Why Invest in Farmland?

Hosted by Bob Simpson, today we shift the focus to answering the question "Why Invest in Farmland?".

Learn from our host Bob Simpson and our expert guest, Kent Willmore, CEO & President at AGInvest Properties Canada Inc.

Today's questions of interest:

0:00 - Intro
2:38 - Kent's background, growing up on a farm and getting into this investment space.
5:15 - Are baby boom farmers looking to exit their business with kids resisting the legacy? 
7:10 - Is farmland owned 50/50 by elderly farmers and corporations?
8:51 - Describe the work that you do to make investments available to people like our listeners. 
10:39 - Is it a good idea to invest in farmland, especially down in Southwestern Ontario? 
12:32 - Can you explain the one group you've rented to using technology to ship soybeans worldwide?
13:29 - Why should investors consider the farmland asset class in their portfolio? 
16:32 - When you buy a farm, are you trying to improve the land and the investment overall?
18:22 - Who are you leasing farmland to and what is the process?
19:56 - What do you do to protect that important 12 inches of soil on farmland?
21:13 - How has farmland reacted with some of the recent economic pressures in the marketplaces?
23:20 - Can you touch on how farmland considers ESG as part of the investing process?
25:13 - Why should somebody choose your firm over some of your competitors?
27:05 - What do you see happening with farmland in the longer term, say 25, 50, 100 years?
30:19 - Will there be farm tours available for interested investors?

If you enjoyed this episode, please subscribe and visit our website at https://www.privatedebtandequity.ca/ for any questions or to learn more!

Transcript

0:15

Greetings, listeners. I'm Bob Simpson, your host, and welcome to another educational episode of My Private Network. You can listen to a podcast and never really know much about the podcast, or especially the way we deliver My Private Network. Every week, we open the doors to people. Now, not just people, but specialists in a wide variety of private debt and equity concepts. During our podcast, we focus on our guests because we want to help them to share their stories So we want you to hear directly from them so that you can get a better understanding of their particular concept. Today, I'm going to make an exception and share something about myself. You can read my bio on private debt and equity. ca, but that simply discusses my professional background. Now, personally, I grew up on a farm in the Niagara Peninsula. We grew peaches, cherries, raspberries, and a variety of vegetables. We had chickens and we actually even had a cow, just one cow. I worked every summer for my neighbor, Art, who had what we called a dirt farm. Everything he grew required laborers like me to bend over all day or occasionally get down on our knees when Art wasn't looking. He didn't really like that too much, but we spent every day planting, weeding and harvesting the crops. During university, I got a job at Canada Agriculture, and it was exciting because I made twice as much money working for the government than on a private farm. We called that place an experimental farm. It was in Jordan, Ontario, in the Niagara Peninsula. And every day, I went to work from 8 till 5, and I put in a full day's work, and at the end of the day, I went out and played lacrosse and did wind sprints for two hours. Or jumped on a bus to Oshawa or someplace in Southern Ontario. I learned at a very young age, what really hard work was all about. You know, when you work on a farm, you learn how to work, you know what hard work is, but you also learn that there's gotta be an easier way to make a living than working on a farm. So why am I telling you this? My guest on today's episode is a man who is outstanding in his field. Kent is president and CEO of Ag Invest Farmland Properties. And he joins us today from Southwestern Ontario, Chatham to be exact. Kent, thank you. Thanks for joining us today. I appreciate to appreciate your time. Thank you, Bob, for that story and that introduction. I appreciate it. And yeah, as you told your farm story, I'll share my farm story. I was born and raised on a farm near Chatham, Ontario. So like you, I learned what it was like to work hard at a very young age. And when I was a teenager, I actually started a farm service company working with the seed corn industry. So I really got to know farmland and working in the fields and in my 20s, I started to figure out, you know, how can I perhaps one day become a farmer and own land myself? So I started thinking about that. And really Ag Invest, um, it really came to be when I, I tried to. to wrap my head around and solve two really key problems that I saw early, early on in my life. And the one problem really does affect farm families all over Canada, certainly other places in the world. And that is, I thought to myself, why do farmers have to die to realize their value? Because they, they hold all this valuable land. Until they pass away. And I was thinking about my own parents and my own parents were farmers and they were, you know, they were struggling to, to, uh, to make a reasonable amount of profit, um, because they didn't have the economies of scale, there were smaller farm operations. So I always, I always wonder, I always thought that was unfair. So I started to think about that. And then I started to try to buy my own farmland and I bought a farm, I bought a second farm. And it was going quite well. Then I went to my banker to buy a third farm and the banker said, we're not going