Diversifier allows investors to reap what they sow

Founder of Area One Farms explains how investment counters volatility and targets 12% return

Diversifier allows investors to reap what they sow

As a fourth generation Canadian farmer, Joelle Faulkner knows her crops from her combines. She also has extensive knowledge of one of the biggest open secrets in Canadian investments – that farmland is among the best diversifiers out there.

About ten years ago, Faulkner’s family was looking to expand and had the chance to buy a neighbouring farm. However, they failed to find any partners to invest with and did not want to take on a mountain of debt, so the opportunity slipped away.

The Faulkners ended up purchasing a farm in Saskatchewan and Joelle’s eyes were opened as to how intergenerational farm growth took place. She envisaged a pioneering partnership structure between farmers and investors and, in 2011, founded Area One Farms.

“The conventional way to invest in farmland in Canada is you buy land and rent it to a farmer," she told WP. "I don’t love that because it wasn’t something we would have wanted on the other side as farmers.

“The reason we don’t do it is because most of the money you make in farming, you make with land appreciation. If you are renting land, you don’t share in any of that appreciation. It’s like if you rent in Toronto like I do - every year I get further and further away from being able to buy the same place because no matter how much my income grows, the value of the place grows so much more.”

With a spell as a management consultant under her belt, Faulkner threw herself into the firm and by 2013 had its first investment up and running. It currently has farm partnerships in Alberta, Saskatchewan, Manitoba and Ontario, and this summer closed Fund IV at $120 million, taking its AUM up to the $250 million mark.

The pool fund structures are organised in limited partnerships which invest in multiple farms. Each farmer is also invested along with the fund, which typically consists of pension plans, endowments, high-net-worth clients and family offices. The idea is to take the stress away from expansion and allow the farmers to grow their business, make the best decisions and ensure their farm’s legacy.

The investors, therefore, also benefit, with Area One Farms targeting a 12% return. Faulkner believes opportunities abound in Canada given its rich farming heritage and ideal conditions.

She said: “It has historically been a very high risk-adjusted return with very different drivers than almost any other asset class. Residential and commercial real estate often moves with the economy in developed countries but farm land doesn’t. Its driver is productivity of the land - the number of bushels per acre it can produce long term and the profitability of the crops it can produce.

“I think the opportunity in Canada is very significant. We like partnering with farms because 80% of Canadian farmland sells off-market, so if you are in partnership with a local farmer, you actually get access to local opportunities you can’t as a normal investor.

“Canada is a water-rich country, has stable laws for ownership, has really, really strong farmers and has a lot of room for land conversion and improvement, which will bring land to higher productivity [levels]. There is more than 1 million acres that could be irrigated but hasn’t yet.”

For investors who don’t have knowledge of whether one farm in central Alberta is better than another in southern Manitoba, they need that local partner. Faulkner actually believes it goes deeper and revels in taking investors to the farms to see how things are done. Bay Street veterans are regularly left stunned at farmers’ management capabilities.

“I, and my team, have a fair amount of expertise around farming and farmland but we actually think that to buy the right land and make it as productive as we can to maximise its value, we need local partners.

“Our idea improves outcomes for the farm, but we actually think it makes for a better and higher returning investment for the investor. Our theory is you should be investing at the very least with us but also with a local farmer and that the strength around those management systems are stronger than most people’s.”

She added: “Most of our investors who come back [from the farms] say, ‘wow, these farmers are really bright’. The scale of what they manage in terms of the diversity of financial and weather risk is just way higher than you would think of in terms of the romantic view of a farm.”

The rise to prominence of alternative assets has also helped Area One Farms get noticed, although the scope for more investment is huge. While markets may swing with volatility, Faulkner said Canadian land has been steady.

“We are making a go of it. We have meetings with our partners to bring in expertise to help them improve management capacity at farm level and we are starting to run exclusively in referrals.

“Our management capacity is growing but also our farm partners are growing. It’s getting really fun with the variety of what we can do.”