Farmland investment and financialization in Saskatchewan, 2003–2014: An empirical analysis of farmland transactions

Highlights

• We analyzed a database of transactions to provide insights on the financialization of farmland in Saskatchewan, Canada.

• Pension funds, private equity firms, and wealthy individuals have purchased large tracts of land in Saskatchewan since 2003.

• Investor activity increased rapidly from 2005 to 2012, but then slowed.

• On average, investors paid more per acre for farmland than other buyers in high-activity regions of the province.

• While some investors accumulated land throughout the study period, others bought and sold large portfolios over a few years.

Abstract

Since the province of Saskatchewan, Canada liberalized its farmland ownership rules in 2003, private equity firms, pension funds, and wealthy individuals have acquired more than 800,000 acres of farmland. These investors have acquired land with the aim of securing income flows by renting land to independent farm operators and realizing capital gains. The influx of outside investment has raised questions about how these trends could change patterns of farmland ownership, influence farmland values, and affect rural communities. This article analyzes a database of all farmland transactions in Saskatchewan from the period 2003–2014 in order to examine investor behaviour in relation to the farmland market. We present data on the amount of farmland changing hands (the turnover rate), the scale of investor farmland purchases, and prices paid by investors and non-investors, on an annual basis. Our analysis reveals that investors acquired their farmland portfolios over a relatively short period of time; that investor activity seems to have peaked in 2012; and that, on average, investors paid more for farmland than other buyers in a number of ‘high-activity’ regions of the province. Furthermore, while some investors continually accumulated land throughout the study period, others bought and sold large portfolios over a few years. These trends provide further evidence of the ‘financialization’ of farmland in Saskatchewan.

Introduction

In 2015, the government of Saskatchewan, Canada launched a review of its farmland ownership legislation in response to growing public concern over the role of large, institutional buyers in the province's farmland market. The Canada Pension Plan's 2014 purchase of 115,000 acres of farmland for $CAD 128 million, the single largest farmland transaction in modern times, was particularly controversial (Briere, 2014). Some farm organizations and politicians have argued that institutional investors, with billions of dollars at their disposal, create an uneven playing field for farmers who wish to buy farmland. Meanwhile, the CPP and other investors have argued that, by purchasing farmland, they are supplying much needed capital to the agricultural industry (Leduc, 2015) and helping to facilitate the process of farm succession by buying land from retiring farmers (White, 2015). Saskatchewan farmland values have risen very rapidly in recent years -- 138% between 2007 and 2015 (FCC, 2016) – reflecting strong agricultural incomes as well as investor interest in farmland as an asset class. While Saskatchewan's ownership rules are already quite restrictive, the debate has raised crucial questions about the politics of farmland ownership: Who should be allowed to own farmland? What are the implications of investor activity for family farms, rural communities, and the agricultural sector?

These debates and questions reflect broader currents in the global agri-food sector. There is a growing body of literature on the ‘financialization of farmland’, the process by which financial actors, including hedge funds, private equity firms, wealthy individuals, and pension funds, are buying farmland as part of investment strategies (Daniel, 2012, Gunnoe, 2014, Fairbairn, 2014b, Magnan, 2015, Sommerville, 2013, Sommerville and Magnan, 2015). To date, the literature has documented macro trends at regional, national and international scales, explored the motivations and business models of key actors, and examined the financialization of land in the context of the broader transformation of the agri-food system (Burch and Lawrence, 2009, McMichael, 2012). In this article, we provide a fine-grained analysis of changing patterns of farmland ownership in Saskatchewan, Canada's leading agricultural producer and exporter. Our purpose is to shed some light on the dynamics of farmland ownership change, including the amount of land changing hands, the scale of investor farmland purchases, and the behaviour of investors over time. In turn, we relate these patterns to legislative changes, the financialization of farmland, and broader changes to the agricultural sector in Saskatchewan. Our analysis contributes to understanding financialization as an empirical phenomenon and to debates around the social and economic implications of investor activity.

The article is organized as follows. First we provide a brief review of the literature on financialization and farmland ownership, with a focus on patterns of change in industrialized countries. Next, we provide context for understanding the dynamics of farmland ownership and investment in Saskatchewan. We explain our methodology in the following section, before presenting our findings on key trends. In the discussion, we interpret these trends in light of the institutional, political, and economic context in Saskatchewan and make some observations about the significance of farmland financialization in patterns of rural change.