to loan you any more money to buy a third farm. And I just thought, well, why not? This, this is, this is going well. And we're increasing the equity and trying, trying to acquire scale to be a successful farmer. So it was really at that moment, combined with the fact that I'm very entrepreneurial and had already started an ag business and a farming business, and I just thought something's not right here. And I just thought it would be a wise move to involve others and other people who wanted to deploy capital into this, into this asset class, and then really help farmers sort of transition these two key problems, which is, you know, a graceful exit. Before you pass away at the farm owner and also from a young farmer perspective, uh, to help achieve economies of scale. So, so that was sort of the thesis behind the very start of the spark of AGInvest. So are you finding Kent that now the second biggest demographic group in Canada are the baby boomers, the millennials have taken over from there. Are you finding that a lot of farmers are now looking to exit their business and their kids don't really want to take over the. The farm, they want to get away like I did. Yeah. Like that problem that I personally lived through an experience, it's been exacerbated and now the average farmer in our country is 60, the average age, which means 50 percent of them are older than that. And if you look at it from an ownership perspective, the bulk of the farmland is owned by those who are greater than 60 years of age. So there's a real issue here at hand. And that is, you know, how do we transition that? How do we exit those folks and, you know, we don't live to be 200 years old. It's just not so it's just a matter of time where we do have a problem on our hands. So by bringing in outside capital to help with the transition and help get into the younger generation, I mean, that is important. It's important for a lot of reasons, and we are seeing that. And yes, the next generation, the younger generation. It comes back to your point about hard work, and I'm not saying they don't like to work hard, but it is difficult to get into the farming operational business because to be successful in Ontario, for example, you need to be farming a thousand acres. Now, that's going to cost 20. 30 million to start up. That's hard to do. So it's not that young people don't want to necessarily become farmers. There is a big capital problem there just to start up a farming operation. So we're in a bit of a conundrum here that we're trying to solve at AGInvest. Yeah. 20 million bucks is hard to come up with, especially when you have student loans, right? It is. It's. It's, it's a real, it's a real problem that most people don't, don't know about it. And for those who own the land, like those older folks who own the land, I mean, it's It's kind of a good problem, but it's still a problem. It's still a problem. Now, would you think, you know, cause if you look at the baby boomer generation that, you know, the end of the generation is somewhere in the 60 range today. Right. Are you finding that half the farms are owned by elderly farmers and the other half are owned by corporations who can afford to do the 20 million dollar layout for the farmland? No, I wouldn't say that half is owned by corporations. Like, especially if you're considering the corporations to be investment firms, 98 percent of farmland is owned by farm families. And I would say a bulk of that 98 percent is owned by. older farm families. Now there are a lot of older owners that own the land that are not operating the land. So there's a difference there that a lot of people don't know about. But you know, over 50 percent of the farmland is owned by, you know, a widow or, or a smaller operation that has It's too small to be successful, so they rent it out to larger farmers. So there is a bit of a disconnect with the knowledge base out there with that regard. Yeah, and that's what I've, I've seen when I go and visit some of my friends in Niagara and their parents still own, you know, we have, we have the third oldest barn in the Niagara Peninsula and we're tearing it down now because it's not safe. But yeah, we're renting out the farmland where, you know, it's, it's not like we can pick the peaches and pick the pears every year, like we did in the past. But, you know, I had a thought there that, you know, if a farmer could live to 200 years, he'd still be out in the field. They probably would be. And it's certainly where I want to be. And, and my last few years is, is working in the fields. That's where I like to be. Yeah. Most, most older farmers feel the same way. They, they love their life. They own all these very valuable assets and it's a good place for them. Yeah. So, you know, now we sort of heard the stories, my background, your background, you've made the transition from really farmer to being a private equity manager. Specializing in farms. Describe the work that you do to make investments available to people like our listeners. Yeah, I was told once you better have your pitch down to a three floor elevator ride. And it's real, I have it down short or not. But Ag Invest is a company that stands in the middle between farm families. and folks who want to invest in farmland. It's, it's really that simple. And I find that our company is, is most of the time educating both sides of the equation, educating farm families, how outside capital can, can help them be successful or help them exit or help them grow. Usually a pretty good conversation. And then from the investor side, it's like