Time For Canada's Pension Funds to Invest in Ontario Farmland?
Before I get to our Q&A, it's useful to first revisit why CPP Investments decided to exit Canadian farmland six years ago:
Canada Pension Plan Investment Board (CPPIB) has decided against making further investments in farmland and is open to selling its existing portfolio after reviewing the operations, people familiar with the matter told Reuters this week, a shift in strategy after some local farmers voiced concerns.
CPPIB began buying farmland in North America in 2012 and has since purchased about 120,000 acres in the United States and a similar amount in Canada. The country’s biggest public pension fund purchased 115,000 acres of Saskatchewan farmland from Assiniboia Farmland LP in 2013 for C$128 million ($95 million)and had intended to invest another C$500 million in Canadian farmland over a five-year period.
However, its plans met with a backlash from some local farmers who believed they would be squeezed out of buying land themselves and feared rising rents if the CPPIB pursued its mandate to maximize returns for Canada’s pensioners.
Those concerns eventually prompted the Saskatchewan government to ban some institutional investors from buying farmland in the province, whose plains usually grow more wheat than Argentina, thwarting CPPIB’s plans for expansion.
CPPIB, a late entrant to farmland business, declined to comment specifically on the changes, but the fund’s global head of public affairs, Michel Leduc, said:
“We assess performance of each investment program with that in mind as well as fit within our total portfolio approach, contribution to diversification and desired return-risk profile.”
CPPIB, which had C$298 billion ($219.62 billion) under management at the end of 2016, oversees the national pension fund on behalf of 20 million Canadians.
The fund’s move stands to be good news for some farmers and not so good for others. Those who want to expand the size of their farms are winners because they have one less tough bidder to compete against, but those hoping to sell the farm and retire may find fewer buyers.
Although CPPIB continued to buy farmland in the United States, plans to purchase farmland in Australia, New Zealand and Brazil also failed to materialize. Frustrated by the fund’s lack of progress, CPPIB Chief Executive Mark Machin recently ordered a review of the business led by its global head of real estate investments, Graham Eadie, the people told Reuters.
The sources spoke on condition of anonymity because the matter is confidential.
Eadie’s review concluded the business was not sufficiently scalable to justify further investment. As a result, CPPIB has decided not to acquire more farmland and is open to selling what it already has, the sources added.
It is not clear whether the fund is actively seeking buyers.
CPPIB’s decision comes as some large pension funds continue to look for opportunities in the sector. Wealth funds of Gulf Arab states have been buying farmland in developing nations to ensure food security. Recently, some of the Australian pension funds have started buying farmland after staying away as the local farms were often too small in value to be of interest to the A$2 trillion ($1.51 trillion) pension fund industry.
Global farmland investors range from pension plans like CPPIB to companies including Ontario-based Bonnefield and U.S.-based real estate investment trust Farmland Partners Inc.
The CPPIB has decided instead to focus on the processing, delivery and storage of agricultural products following last year’s acquisition of a 40 percent stake in Glencore Plc’s agricultural business for $2.5 billion.
As part of the changes, the fund has parted company with Angus Selby, who was based in London and had led the bank’s global investment strategy for agriculture and farmland for five years, the people added. The fund’s agriculture trading group was also laid off at the end of last year, one of the people said. Selby was not available for comment and CPPIB declined to comment.
That article that appeared six years ago has become one of the most cited articles on why Canadian pension funds shouldn't invest in Canadian even foreign farmland.
Since then a lot has changed.
While CPP Investments never got back into farmland, PSP Investments and Ontario Teachers' have invested but mostly abroad.
PSP Investments in particular is leading the Maple 8 in farmland investments.
Led by Marc Drouin, Senior Managing Director and Global Head of Natural Resources at PSP Investments, that team has managed to put together a very nice portfolio of Australian farms one farm at a time.
It also engaged WSP Global Inc. to develop a consistent methodology for analyzing the environmental impact of its natural resources assets. I discussed that here.