In recent years, scholars have been documenting the growing involvement of financial actors – commodity speculators, hedge funds, pensions, private equity firms, and the like – in the global agri-food sector (Burch and Lawrence, 2009, Clapp, 2012, Clapp, 2014, Daniel, 2012, Williams, 2014, Isakson, 2014, Fairbairn, 2014b). The financialization of agri-food is driven, in part, by restructuring and change within the sector. As agricultural supply chains and corporations become globally integrated, various facets of the agri-food sector – including highly industrialized farms (Visser et al., 2012; Murmis and Murmis, 2012, Visser, 2015), agricultural inputs and risk management (Isakson, 2014), supermarket chains (Burch and Lawrence, 2013), and farmland (Fairbairn, 2014b, Gunnoe, 2014) -- have become more attractive targets of financial investment. Investors have also turned to the agri-food sector in response to forecasts of rising demand for food, fuel, and fibre linked to the growth of middle classes and changing dietary patterns in the developing world (Cotula, 2012, McMichael, 2012, Weis, 2013). Scholars are interested in the ways in which the growing influence of financial actors and logics may contribute to further agri-food restructuring and change relationships among key actors such as governments, farmers, food corporations, workers and consumers.

The financialization of farmland is of particular interest, not only because of the centrality of land to food production, but also because of the unique social and economic context of farmland ownership. As a result of 19th and 20th century patterns of colonial dispossession and agricultural development, farmland ownership in places such as Canada and the U.S. has traditionally been distributed among many thousands of discrete owners, usually farm families, who are descendents of Euro-American settlers. This pattern persisted, even as farm numbers declined precipitously from the mid-20th century onward through a process of consolidation and increasing farm size. While some families who exited agriculture held on to farmland as a form of retirement security or investment, the bulk of farmland continued to be held by farming families, with only small amounts owned by corporations, institutions, or investors. For instance, in 1999, corporations represented fewer than 3% of landlords who owned farmland in the U.S. (Jackson-Smith and Petrzelka, 2014). In Saskatchewan, investors held less than 0.1% of farmland in 2002 (Desmarais et al., 2016).

The role of non-farm actors in rural land markets around the world has been increasing since the mid-2000s (GRAIN, 2010, Daniel, 2012, Cotula, 2012, Visser et al., 2012, Fairbairn, 2014a, Fairbairn, 2014b). Interest in farmland emerged in the wake of the global financial crisis, as investors fled from riskier assets toward the relative safety of ‘real assets’ like land and gold. Investors have touted farmland as a hedge against inflation, a low-risk store of wealth, and an asset that delivers both capital appreciation and an income stream through rents (Fairbairn, 2014b). The ‘financialization’ of farmland thus refers to the way in which financial actors are deploying capital to acquire farmland through pension plans, private equity funds, public companies, and Real Estate Investment Trusts (Fairbairn, 2014b, Gunnoe, 2014, Visser, 2015, Magnan, 2015). As part of this phenomenon, some investors have targeted farmland in industrialized countries (Highquest Partners, 2010). In the U.S., institutional investors, including UBS Agrivest, a Swiss financial services firm, Hancock Agricultural Investment Group, a subsidiary of a major insurance company, and the TIAA-CREF, a public pension plan, have invested hundreds of millions of dollars in approximately 540,000 acres of farmland (Mittal and Moore, 2014). In the EU, some Eastern European countries have seen considerable outside investment into farmland, usually in the form of huge, integrated corporate farming operations (van der Ploeg et al., 2015). Since the mid-2000s, there has been a significant increase in foreign investment in Australian farmland and farm operations, driven by institutional investors, wealthy individuals, and sovereign wealth funds (Lawrence and Campbell, 2014, Magnan, 2015, Larder et al., 2015, Sippel, 2015).