educated investors on, first of all, how can I invest in farmland and why would I invest in farmland? So that's what we spend most of our time doing. It's just being right in the middle and communicating to both sides. Yeah. So you're really providing a service to, to both sides of the, uh, of the equation, which is awesome. Yeah, yeah, we're providing a service and an education and the cool thing about I feel what we do is that it's a win win win situation for many different parties. It's not like one side gets taken advantage of and the other wins. It's absolutely not like that. It's success on both sides. It is a, it is a really nice story and it does, it does bring a lot of, a lot of good to a lot of people. Yep. Now I've been on some of your farm tours. I've seen, you know, you're growing pumpkins and you're growing squash and you're growing things. So it kind of reminded me of, of Art's Dirt Farm that I worked on. But you're down in Southern Ontario. You know, one of the first things you did on the farm tour is dig a hole. Just show the topsoil and I was impressed. I don't think I'd ever seen topsoil that deep. Why do you think it's a good idea to invest in farmland, especially down in Southwestern Ontario? Well, just a few points of clarification. Thank you for the comment on the hole. I like to dig the hole because I. You're investing in the top 12 inches of your surface, really. So it's really important to understand that top 12 inches. And obviously we manage it and care a lot about that top 12 inches, but we're actually invested throughout Ontario from Windsor all the way to Montreal. And really, if you look at that large corridor. It's very small in the big picture of Ontario, and it actually is the southwestern piece of Ontario, and that's just where all the soil has been left from glaciation 10, 000 years ago. That's where it was all dumped and then throughout the U. S. So we're very focused in Ontario, uh, as a, as a farmland, uh, manager and there's farmland across the country, but we're focused in Ontario for a few reasons, and one of them, like you said, is the very, very rich soil, but we also have, uh, access to an incredible amount of heat and water. That comes into this part of Canada and this part of Canada is much further south than the rest of the country. Really? In fact, the southernmost border of Ontario is the is the same latitude as the northern border of California. And I say that to every American I meet because they're shocked, but we have this great combination of water, heat. Quality soil, we have fantastic logistics and roadways here in southwestern Ontario, as everyone knows, and then we have access to almost 300Million people within 1 day truck drive. So it's just this crazy combination of. Great things that make food and we're blessed. And then we're also attached to the, to the state, the great lake St. Lawrence seaway system. So we can literally get crops anywhere in the world from Southwestern Ontario, very, very blessed in this region. Yeah. And I remember you talking about, uh, high protein soybeans and. One of the groups that you rented to, and they were simply using technology to do the job and shipping, shipping the soybeans all over the world, right? Yeah, most of the produce in Canada is shipped as a raw material. So there's also a huge opportunity coast to coast in our country to add value to our raw materials that are being shipped around the world in food. A real simple example is instead of shipping basic soybeans in a container to Singapore to make tofu in Singapore. You could actually just make tofu here and ship the finished product, which, you know, adds, you know, 20 X the value. So there's a lot of opportunity down the road in the future for Canadians to add value through production and added value sources with their food. Yeah. So as an investor, one of the things that we like to say on this podcast is what you should be trying to do as an investor is acquire good assets. Good long term assets. It's not about buying and selling stocks. They're going to go up today or tomorrow. The great investors are buying great assets. Talk about farmland as one of those investments, one of those asset classes that people should consider in their portfolios. So when we speak to investors, I mean, I'm an investor myself. We all are in different products. We've tried, I've tried stocks and. Bonds and all kinds of mutual funds. So we do have to address this head on. And what's unique is when we started to put the data together and compare and contrast farmland performance in Ontario to TSX to the S& P 500 indexes. Simply put, farmland has far outperformed those assets. They, they, they've outperformed the TSX, the s and p, the MSCI significantly. So just looking at it from a pure investment, having it in your portfolio. It's a winner on day one on day one. And it's been like that since the turn of the century, it's outperformed significantly. It's also a unique, uh, asset to invest in because it's a great diversifier portfolio diversifier, because it has very low next to no correlation to stocks and bonds. and has a very high correlation to inflation. So it really is a great diversification tool for your portfolio. I like to refer to it as a foundational investment inside of a portfolio. And then if you look at the macro economics of owning farmland, I mean, we're forecasting an additional 2 billion people on the planet over the next 30 years. We're losing farmland every single day. Valuable farmland and we can talk about the reasons why we are investing so much money into