I also discussed PSP's approach to building that portfolio with its former CEO, Neil Cunningham, when I covered PSP's Fiscal 2022 results with him:
Neil then made a comment on Natural Resources:That to me is a huge success in that we built the asset class without having the ability to buy scale. Timber was different, you may remember we did our first investment there on Vancouver island and that was really the genesis of the asset class. But branching into agriculture, we built it one farm at a time by building up strategic partnerships and managing them at a certain level but giving them the leeway to expand their businesses in various areas. We built an $11.5 business which is now roughly 2/3 agriculture, and we built it partner by partner, farm by farm into a really interesting asset class. One of the problems with that asset class is actually benchmarking it which is an indication that it's highly useful for us because if you can't benchmark it, it's an indication that it's not correlated to other things. It's one of the reasons we like it so much and of course, as you say, it has inflation protection naturally built into it.I told Neil that I honestly don't know many other large Canadian pensions who have done as much in agriculture as what PSP has done (OTPP a bit but nowhere near as much).
Neil concurred and told me it wasn't easy to build that asset class:Because it's not an asset class which is as established as others, you can't just call an investment banker to say I need exposure to this asset class. It was a lot of people making a lot of trips to places where that portfolio is located. A lot of it is in Australia, Western US and Western Canada. That's a lot of time on planes, building relationships becoming known in the market. Now it's at a point where the growth is almost organic in the sense if you have an existing platform (partnerships), literally you can buy the farm next door. It's a proprietary form of organic expansion now that the footprint is there. You know the expression it's a long hard road to being an overnight success, right? The team members put a lot of sweat equity into building this out and it's paying up.
What did PSP's Natural Resources team get right that CPP Investments didn't get right back in 2017, leading to their decision to exit farmland?
They basically got the approach and geography right and they got full backing from their Board which is critically important.
That is why PSP's Natural Resources portfolio is unique and why it's a leader among global pension and sovereign wealth funds in this field.
Now, farmland has important diversification characteristics that you can't find in timberland, real estate or infrastructure, but what they all share in common is they are real assets that provide a hedge against inflation.
Are there risks? You bet, farmland is not immune to the global economic recession which is headed our way and investing in farmland abroad carries its own set of risks even if Australia has rule of law and is open to foreign investors (a lot more open than Canada).
One benefit Australia has for large Canadian pension funds like PSP is scale. It has huge farms that are a lot bigger than Canadian farms.
I am giving you some background before heading into my Q&A with Kent Willmore, President and Founder of AGinvest. You will understand why below.
I want to particularly highlight the following ones:
- Ontario farmland’s long history of phenomenal growth | Wealth Professional
- AGinvest Farmland Properties Canada Announces Strong Returns in 2021, Bringing the 4-year CAGR to 18.02%
- This is why you want a Diversified, Uncorrelated Portfolio
- Farmland During Inflationary Periods
Now, let me get right to my Q&A with Kent Willmore, President and Founder of AGinvest (added emphasis is mine):
1) Please briefly introduce yourself and your fund.
My name is Kent Willmore, and I am the President and founder of AGinvest Farmland Properties Canada. Born and raised on a farm and founder of several farming businesses in Ontario, I have had the privilege to have been exposed to decades of experience working in the Ontario AG industry, including buying, optimizing, and operating a family farmland portfolio. AGinvest exists to serve farm families and provide a unique alternative investment for investors.
AGinvest Farmland Properties is an asset manager that manages highly productive Canadian farmland. It has created a pathway for investors to partake in the ownership of this asset and add farmland to their portfolios. The focus is on premium quality farmland, particularly in Ontario. We have unique access with a "boots on the ground approach" to acquiring farmland assets. We have a track record of optimizing each farm we buy and adding significant alpha to our investments.
We work closely with local farmers seeking to grow their operational capacity, allowing them to lease additional acres, which will help make their overall farming operation more efficient and profitable.
Ontario is unique and home to some of the best farmland in the world. The climate provides a long growing season, abundant fresh water, exceptional infrastructure to access the North American and Global markets, and a talented workforce to put it all together.
Protecting these assets for future generations of farmers and investors is paramount. Sustainable soil health and freshwater management practices are a cornerstone strategy for the firm.
2) Please describe the Canadian farmland landscape and the opportunities you see across Canada and in Ontario.
Canada has a resilient and innovative food system that plays a massive role in our national economy and is a net beneficiary of global climate change and freshwater distribution. The agri-food industry employs 2.1 million people, representing 1 in 9 Canadian jobs.  6.8% of Canada's GDP representing 134.9 billion, is the net impact on our economy.
In Canada, approximately 189,000 farms cover 62.2 million hectors with a market cap of roughly $673 Billion. 
Canada boasts several key advantages that help make our country a global leader in food production and processing.
- Abundant land and water resources
- Access to international markets
- Vital research and development and education
- Strong global reputation as a trusted supplier of safe, high-quality food
- Strong stewards of the land.