Investment in farmland in the industrialized countries tends to be driven by relatively long-term investors seeking low-risk portfolio diversification (Knuth, 2015). Typically, investors acquire a portfolio of land that is geographically dispersed, to help mitigate weather and disease risks, and sometimes diversified by production sector (e.g., permanent crops, annual crops, dairy, meat). Investment models differ in terms of the relationship between farmland owners and agricultural production. In some cases, an investing firm both owns and operates the farm, providing investors exposure to the appreciating value of the farmland and to potential profits from agricultural production. In other cases, investors own the farmland, but rent it out to independent farm operators or to third party farm management firms. This ‘own lease-out’ model is common in the U.S. and Canada, while there is a more even mixture of different models used in places such as Australia (Magnan, 2015). The ‘own lease out’ model is considered a lower-risk, more passive approach, while ‘own operate’ is somewhat higher risk, as it provides investors exposure to agricultural commodity prices. There are as yet few studies that have directly examined the impact of financial investment on farmland on rural community dynamics. Case studies of financialization in rural Australia suggest that the entry of financial actors can have mixed effects on local farmers and residents (Sippel, 2015, Sippel et al., 2016). For instance, while some rural residents felt uneasy with land purchases by financial entities, other actors – notably, large farm family entrepreneurs – either accepted these investments as benign or actively partnered with financial firms in order to further their own business objectives (Sippel et al., 2016).

Recent scholarly commentary has cautioned against overstating the financialization thesis (Christophers, 2015), and in particular, presenting the financialization of agri-food as a straightforward, inevitable, or monolithic process (Ouma, 2014, Ouma, 2015). The process is certainly more complex than sometimes presented in popular treatments. Recent research has acknowledged, for instance, that there is a range of investor types involved in farmland acquisition, and that these investors may differ considerably in their goals, expectations, and activities (Knuth, 2015). Others have recognized the tensions and obstacles involved in the financialization of land. In the investment world, agriculture is considered an ‘alternative asset class’ and investors are actively engaged in constructing farmland as a desirable investment (Fairbairn, 2014a). Some scholars have pointed out that, contrary to media ‘hype’ about large-scale land deals, many farmland acquisitions and agricultural projects fail as a result of political and social backlash, logistical and legal problems, or simply a lack of profitability (Li, 2015, Magnan, 2015, Visser, 2015, Kuns et al., 2016). Yet, financial actors, strategies, and instruments are clearly becoming more influential in the agri-food sector (Lawrence, 2015), and the concept of ‘financialization’ continues to be a useful way of describing recent trends and connecting “apparently discrete developments” (Fairbairn, 2015). Fairbairn (2014b) and Gunnoe (2014), for instance, document how financial actors have been developing new financial instruments, called Farmland Real Estate Investment Trusts, which contribute towards making a notoriously illiquid asset like farmland more liquid.

If financialization is to be a useful framework for understanding changes in the agri-food sector, careful empirical work is needed in order to establish the scale and scope of the changes. Most empirical studies of financialization rely on data such as websites, corporate documents, news media, and sometimes, interviews with corporate officials. These data can provide a useful snapshot of ownership patterns, but typically do not track ownership changes over time. Furthermore, it is important to understand investor behaviour in light of broader farmland ownership patterns and the dynamics of rural land transactions. In the U.S., there is a rural sociology literature on farmland ownership and tenancy (for a recent review, see Jackson-Smith and Petrzelka, 2014), but little concrete information exists on the extent of farmland ownership for investment purposes (Jackson-Smith and Petrzelka, 2014, p. 60, but see Duffy (2011) on investor ownership of Iowa farmland). In Australia, researchers have used land titles data and geographic information technologies in a sophisticated analysis of patterns of rural land ownership change (Pritchard et al., 2012), but did not focus specifically on investor ownership.

While our goals are more modest than the comprehensive analysis undertaken by Pritchard et al. (2012), we take some inspiration from their approach by drawing on land titles-derived data and by examining year over year changes in land ownership patterns. Specifically, we analyze a comprehensive database of farmland transactions between 2003 and 14, a period of peak activity in the Saskatchewan farmland market. This approach allows us to track investor behaviour – including purchases, sales, and prices paid – over time, painting a more fine-grained picture of changing ownership patterns. In turn, we seek to understand investor purchasing patterns in relation to policy changes, agricultural commodity prices, and the dynamics of the rural land market. The analysis provides new insights into the financialization of farmland in Saskatchewan.

