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Sunday, February 17, 2008

Pay dirt: the coming agriculture boom

Farmer2_72_3Did Warren Buffet really get his start by investing in farmland?

According to real estate investing expert Steve Gillman, when Buffet “was just a teenager, he parlayed his newspaper route earnings into the purchase of farmland, which he leased out.”

If it’s true, the days of buying farmland with the income from a paper route are probably over, even a paper route run by the Oracle of Omaha. Since 2003, farmland prices in Omaha have soared more than 50% due to Asian food demand and US biofuels mandates. In general, the average price of US farmland is now $1900 per acre and as high as $3,908 per acre in places like Iowa.

With grain prices at all time highs and farmland prices soaring, there is little doubt we are seeing the start of an agriculture boom. The Economist magazine published a cover story on “agflation” and the end of cheap food and today’s Globe and Mail has a two-page spread on the “profound change” sweeping the world’s agriculture markets. The Globe and Mail story reported:

“Net income for the average Canadian farm is expected to rise 16 per cent this year, according to Agriculture and Agri-Food Canada, and crop receipts are expected to be nearly 40 per cent higher than in 2006.”

"Western Canadian farmers, unless they have an all-out crop failure, are going to have the biggest year in their history," Mr. Coxe said.

All of this is good news for Calgary-based Amcapita Investments. The company has created Canada’s first and only RRSP-eligible farmland investment vehicle with a mandate to invest in Saskatchewan farmland. (You may have noticed the “I [Heart] Saskatchewan Farmland” ads on this site. To disclose any conflict of interest, Amcapita Investments is both an advertiser and supporter of the Western Standard. The investment director, Stephen Johnston, is also my brother - and I have a financial interest in the company. How's that for disclosure?)

At $350 per acre, Saskatchewan farmland is some of the cheapest in the world and investors are taking notice. If you consider what the recent oil boom has done for Alberta, the promise of an agriculture boom in Saskatchewan is very big news for investors.

If you’re not an investor, consider the political implications of this news: Saskatchewan’s new conservative Premier has inherited an economy with a booming housing market, booming oil & gas sector, booming mining sector and, soon enough, a booming agriculture sector. If Brad Wall manages this prosperity well (i.e. stays out of the way), it could entrench his conservative Saskatchewan Party in what was once considered a socialist wasteland.

If you want to learn more about farmland investing, you can download the Amcapita Investments research report here.

Posted by Matthew Johnston on February 17, 2008 | Permalink

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Comments

If its in the paper, its in the price.

The reason farmland in my home province is cheap is because a) Saskatchewan is a high tax jurisdiction; b) foreign investment is prohibited;

The reason why the agricultural boom will not go much farther is because a) inputs like fertilizer and oil for transport are skyrocketing; b) the Canadian dollar will deter sales in favour of purchases from places like Argentina; c) China and India are facing a serious correction in their markets and currencies, and possibly their first real recession.

Despite your disclosure, I feel your promotion of that investment is actually a conflict of interest.

Posted by: Evan Robisky | 2008-02-17 2:47:16 AM


Saskatchewan farmland won't grow much, other than wheat and barley. The coming boom will be in corn. It's not so much about food as it is ethanol. Most of the world's population can't afford our crops at today's prices.

Besides, are we entering a new era of serfdom? It's bad enough that Hutterites control such a huge percentage of farmland with their communist practises. Now we're looking at corporate agriculture?

Posted by: dp | 2008-02-18 1:04:33 PM


“If it’s in the paper, it’s in the price.”

Evan, it sounds like you’re an adherent to the Efficient Market Hypothesis which argues that prices of tradable goods already reflect all known information making it impossible for investors to outperform the market by relying on information already in the market and in the price.

http://en.wikipedia.org/wiki/Efficient_market_hypothesis

If that were true, of course, there would be no consistent returns made in the market. There would be no Warren Buffetts.

Unless you’re just saying that by the time the mainstream press is getting around to covering a story, it’s old news.

Posted by: Matthew Johnston | 2008-02-18 8:48:10 PM


dp, there is a finite amount of arable farmland in the world. (In fact, it’s shrinking.) If global biofuels mandates turn food into fuel, as you’re saying, it puts greater demand on the remaining farmland – and that drives food and farmland prices higher. There is also the issue of changing diets in China and India, but that’s another matter.

As for your second point, while I would not call it “servitude”, farms are consolidating and big players are emerging. Given the capital equipment required for farming, does it really make good economic sense to have thousands of small farms each with their own tractors and combines all desperately trying to scratch out a living? The market is a good determiner of the optimal size of businesses.

I know this is a sensitive issue, which is why the Saskatchewan Farmland Security Act exists, but look on the bright side – if farm incomes improve, maybe John McCain (and Stephen Harper) will succeed in ending farm subsidies (see D.J. McGuire’s post).

Posted by: Matthew Johnston | 2008-02-18 10:18:37 PM


Investors push farmland prices higher: report

Mon Mar 24, 2008 12:35pm EDT

CHICAGO (Reuters) - The slump in residential real-estate prices may have pushed speculators out of the housing market and into farmland, lured by the growing biofuels market, a report said on Monday.

http://www.reuters.com/article/gc03/idUSN2432346620080324

Posted by: Matthew Johnston | 2008-03-24 4:50:27 PM


Food prices rising across the world

MEXICO CITY, Mexico (AP) -- If you're seeing your grocery bill go up, you're not alone.

Protesters share a loaf of bread in Cairo, Egypt, while demonstrating against high food prices.

From subsistence farmers eating rice in Ecuador to gourmets feasting on escargot in France, consumers worldwide face rising food prices in what analysts call a perfect storm of conditions. Freak weather is a factor. But so are dramatic changes in the global economy, including higher oil prices, lower food reserves and growing consumer demand in China and India.

http://www.cnn.com/2008/WORLD/americas/03/24/food.ap/index.html?eref=onion

Posted by: Matthew Johnston | 2008-03-25 9:23:35 AM


Well I wonder if we've had enough "government intervention" yet? As usual even if their efforst are well intentioned our respective governments have proven time and time again that they are ridiculously inept at market manipulation and should just stay the hell out of it. What they don't seem to understand is that commodities will be subject to demand and that turning food into fuel seems like a great idea until you run out of crack to smoke. The people of Mexico depend on corn as their main staple. Now its getting too expensive to buy as food and ridiculous to buy as fuel. What we'll see next is about 100 million really pissed off Mexicans and others throughout the world. And this shortage isn't very far away from your own table. We may now use an increrasingly worthless and inflated dollar to buy expensive goods that are in short supply and may soon just disappear altogether. Good work UN and the western Governments...pat yourselves on the back and have a cigar.

Posted by: JC | 2008-03-25 11:04:25 AM



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