Ontario is one region within Canada that is home to $180 Billion (27%) of the market value and only 7.7% of the total farm acres.  Packing such significant value into a small region speaks to the premium that Ontario provides. Ontario is the leader among all provinces in farm commodities such as soybeans, corn for grain and greenhouse products.
For many, the opportunity to invest in Canadian farmland is a new concept. There is a tremendous knowledge gap between those that understand farmland and those who do not. In Ontario, for example, there are 46,000 farms and well over 15 million people.
Providing investors with access to quality Canadian farmland is in its infancy, and the opportunities are tremendous.
3) Are these investments scalable? Can they move the needle?
The size of the farms available is a roadblock for many larger institutions. Land assembly and scale are challenging, with an average farm size of fewer than 250 acres in Ontario. .
While scaling rapidly is a roadblock for investors unwilling to be patient, we see this as an opportunity. Smaller-sized acquisitions mean the market is inefficient, providing potentially higher returns for investors willing to invest at this consolidation stage. In Canada, greater than 98% of the farmland is owned by farm families meaning operators own the vast majority of farmland.  Farmers are the ones who determine the value of the land, making the asset completely uncorrelated to financial assets. Also, given that farmland produces the food humans require, it is not vulnerable to economic cycles.
Our position within the farming community allows us to see more acquisition opportunities since most don't make it to public markets. Ultimately, we believe there will be significant value to a large, professionally managed portfolio, in addition to the optimization that occurs along the way.
Farmland is a capital preservation tool with a long track record of performance.
For investors with long-term capital needs who require real returns to meet those capital needs, farmland has proven to be one of the best assets to own during periods of inflation (best on a risk-return basis). We believe generating real returns during periods of inflation is moving the needle.
4) What are the major impediments to investing in Canadian farmland?
Aside from achieving scale rapidly, there are no real impediments to investing in Ontario, but there are rules around the concentration of ownership in some Canadian prairie provinces.
The fundamental limitation or impediment is the lack of agricultural or farming knowledge within the investment community. Most finance professionals have a limited understanding of farming, making it very difficult to recognize opportunities and add value. Acquiring farmland with little knowledge of farming leaves investors vulnerable to materially overpaying and leaving them with much lower returns. Financial players entering an industry predominantly owned by operators puts them at a tremendous disadvantage. AGinvest has proven, over multiple funds and five years of operation, that our farming knowledge is the competitive advantage that has allowed us to deliver significantly higher returns than just a passive farmland ownership strategy.
5) What returns can investors realistically expect over the next ten years? What will influence these returns? Please discuss the significant risks and opportunities you see.
Ontario farmland has had an 8.2% CAGR over the past 71 years. The appreciation began in the 1950s when improvements in mechanization began. Since then, innovations in biogenetics, methods of fertilization and continuing improvements in farming equipment have made farmland more productive and efficient to operate. We believe that with elevated levels of investment in agricultural technology, agricultural innovations should continue, and farmland values are likely to benefit. At the same time, in 2019, the United Nations reported that the world loses 12 million hectares of productive land each year from urbanization and climate change, making farmland with ample water and a long growing season far more valuable.  This global decoupling of farmland and food production supports increased valuations moving forward. 
We expect this asset can continue to appreciate at the rates seen over the past 70 years. We also believe that our optimization measures can surface additional value for investors.
Also, unlike financial assets that can trade in a volatile manner and lose significant value suddenly, farmland values are driven by fundamentals. The returns are cumulative since the improvements in productivity and efficiency are permanent.
6) A few significant Canadian pension funds have invested in farmland in Australia and South America. What are the risks and opportunities of foreign investments in farmland?
Australia and South America provide opportunities for investors to invest significant capital quickly. These countries were settled differently, and larger blocks of farmland are available. By way of example, Australia has 427 million hectares of agricultural land compared to Canada's 62.2 million hectares. Quite a difference.
The risks are numerous, with climate, currency, political and water rights leading the way. A foreign buyer is also subject to mismanagement and overpaying conundrums that are part in parcel of investing in a region far from home. This type of investment is likely to achieve "beta-like" returns.
7) These same Canadian pension funds prefer to go alone, building their farmland investments one farm at a time, partnering with local investors. What are the risks of this approach?