Saskatchewan is known as Canada's ‘breadbasket’ and has been a major grain producing and exporting region since the late 19th century. In 2015, the province produced 13 million tonnes of wheat, 8.8 million tonnes of canola, 2.8 million tonnes of barley, and 2.2 million tonnes of lentils, the most important crops by production volume.¹ In 2011, there were approximately 22,000 grain producing farms in the province, a 29% decline from 2001.² The vast majority of farming operations in the province are family-owned, with less than 2% owned by non-family corporations.³ Since the 1980s, the agricultural sector has undergone significant restructuring under a broadly neoliberal policy regime (Knuttila, 2003, Wiebe, 2012). While farm families have benefitted from relatively high farm incomes since 2007, thanks to higher commodity prices, this was preceded by nearly three decades of low, and sometimes negative, net farm income. Farm debt has also risen considerably in recent years, standing at $13 billion in 2014, compared to $6.9 billion in 2004.⁴ While the debt to asset ratio for Canadian farms has declined in recent years, reaching its lowest level since 1997 in 2014, farmland represents a large and growing share of agricultural assets (Pratt, 2016). For instance, in 2014, farmland accounted for two-thirds of agricultural assets in Saskatchewan compared to only 54% in 2001.⁵ Farmland value inflation is therefore partially responsible for the relative health of farmers' balance sheets.

The institutional and regulatory context around farmland ownership has changed at key moments in Saskatchewan history (Desmarais et al., 2016). In 1974, as agricultural commodity prices and farmland values skyrocketed, the provincial government introduced legislation that restricted farmland ownership to Saskatchewan residents (Ferguson et al., 2006). These restrictions were in place until 2002, when the government of the day partially liberalized the rules. Under the amended legislation, Canadian residents, citizens and 100% Canadian owned companies were allowed to purchase farmland without restrictions, while non-Canadian individuals and companies were prohibited from purchasing more than 10 acres without a special exemption from the Farmland Security Board. At this time, the government sought to bring its farmland ownership rules in line with the other Western Canadian provinces, and convey an ‘open for business’ message it hoped would stimulate investment into the sector. The change in ownership rules in 2002 opened the door for out-of-province Canadian investors, whether individuals or companies, to acquire farmland in Saskatchewan. Because the law continued to prohibit non-Canadian corporations (defined as companies with any degree of foreign ownership) from owning farmland, farmland investment companies have typically been set up as private partnerships of Canadian individual and institutional investors.

Previous research has shown that, since the liberalization of ownership rules in 2002, investors have purchased considerable tracts of the province's farmland. By 2014, it was estimated that investors including the Canada Pension Plan, private investment trusts, and wealthy individuals, owned 837,000 acres (Desmarais et al., 2016). Investors are attracted to Saskatchewan farmland for a number of reasons: the province has a well-developed agricultural sector, a stable political environment, abundant farmland, and, compared to other jurisdictions in industrialized countries, low farmland values (Sommerville and Magnan, 2015). Some early investors in Saskatchewan farmland expressed their desire to capitalize on the province's ‘undervalued’ land (Johnstone, 2007). Agricultural economists have argued that the ownership restrictions in place between 1974 and 2002 depressed Saskatchewan farmland values relative to neighbouring provinces, Alberta and Manitoba (Ferguson et al., 2006). The thesis was that, as ownership was extended to Canadians outside of Saskatchewan, farmland values in the province would catch up with those of neighbouring provinces, providing an opportunity for investors to buy low and sell high. Between 2003 and 2007, Saskatchewan farmland values actually fell further behind those of its nearest neighbours (Table 1). These were years of low commodity prices and drought conditions in the province. Only after 2007, when commodity prices and farm incomes increased substantially, did the gap begin to narrow.

The largest investors in prairie farmland are private partnerships (which I refer to as Farmland Investment Firms or FIFs), pension plans, and family-held companies, which by 2014 had collectively invested about $CAD335 million in Canadian farmland, the large majority of which in Saskatchewan (Magnan, 2015). These investors buy land and lease it out to farm operators, profiting from rental income and the capital appreciation of the farmland asset. Although the FIFs and pension plans have received the most media and scholarly attention, Desmarais et al. (2016) have shown that the single largest farmland holding belongs to a wealthy individual, who in 2014 owned some 161,000 acres of land for investment purposes. While previous studies have documented how much farmland investors own, little is known about the timing of investor purchases, the significance of investor activity in relation to all farmland transactions, the average prices paid by investors for farmland, and the extent to which investors are buying and holding farmland for the long term versus buying and selling land to make short term capital gains. We address each of these issues below, providing a more dynamic understanding of the on-going financialization of Saskatchewan farmland. We turn to our data and methods in the next section.