Harvesting Alpha from Canada’s Agricultural Heartland

Avenue Living Agricultural Land Trust
With its proven active management capabilities and culture of partnership, Avenue Living is reaping the benefits of farmland.
For investors seeking to diversify away from the public markets, the case for farmland investment is all too clear. And for Avenue Living, which has its sights set on Canada’s breadbasket, it’s an opportunity that’s been growing for over half a decade.
“We launched the Avenue Living Agricultural Land Trust in December 2016,” says Gabriel Millard, SVP, Capital Markets – Equity & Research at Avenue Living Asset Management. “From its inception up to now, it has performed well for our investors, and we’ve seen a significant and increasing demand for the strategy.”

Harvesting Returns

Over the past five years, the fund’s portfolio has grown to $184 million in assets under management and 83,000 acres of farmland across Saskatchewan, with historical annual returns consistently above 10%.
“Within the farming community, a lot of operators look for opportunities to expand. They often don’t have access to the capital required to acquire neighbouring parcels when they come up for sale. Others are looking to exit, and don’t have heirs or successors to buy them out of the business,” Millard explains. “We leverage our considerable capital resources to acquire productive, arable farmland in Saskatchewan, which we rent to farmland operators and help them to expand their businesses.”
The Avenue Living Agricultural Land Trust has a fixed sunset date within the next two years. The organization is looking to replicate its success with its new fund, Tract Farmland Partners LP. Raintree Capital Partners, which has been a partner to Avenue Living since 2017, will be among the select exempt market dealers to offer this new fund to clients.
“We wanted to give investors a way to keep benefitting from our experience with Saskatchewan farmland, as well as our active management capabilities in the agricultural space,” Millard says. “Raintree has been side-by-side with us since we launched our first alternative products, so we’ve built a strong working relationship with them.”
Avenue Living’s approach to farmland is led by Leif Snethun, the CEO of the Avenue Living Agricultural Land Trust, and Tract Farmland Partners LP. Snethun comes from a proud tradition of Canadian farming. His father was the youngest of five boys raised on a farm in east-central Alberta. That farm was homesteaded by Snethun’s grandparents, who immigrated from Norway. With help from his wife, Snethun owns a cow-calf operation west of Stavely, Alberta and helps his younger brother operate the near-by family farm.

Sowing Seeds for Future Alpha

“The average urban person can’t imagine the size of the farmland parcels we deal with in the portfolio. 83,000 acres equates to almost 130 square miles,” he says. “With that said, it’s easy to understand why our farmland managers can’t possibly know the specific nuances of the portfolio of land the way our tenant-operators do.”
To maximize alpha, Snethun and his team actively encourage tenants to come forward with land improvement ideas. Through investments in land reclamation and remediation, and construction of strategic grain storage facilities, Avenue Living adds direct value to the portfolio and improves tenant farming efficiencies. These improvements mean the tenant is able and willing to pay increased rents.
“We’ve earned a great reputation in the community,” Snethun says. “I believe that there’s no other form of real estate where the tenant and the landlord are so aligned. Our tenants are financially motivated to look after the land like it was their own as that is how they maximize crop yields.”
According to Millard, the new strategy leverages the same economics that makes farmland appealing, along with Avenue Living’s proven management capabilities and reputation in the agricultural space.
“Over the six years we’ve spent running our Agricultural Land Trust, we’ve developed a track record of being able to close land acquisition deals on time with farmers, which provides important liquidity for them,” he says.
Returns in the Avenue farmland model have the potential to be boosted through a judicious use of leverage. Despite having similar soil characteristics as farmland in neighbouring provinces such as Alberta and Manitoba, Saskatchewan farmland trades at over a 30% discount.
“With the Federal government’s interest in food supply and security, farmers in Canada benefit from added stability through crop insurance,” Millard adds. “This creates a layer of protection for our tenant-operators in case they suffer adverse weather conditions or other occurrences that negatively impact their crop yields.”

Favourable Tailwinds

Globally, the case for investing in farmland is gathering strength from several macroeconomic tailwinds. Urbanization is playing a part in the depletion of farmland acres. Over the decades, arable farmland area has shrunk from 5.6 acres per capita in 1961 to 1.2 acres per capita as recently as 2016 (Food and Agriculture Organization of the United States (FAOSTAT), 2021).
There’s also pressure from the growing global population, which officially topped eight billion last year.  As more countries enter a period of economic prosperity in the coming decades, the World Bank forecasts an increase in the average daily caloric intake among developing nations, with citizens’ dietary preferences shifting toward higher-value, more calorie-dense foods such as meat.
Because of limited supply and the prohibitive cost of meat products, import-dependent markets may turn to pulse crops – including legumes such as lentils, peas, and beans – as nutritionally equivalent alternatives. The Canadian Prairies stand as the largest exporter of lentils, peas, and chickpeas in the world today. Within Canada, around 90% of lentils and 50% of pea production originates from Saskatchewan (Government of Saskatchewan, 2021).
“According to the Government of Saskatchewan, the province accounts for more than 40% of the cultivated farmland in Canada,” Millard says. “It’s a critical piece of Canada’s food production capacity, and critical to helping fill the growing global food supply gap.”
Historically, farmland has proven to be a strong inflation hedge, with annual returns outpacing gains in the CPI over the past 30 years. That trend is set to continue as demand grows and a breakdown in supply chains throws the world into a new commodities supercycle.
“Increases in commodity prices tend to correlate with revenue increases for farming operators as well as generating more investor demand for farmland. As the price of each acre of farmland increases, so does the value of the asset,” Millard says. “Even in years where CPI is negative, we’ve historically seen positive farmland returns.”
Investing in farmland also provides diversification, as its return performance is generally uncorrelated to other asset classes. Saskatchewan’s expansive terrain encompasses a variety of weather patterns, allowing Avenue Living to capture a wide continuum of crops and crop yields.
“Right now, our farmland ownership is scattered throughout the arable portion of Saskatchewan,” Snethun says. “We’ve witnessed a massive change in people’s awareness and interest in the agricultural space over the past three years, and we’re very excited to be part of that wave.”

Investing in the Everyday

Avenue Living continues to focus on its strategy of investing in assets which support sectors essential to the everyday lives of North Americans — farmland, workforce housing, self-storage, and commercial real estate.  As an operations-first organization focused on moderate growth markets in the North American Heartland, Avenue Living is well positioned to continue its growth and success.
Learn more about Avenue Living here: https://www.avenuelivingam.com

References

Food and Agriculture Organization of the United States (FAOSTAT). (2021). FAOSTAT. Retrieved from Food and Agriculture Organization of the United States: https://www.fao.org/faostat/en/#home
Government of Saskatchewan. (2021). Saskatchewan Agriculture Exports 2021. Retrieved from Government of Saskatchewan: https://www.saskatchewan.ca/business/agriculture-natural-resources-and-industry/agribusiness-farmers-and-ranchers/saskatchewan-import-and-export-information/resources-for-importers/trade-statistics
This commentary and the information contained herein are for educational and informational purposes only and do not constitute an offer to sell, or a solicitation of an offer to buy, any securities or related financial instruments. This article may contain forward-looking statements. Readers should refer to information contained on our website at https://www.avenuelivingam.com/forward-looking-statements for additional information regarding forward-looking statements and certain risks associated with them.