technology to help with food supply and agricultural production techniques. So we have increasing demand for food. We're able to produce more on an acre of land. We're getting paid more for whatever we're producing on that land. So the macro thesis, macroeconomics of investing in farmland is really compelling. Farmland is an asset that has a vacancy rate of zero. So if you want to compare it to commercial or residential, it has a zero vacancy rate. It's not like we have an option to eat food. I mean, I can go on and on about the value of this asset in your portfolio. I think the biggest problem that we're having is how do we put it into people's portfolios? Like up until 15 years ago, there was no way. The only way you could put it in your portfolio is literally going by a farm. But now there are a million and a half, 10 million per farm. So how do investors do that? So the real. Key thing is that we're trying to make a structure. We have structures that investors can invest into to own farmland directly. Yeah. And I think that's, I think that's a very important point that you make is that, you know, like many of the concepts on private debt and equity, these are new things, not, yeah, let's go buy some farmland. Let's buy some music royalties. Let's buy a storage facility. Let's do some of those sorts of things. So it is unique to most of the investors there. Now, Kent, also when you're purchasing a farm, you know, one of the things that people who do private investing, things like multifamily, they use the term value add. When you buy a farm, you're just not buying the farm and renting it out. You are trying to improve the. the land and the investment overall, aren't you? Yes. And buying a farm and renting it out is a strategy that many people do. And it's not a terrible strategy. We like to refer to that as the beta strategy. You're getting the performance of farmland in general, which has done very well. But as a farmland asset manager, we want to Add value to our investors and really want to earn our fee, if you will, and we're incentivized to do so. So we want to do things to add value above and beyond the beta return of pharma, which we call the alpha return. And we've done well with that. But we're intentionally buying farms that. May have been beat up a little bit because of the ownership may have opportunity to to clean up some more workable acres or several home in Ontario or improve the drainage every farm we buy. We're trying to protect the soil and make it as productive as possible. We want to maximize productivity on every farm we own and then protect that soil over the long term. So we just have a really great asset that the owners. The investors, oh, and they can go and stand on it. I know Bob, you've done that. So we're, we're adding value with, with every farm. And you can also add a lot of value by really understanding the farmland in Ontario, which is very diverse, by the way, from concession to concession, you can have different valuations. So buying correctly is also, uh, a real big piece of the alpha equation. And then of course, after that, you then have to know how to manage farm families and understand crop rotation and all kinds of things that are related to farming. So there's a whole bunch of work that goes into the management or alpha of what we do here at AGInvest. Now talk about the people who are leasing the land from you. Like what's the process? Is it farmers or is it corporations, you know, give us an idea of who the people are that you're, you're leasing to. And what's the process. It's all farmers. Most farmers have structured their own farming at the DS corporations. So there's a little confusion there, but it's farmers that we're, we're leasing this land to or renting or partnering with. We're not operating it ourselves. We're, we're leasing in working with farm families. And for the most part, we are working with the younger generation of farm families, those who just. They have to get economies of scale to be successful back to my very first example, you can't just go out and say, I want to buy 1000 acres of farmland. So by us coming in, helping them, we want them to own as much as they can on their own. But we come in, and if we can add 100 acres to their portfolio, and then they rent 100 acres from us, they can then spread their costs out over a larger volume of acres and they're very happy. So the process is. First of all, if through our growing relationships, if they bring us a farm, then they have the first right of refusal to rent that farm back from us. And then in our grower agreements, they continue to have that right of refusal indefinitely. They get to continue to farm that so long as they're willing to pay the rental price that we have established. In cases where we don't have a farmer, like sometimes we will buy it off of real estate where there's no farmer in place, we will do what's called a tender rent process, where we, we, Put a bid out to our large network of farmers and then they'll come back with a bid. And, and that way we're doing our fiduciary due to the investors and making sure we were raising as much revenue as we can for the investor. So we're keeping everybody happy that way. You talked about the 12 inches of topsoil that people are really, that you're really investing in. What do you do to protect that 12 inches of soil? Well, there's several things we do, but one thing that's really nice about this is that they. The tenants, if you will, you know, many people have talked about, I don't want to have a rental property because I don't want to deal