Seasonal Update - 2017

Report On Canadian Agriculture.

When I began Area One Farms in 2013, I had the following three views: ‘farm kids’ under 30 had returned to the farm and were eager to stay (a contrast to those a decade older who had rarely been able to return to farming as a full time occupation); the land we were targeting would see a change of crop in the upcoming decade; and partnering with farmers could lead to a win-win outcome, a solution that buy-and-leaseback models are unable to achieve. Some recent information has come out that speaks to these points that directly impacts our views and decisions as we decelop and evolve and as our investors and friends I believe you may find it of interest.

The 2016 Census (released on May 10, 2017) revealed that over the last five years the number of farms in Canada declined by 6% (the lowest rate of decline in 20 years) and for the first time since 1991 the proportion of farm operators under the age of 35 rose – both in absolute numbers as well as a proportion of total farm operators. An increase in the number of young farm operators is a positive for the Canadian agriculture industry and demonstrates that young entrepreneurial operators are increasingly encouraged by the economics of the industry and excited by the abundant opportunities in the Canadian agricultural landscape. It also brings continued relevance to our partnership model, which is a tool for growth and potentially for intergenerational transfer. In my visit to Alberta this week we began our internal conversation about how to better serve these unique partners that we expect will be the majority of our partners over time. 

The Census also revealed that the profile of crops being grown on Canada’s farms, and particularly in the prairies has already shifted significantly. On the prairies in the last five years, the number of soybean acres has increased by 140%, the number of grain corn acres by 78%, the number of lentil acres by 61%, and the number of canola acres by 11%. The shift away from the crops that used to blanket the prairie landscape such as wheat, winter wheat, and barley (planted acres down 13%, 52%, and 17% respectively), are part of the industries on-going efforts to improve margins and diversify farm income from a historical reliance on cereal crops. Canadian agricultural producers have proven to be agile and responded to export market stimuli and from our inception forward we have been able to help lead this transformation. On our farms, both soybean and lentil acres have increased. Recently, we have also been able to increase our focus on developing higher on-farm profitability, and our research around crops and production methods that could produce higher profits are well underway and I am looking forward to results. 

Agriculture, generally, is of interest federally. In its latest budget the Government of Canada, acting on core strategies identified by the Advisory Council on Economic Growth, has outlined agriculture as one of three pivotal areas exhibiting “great potential for growth and job creation”. While details about the proposed growth plan are not yet concrete, a target of $75B in annual agriculture exports by the year 2025 has been set (An increase on $20B in annual agriculture exports), and the industry has been made eligible to receive research grants from a proposed $1.26B five-year Strategic Innovation Fund. It is encouraging to see government stakeholders recognize and foster the Canadian agriculture industry which has the potential to be a principal driver of the Canadian economy and prime beneficiary of global macro trends such as a projected 70% increase in food demand by 2050 and a need to produce as much food in the next 45 years as in the previous 10,000.

The final story shaping the Canadian agricultural landscape throughout the first half of 2017 is the Canadian Pension Plan Investment Board’s (CPPIB) recent indication that it will retreat from direct investing in Canadian farmland (purchased 115,000 acres of Saskatchewan farmland in 2013 for $128M), in favor of a food-processing strategy (purchased a 40% in Glencore’s for $2.5B in 2016). It is very likely that this is because CPPIB struggled to deploy capital at a necessary scale to achieve returns. However, one contributing factor is CPPIB’s received backlash from farmers who felt that the pension fund’s deep pockets would potentially price them out of their most valuable asset – their land. It became clear over the last year and a half that the partnership model, which is built on the very unique capital concept of shared value, is perhaps most unique because of the pathway to ownership that it provides for its partners. That is, not only are farmers better off partnering with Area One Farms than they would have been able to do on their own, something that lease-back models struggle to deliver, but they also already have the portion of land that they need to be able to own for the next generation to succeed. The struggles of CPPIB have shone a light on the differentiating intricacies of the Canadian agriculture industry that demonstrate that a deep understanding of farmers and their vision is a necessity for success when investing in Canada’s agricultural industry.  

Joelle Faulkner

President and CEO

Area One Farms Ltd