Are there seeds of private debt opportunity in the farming space?

Following the multi-decade record inflation levels that defined the summer of ‘22, many investors became familiar with farmland as an investment. By owning arable land and using it to cultivate key agricultural commodities, investors can get a measure of inflation protection in their portfolios.

Of course, that’s not the only way to get farmland exposure.

“We believe strongly in private credit and private debt, as opposed to equity purchases into the agricultural sector,” says Matt Alexander (pictured above), director of Investor Relations and Operations at Agriroots Capital Management, which recently rebranded to Farm Lending Canada. “We feel that it's a benefit overall to be able to keep the land in the hands of the farmer, as opposed to moving it to an equity structure.”

A different breed of borrower

While residential investments hold a bigger share of Canadian investors’ portfolios, Alexander says farmland is far less volatile, with agricultural land values dipping only twice over the past 70 years. And with an estimated $830 billion in farming assets across Canada today, it’s a rich market with considerable size and potential for scale.

One reason why agriculture is a lending space worth watching, according to Alexander, is the character of farmers as borrowers. That comes down to the farming community’s attitude toward their land.

“They take a look at this land as being something that they want to be able to pass on to the next generation. There's a large sense of pride and ownership, and you see that in their intentions to pay,” he says. “It’s something you don't see in other sectors. … These are very attentive borrowers.”

According to Alexander, a significant proportion of farmland assets across Canada are held by individuals who are over 70 years old, which creates considerable urgency for financing to transition farmland properties within the family.

“We come in and help farmers who may be facing short-term cash flow concerns from succession planning, where one individual in the family is taking over, and they need a mortgage to buy out the other siblings,” he says.

Debt costs weighing on acquisition plans

Because the farming business is typically very low-margin, achieving economies of scale is very important. As operational costs continue to tick up, farmers are looking for opportunities to purchase more land. But as Alexander explains, they may not be able to get the financing needed right away from their existing bank.

“The bank might want them to finance that through another provider for a period of time,” he says. “Once the farmer can demonstrate they’re able to profitably operate with that new acquisition, then the bank will be more comfortable providing the financing for the longer term.”

The consolidation trend has been going on for years, Alexander says, with farmers keen to pick up additional parcels with debt. But as borrowing costs have soared quickly above 2%, he says getting mortgages renewed at traditional banks isn’t as easy as it used to be.

With those higher costs, farmers are now having to weigh their options: should they pivot to another type of crop, change their operations, or sell off a few parcels to survive the current economic challenges?

“Interest rates aren’t coming back down to where they were. They may stabilize, and they may come down a little bit. But they’re not going to come down to where they were,” Alexander says. “As farmers see their mortgages come up for renewal, we’ll see the same headwinds that are developing in the residential markets.”