with tenants. It's not really like that in the farming community because most farmers are incentivized to take care of that property. In this case, the soil, because if they don't take care of the soil, then they're not going to have a crop and they're investing a lot of money into the seeds and the equipment to grow those crops. So we're very much aligned to protect that soil for the investor. But on top of that, we do our own soil testing on all of our crops. We have a lot of technology that can monitor the crops from space throughout the year. So we can see how things are growing. We can see the drainage problems. So we're watching over this asset for the investor. We're getting paid to do so. So we're watching over the soil. We're optimizing it. We're watching. We're working with the farmers and together we are protecting the soil long term. So let's shift our attention a little bit back to what most people would consider normal things that you look at when you're looking at investing, and that's like interest rates, inflation, how has farmland reacted with some of the pressures that we've seen in the marketplaces over the last little while. The last three years have really tackled both of those issues head on, like inflation. Wow, did we get hit with a wild inflation? And then, and then, and then we got hit by some pretty crazy interest rates. So I'm going to talk about them both. I think farmland is. It might be the best investment on the planet when it comes to handling inflation. And this has been seen many times in history. In the 70s to 1981, where we had a real bad bout of inflation, Ontario Farmland did almost a 16 percent compound annual growth rate, while the S& P did 2 percent over that same 10 year period. So we look back and now like, wow, did it handle inflation? Well, but just recently the last couple of years, so 2021, 2022, we had significant inflation and farmland had two of its best years ever during those two years. So it really has repeated its ability to handle inflation. Now with interest rates, interest rates are interesting because. We saw what it's done to the housing market, like interest rates have really, really sort of put a lot of pressure on the housing markets and housing markets have come back in many regions across the country in terms of their value, they're still expensive, but they've come back from their highs. Farmland just pushed through. It didn't, it didn't retreat at all in value. In fact, it didn't improve double digit this year, but it improved single digits this year. And the reason why farmland handled the interest rate. increase better than residential, for example, is because the debt to equity ratio of farmland ownership in our country is less than 18%. So all the farmers in this country, we're less than 18 percent debt to equity. So rising inflation doesn't hurt as much as the, as the residential market, which I don't know the number, but I think it's maybe 40, 50 percent debt to equity with our housing. So that's sort of the story with interest and inflation. Yeah. It's really where I was going to go is that if you look at the housing market, that most people have 30%, 40 percent equity in a property and 70 percent debt. So when rates go up, it's, it's a real pressure, but if you're 18, it's a lot easier to handle. Yeah. So that's an interesting point. Farmland seems to be the ideal investment for somebody who really cares about the world and trying to make it a better place. Yeah, ESG is a part of investing, certainly at the institutional level, it's very much a focus at the accredited investor level, like some people are very focused on that, others are not, but when ESG started to come into, you know, into the vocabulary here a few years back, it was easy for Ag Invest to sort of adopt this because by nature, we have to, we are part of the environment, owning farmland, so we're very much In tune with a lot of things that you need to care about with environmental factors like sustainable agriculture and caring about soil health and being cognizant of water, water usage and over usage a lot of investors around the world who a lot of larger investors that have invested in farmland regions like Australia or California, where there's been significant drought. It really does add another layer of risk to the investment if you're not thinking about the water aspect. So we're thinking about all these things and we're working with farmers and protecting the soil. So it does come quite naturally. So we don't have to greenwash, if you will, to make this work for investing in farmland. From the social side, so the ESG, the S piece, I'm really passionate about the social side of this investment, because we are absolutely helping the older generation with the exit strategies, and we're helping the younger generation with their problems with entering the firm space. I think we're making a big impact with the social side and good governance is I think it's important for any asset class regardless and, you know, following local laws and different rules that we have to follow when you're owning farmland is something we just do naturally. So it's a good fit. It's a really good fit. If you want to impactful investment or an investment that's focused on ESG. There's not many better assets you can invest into. Yeah. So Ken, when we look at working with you or your firm, why should somebody choose your firm and the work that you're doing over some of your competitors? Well, that's a good question. And there's not a ton of competitors in Canada. Well, we do have a few. Areas where