Again, buying farmland requires farming knowledge, and there is very little farming expertise within the investment community. Farmland values can vary significantly within a small region. Understanding the value drivers of farmland is difficult if you have never farmed before. We evaluate every farm property based on the productive value of the farm but also on the potential opportunities to surface additional future value. We have been doing this for years, even before we launched our first fund. Having a financial player doing it themselves brings the risk of overpaying, alienating the farmers in the community, not understanding farming well enough to negotiate leases with the farmers, as well as a host of other pitfalls.
8) Please discuss the demographic time bomb in Canada's farmland and what worries you most, and how institutional investors can help.
In 2021 farm operators aged 55 or older represented 60.5% of Canadian farmers, up 6% from the 2016 census. Conversely, Canada's share of young operators fell by 8.6%. The net sum of these statistics is what we refer to as the "demographic time bomb." Added to the data, Statistics Canada reports that the proportion of farms in Canada with a written succession plan is only 12%. One of the most significant barriers to entry impacting young farmers is the cost. Land prices and AG technology are challenging for the younger generation, where economies of scale are the pathway to operational success. We feel that managers like AGinvest can make an impact.
Alternative sources of well-managed capital focusing on long-term sustainability and food security can make a difference. At AGinvest, we intend to be a big part of the solution to combat the demographic time bomb ahead. For investors, we see the potential of up to 50% of the farmland value in Canada changing hands in the next ten years. Our goal is to provide investors with the opportunity to be part of the capital solutions for the younger generation of farmers.
I thank Kent Wilmore for sharing his insights with my readers and ask you to please refer to AGinvest's website here to learn more about why you should invest with them.
Area One is a competitor of sorts to AGinvest but the latter focuses on Ontario farmland almost exclusively.
I agree with a lot of what Kent discusses above, you need specialized skill sets to invest in farmland, you need to be able to quickly build relationships with farmers and add value over time.
I remember telling Kent he should forget the mamoth Canadian pension funds because his capacity is roughly $250 million, but maybe it makes sense for an OMERS or a HOOPP to buy them outright and use them as an agricultural platform.
Or maybe the smaller ones like OPTrust, CAAT Pension Plan or Vestcor can invest in them, provided they pass their due diligence and fit nicely in their portfolio.
Just throwing out some ideas and will follow up with Kent to make some introductions but feel free to email him directly at firstname.lastname@example.org.
Lastly, please note the purpose of this comment isn't to sell AGinvest, the primary purpose is to inform my readers about the advantages and risks of investing in farmland in general, and in farmland right here in Ontario.
First and foremost, my blog is a platform to share knowledge, not to peddle funds. Nor do I do capital introductions and if someone does invest in AGinvest because they read this comment, then good for them.
Alright, let me wrap it up there.
Below, AGinvest Farmland Properties has a mission to protect the integrity of Canadian farmland for future generations. They work with farmers to help their operations quickly achieve scale and become more profitable. They provide unique transition opportunities for the wave of farmland transfers set to take place over the next decade. They help young farmers quickly achieve scale and make their farming operations more profitable.
AGinvest Farmland Properties recognizes that farmland is an asset that continues to generate more value through higher production and increased efficiencies. Ontario farmland, in particular, is extremely well-positioned to help supply the planet with the increasing demand for quality food. They believe quality farmland that can adapt to climate change is positioned to perform very well relative to other asset classes.
Also, they believe that investing in a manner that makes an impact is the only way to invest. Finding ways to add value for investors by improving farmland to maximize productivity is a great start. Protecting and managing our valuable topsoil is an integral aspect of farmland investing. Managing the interactions between water, air, soil, minerals, and nutrients is key to the long-term sustainability of this precious asset. Working with farm families to improve their productivity, gain economies of scale and create opportunities for farmers to excel.
Third, I embedded a presentation was part of Farm Transition Appreciation Day January 12, 2021, celebrating farm transition planning at every stage and helping you and your farm team take the next step in farm transition. Take the time to watch this.
Lastly, in 2020, AGinvest Farmland Properties CEO Kent Willmore joined AGinvest Director and Rondeau Capital Inc. Founder Keith Graham and successful agribusiness entrepreneur Dave Baute of Maizex Seeds to present at the annual Canadian Alternative Investment Forum.
Considered the premier alternative investment conference in the country, Kent, Keith and Dave participated in a Spotlight Panel discussing the many productive qualities and rich composition of southwestern Ontario farmland. They also spoke about the appreciation metrics, comparative analysis to other investments as well some of the unique opportunities that exist with farmland investing.