CREF has made strides on disclosing the locations of its holdings in that country. The organization still has concerns about the acquisitions, however. “If TIAA is sincere about its intentions, then it should not be investing in any part of the world where there are land conflicts and ongoing processes of agrarian reform,” he says.
And beyond the legal and financial concerns is a more practical one. According to Dolenec, the fund offerings available to institutional investors remained limited, despite the interest in agriculture over the past decade.
“The range of offerings has really not grown as quickly as people expected,” she says.
But as Dolenec notes, there are other opportunities in agriculture besides farmland. Last year, for example, the CPPIB announced it was buying a 40 per cent stake in Glencore Agricultural Products, a global grains and oilseeds company whose operations include processing, storage, logistics and marketing.
As for farmland, the investment opportunities have typically been on the small side, Ontario Teachers’ Graven Larsen noted last month.
Climate change, he added, is another big consideration. “We will continue to focus on that area, but it’s not going to be huge,” he said in reference to agriculture.
“But it’s probably going to be larger than today.”
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