we stand out. One is that this farm investment manager started from the farm side of the equation. So we're very different from other management firms that really started on on Bay Street, if you will, and kind of came at the asset from from the, uh, from the other side, we started on the farm side and came to came to Bay Street, if you will. So we think of this a little differently than the competitors do. Another thing is we're focused only in Ontario. So Ontario has about 200 billion of farmland in the whole province. We think that's a large enough area to be focused in. You'd think by only focusing on this geography you'd be adding risk. We think we're actually de risking the investment because Our land in Ontario has the ability to produce 200 different crops. It's very different from the other parts of the country where there, where there's only a few crops being grown right throughout the prairie provinces. Good opportunity to invest there, but we're very much focused in a very rich, the richest region of the country in terms of soil and the types of crops that are being grown. And the other thing that makes us a little different is we're very focused on optimization. We're intentionally trying to buy those farms that are Maybe undervalued and have an opportunity to add a lot of value. So we're, we're different in that regard. We're really focused on that. We like to roll up our sleeves and get to work back from the introduction. We like to work on adding value to a farm as we acquire. Now, farmland has changed a lot since I was a kid working on arts farm today. It's, it is big business for investors with longer term timeframes. What do you see as you look out? Uh, you know, 25, 50, a hundred years, you know, it's hard to look out a hundred years, but what do you see happening to farmland longer term? Well, I see, I see quite a few things. I made the comment earlier about technology, but the amount of money that is spent on ag tech. Globally is second only to health sciences. So we're spending a tremendous amount of money on improving the ability for each acre of land to make food. We have to do that because if we don't, we're not going to be able to feed our planet. And that's important to understand. So technology is driving productivity gains. And that's important to know as an investor, because if you're investing in an acre of land that today can produce 200 bushels of corn. But in 25 years, that same acre can produce 400 bushels of corn, you know, that's why farmland values continue to improve in value because they're just simply producing more. I see that trend continuing for decades and decades, just with technology. We're seeing all kinds of robotics and AI and all kinds of crazy things that are coming into, into farmland productivity. I also see a trend where the, the size of the farmer will continue to be larger and larger and larger. And we're seeing that with our equipment manufacturers, a tractor can cost a million dollars. A combine can cost 2 million dollars today. So we have to use this technology, but it's only going to work with larger firms. So farms, In number will decrease, but in size will will increase and then my crazy vision going out 100 years in Ontario. We're surrounded by the largest freshwater system in the world. And I see in the future a very, very intense crop. In Ontario, all land heavily irrigated, all very high vegetable crops. Uh, I see pipelines all throughout the province of Ontario, basically turning the entire province of Ontario into a garden or a breadbasket for the world. That's, that's what I see a hundred years from now. Wow. That's a, that's a big vision. Now, one of the things in one of the, um, the farm tours that we did is that one of our investors said, Grew up on a farm. We sold the farm. I've missed that farm forever. I want to own farmland and we're never going to sell it. We're never, ever going to sell it. So, you know, there's a real connection, I think, Kent, with, with investors and. You know, I look forward to our conversations always, you know, with the farm background that I have. And I appreciate today that you've come and shared your story with us. Hope that as people listen to this podcast, they reach out to us and ask to learn more, uh, and help us to make a connection with your firm and the investing work that you're doing. So. Thanks very much. This was fun today. Yeah. Thanks for having me. I appreciate this time. So before making any investment decisions, it's crucial to consult a professional financial advisor to determine suitability. Full disclaimers are available on private debt and equity dot C a now don't forget to follow us on your preferred podcast platform and subscribe to our YouTube channel to stay updated on new episodes. If you're eager to learn more about investing in farmland, we have a channel dedicated specifically to investing in farmland on private debt and equity dot C a. And if you want to learn more, I'm sure Kent that we're going to do another couple of farm tours this summer that we could have people out again. Is that your plan? It is. It's our plan. We have a spring and a fall tour every year and we'll, we'll have details, uh, forthcoming. Yeah. Yeah. And that'll be posted on privatedebtandequity. ca. So in closing, I'm Bob Simpson. It's been my pleasure to guide you through today's conversation. Remember knowledge empowers you to make well informed investment decisions and progress towards your financial objectives. Until we meet again, stay focused and disciplined on your financial journey. Thanks for listening.