How To Double Your Money on Cropland

Yesterday I set the stage for investing in Canadian cropland, Saskatchewan in particular.

Today I want to catch back up with the story of Assiniboia Capital and how they turned this plan into a 112% profit opportunity.

As you’ll see there’s still plenty of reason to believe Canadian farmland is a good bet. And today I’ll show you some more ways to play it…

Brad Farquhar, vice president of Assiniboia Capital, and Doug Emsley, co-founder and president, had a good idea and fortunate timing.

They saw an opportunity opening up in Saskatchewan farmland, thanks to the relaxing of restrictive rules on farm ownership. (For a time, non-Saskatchewan Canadians couldn’t own Saskatchewan farmland.) From 1974 to 2003, you had to be a resident to own farmland.

“During this period, Saskatchewan was a net exporter of people,” Farquhar’s prospectus points out. “It was a province whose population was in decline.” Doing away with these restrictive ownership requirements in 2003 has unlocked some of the value. Annual declines in farmland values immediately began to reverse.

Brad and Doug saw 55 million acres of opportunity in Saskatchewan. Almost half of all the farmland in Canada is found in its golden prairies. Wheat, canola, and barley represent three-quarters of the crop acres in the province. So they started Assiniboia with the idea of investing in farmland. Today, the company is the largest farmland fund in Canada, with over 110,000 acres managed and owned.

Saskatchewan farmland has a lot of ground to make up, though. Only 22 years ago, farmland here was more valuable than in neighboring Manitoba. But today, Manitoba’s farmland is a little over 40 percent higher than Saskatchewan’s. The Saskatchewan discount is attracting ranchers and grain farmers from neighboring Alberta, as well as immigrants from abroad. The government of Saskatchewan actually has a fast-track program in place to assist immigrants looking to farm in the province.

Statistics compiled by the Canadian government show that the average farmer in Saskatchewan is 52 years old. That leads Assiniboia’s team to conclude in its prospectus: “The aging farming population in Saskatchewan has created a buying opportunity that [we] believe may not return for another generation.” Brad adds that the average age of Saskatchewan farmers (53) is not out of line with the rest of Canada, and is in fact less than in the USA (55.3 years). “The challenge is the drop in the number of younger farmers as a percentage of the whole.” This next generation is less interested in farming. The older generation will, in many cases, have to sell to folks beyond kith and kin. Folks like investors in Assiniboia.

Assiniboia’s farmland LP has delivered superb returns so far. At inception in December of 2007, the NAV of the fund was $25 per unit. By June 30, 2012, the NAV was $50.54 per unit.

That doesn’t include $2.62 in distributions made along the way through June. Brad likes to call farmland “gold with yield,” because farmland prices tend to correlate with gold, but it pays its investors income. All told, that’s a 112 percent return since late 2007, during a time when the U.S. stock market has been firmly in the red.

Even now, Saskatchewan farmland is still a bargain, trading at a significant discount to its neighbors on a per acre basis. Take a look…

Crop prices still promise a good return for farmers, but financing is harder to acquire. Farming is a capital-intensive business. You need to spend a lot of money before you see a dime. So farmers often put off expansion simply because money is tight.

Say you were a farmer in Saskatchewan, and you wanted to add acres to your farm to take advantage of market prices. You’d have to purchase or rent more land. You’d probably need new tractors and combines to handle the extra workload. You’d need more on-farm storage. You’d need fertilizer, seed, and chemicals.

How much would all that cost? Brad Farquhar said it is normal for farming expansion to cost $150 – $300 per acre. That means a 2,000-acre expansion needs an investment of $300,000 – $600,000. (Those costs do not include land costs. Buying the land would add another $400 to $1,500 per acre in cost.)

Some farmers have the financial capacity to do that on their own, but most typically turn to a local bank or credit union. In the credit crisis meltdown days, it was tough for anybody to get a loan. Credit is not as easy as it was in the balmy days of no-doc loans and no money down.

So while a farmer could make an extra $100 an acre in revenues for every $30 – 50 an acre spent in fertilizer, he doesn’t necessarily do it. In fact, farmers cut back on fertilizer in the meltdown days, from which we are rebounding. Then, too, there are timing issues. Nitrogen fertilizer is often cheapest in July, right when farmers have maxed out on their borrowing capacity. That means that they can’t take advantage of the lower prices.

These funding gaps are where Brad’s Assiniboia steps in to fill the void. They provide the funding as an investor, with the profits shared between the farmer and Assiniboia. The firm has a simple truism as its mantra: “The returns are highest where capital is scarce.” Saskatchewan farming (and agriculture generally, at least at the farm level) is one such place.

You’d think something like this would have evolved sooner. But it was a new concept when the firm began approaching farmers in 2009. As Brad describes it, after a lot of time at farmers’ kitchen tables and hundreds of cups of coffee later, farmers began to sign up for Assiniboia’s program.

Unfortunately Assiniboia’s farmland play isn’t available to U.S. investors — you can blame the SEC for that one. But the opportunity up north exists nonetheless.

Another Canadian Cash Crop: Canola…

One opportunity that Assiniboia does offer to U.S. investors is exposure to canola.

Brad’s firm is high on canola. Why canola? The heart of canola country is right in Assiniboia’s backyard, in Saskatchewan. It’s like the Silicon Valley of canola. Brad points out that “recent genetic developments are pushing yields to whole new levels.” These breakthroughs are happening in Saskatchewan and lead to better economics.

Peter Phillips of the University of Saskatchewan calls canola “one of our visible and uniquely Canadian success stories.” About 20 percent of the world’s production comes from Canada, which is eager to ship to drought-parched China.

One other thing I like about this model is that farmers have skin in the game. About half or more of the profits will go to them, so they have every incentive to make it work.

Brad drove me over to a canola farm. It’s beautiful, flat country. We walked around to check out the canola crop. Along the way, we stopped to scope out the red lentil crop coming in.

Just to see it all, touch it, and walk on it, the experience makes everything more real. It’s no longer just numbers I imagine when I think about Saskatchewan farmland. I’ll think about how this summer’s yellow blooms will turn into green pods, with their small, narrow seeds. How the seed will go off to the local crusher.

I’ll remember these plains. This farm. (Investors have a tendency to get lost in abstractions. Stocks become only ticker symbols, and they don’t think about what they own, what those shares represent. I’ve always tried to resist that kind of abstracting.)

Having seen it for myself, I think the boom in Saskatchewan farmland still has lots of legs.

How To Double Your Money on Cropland was originally featured in The Daily Resource Hunter. Check out the newest Daily Resource Hunter research video “The Price of Gas Explained”.

Article Title originally appeared in the Daily Resource Hunter (www.dailyresourcehunter.com) At the Daily Resource Hunter our approach to research is different. With our boots on the ground, we travel the world looking for the most lucrative resource opportunities and deliver them to you in a daily email newsletter. For more information visit us at www.dailyresourcehunter.com)