Prairie Gold

Money may not grow on trees, but it's thriving just fine in grain fields

By Fabrice Taylor
Globe Investor Magazine,
September 18, 2008
Photography by Eamon Mac Mahon

The price of wheat and other grains has gone through the barn roof. In the case of corn, ethanol production is sucking up a lot of the supply. Meanwhile, the developing world is getting richer by the day. Wealth, it seems, stimulates the appetite.The average Ameri­can consumes more than 120 kilograms of meat a year. In Russia and China, they eat half that amount, but their consumption is expanding fast. This means the world will have to produce even more grain, making it a good time to invest in agriculture. The trouble is, these stocks have shot up. So how can you make money from this trend?

Don't worry. You don't have to learn to drive a combine. You can invest in farmland, and some of the best investments are in Canada. In Saskatchewan, farmland sells for two-thirds of the price that it does in Manitoba, and one-third of what it fetches in Alberta. Why? Since 1970, only Saskatchewan residents could own large tracts, depressing val­ues for a generation. Five years ago, however, the province quietly loosened the rules.

This led to the creation of Agriculture Development Corp. (ADC), based in Regina, which began packaging land into limited partnerships for investors. The company is now on its fourth limited partnership, and units are being sold through investment dealers. The partnerships buy land and rent it to farmers at a rate that's partly based on the farm's income. The first limited partnership, which raised $3 million, targeted a distribution yield of 1%. That proved to be conservative. This year, it'll be 8%, about half of that from the sale of land, the rest from rental revenue. The price of land, meanwhile, is up more than 10%. Because the partnerships also borrow money on a one-for-one basis, the capital appreciation to investors is roughly twice the rise in land values. All in, the first partnership's returns are approaching an annualized 12%, and food prices have just started to move.

The big upside for investors will come from the sale of the partnership, which has a seven-year term, or an IPO. If land prices keep rising, investors will do well. But they'll do better if the province's laws continue to change. A publicly traded company still can't own farmland in Saskatchewan, nor can foreigners.

ADC management has an incentive to push for further liberalization. The company is paid much like a hedge fund, based on a 2.25% management fee, 10% of farm revenue and 20% of any realized capital gain, subject to an 8% threshold.

There are risks, of course. Beyond the obvious commodity price risk, there's the matter ­­of liquidity. Land has little of that. Plus the units won't be traded, so may be difficult to sell quickly or for fair price. But real estate investment is a long-term proposition. A few years' wait and you could reap a nice harvest.