The Interview - Stephen Johnston, Agcapita Partners: "Farmland combines strong inflation hedging qualities with stable income streams"

Direct investment in farmland has outperformed stock and bond returns over various timescales with substantially lower volatility than the US equity market, according to Stephen Johnston of Calgary-based Agcapita Partners, which invests in land across western Canada, and global demand for crops as food, feed and fuel will ensure continuing strong fundamentals for agriculture for the foreseeable future.

PFW: What is the background to your company and fund?

SJ: Calgary, Alberta-based Agcapita Partners was launched in October 2007 and invests in agriculture private equity, primarily direct farmland investments in Canada. The firm's partners are myself and John Mackay, while board members include former UK chancellor of the exchequer Kenneth Clarke and Jim Pallister. The firm has a total of CAD100m in assets under management in three unlisted vehicles.

PFW: Who are your service providers?

SJ: Our auditor is Buchanan Barry, while legal counsel is Macleod Dixon.

PFW: How and where do you market the fund? What is the profile of your current and targeted client base?

SJ: We carry out limited marketing in Canada via mutual fund dealers and private wealth management firms. Our investor consists primarily of high net worth individuals

PFW: What is the investment premise of the fund? What types of property do you invest in, and where?

SJ: Our core fund invests in row crop farmland in western Canada based on a number of key return drivers. First farmland has historically shown itself to have strong inflation hedging qualities combined with stable income streams, and its returns are competitive with those of other asset classes.

The returns on direct investment in farmland, as measured by the NCREIF US Farmland Index, have exceeded stock and bond returns over the last 17, 10 and five years, as measured by the S&P 500 and Lehman US Bond Index. In addition, farmland has lower risk. The returns on direct investment in farmland have historically been up to 60 per cent less volatile than stock returns, as measured by the S&P 500.

Agriculture fundamentals are strong. Demand for crops as food, feed and fuel will continue to keep the global supply/demand balance in the agriculture sector tight for the foreseeable future. In addition, farmland is a tangible, real asset with an intrinsic productive value tied to agricultural commodity prices. Over the long term, farmland is a less volatile way to participate in higher agricultural commodity prices.

Canadian farmland in particular is of high quality. The country is the world's third largest wheat exporter; its three western provinces alone have approximately 135 million acres of farmland and produce some 20 million tonnes of wheat a year. Its farmland is low cost, and Saskatchewan farmland in particular is an undervalued asset; at an average price of approximately CAD450 per acre, it is among the least expensive in the world. Prices in Alberta are almost three times higher at an average of some CAD1,200 an acre.

Finally, Canada has world class farming infrastructure. In contrast to emerging markets such as Argentina, Brazil and Russia, Canadian farmland is supported by first-world storage, processing and shipping facilities. Also unlike emerging markets, Canada lacks significant political risk. Farmland owners benefit from a transparent and enforceable land title system with no material risk of de jure or de facto expropriation.

PFW: How do you make investments for the fund?

SJ: We make freehold acquisitions of farmland in a diversified portfolio across western Canada.

PFW: What is your approach to managing risk?

SJ: Our core risk management technique is to focus on portfolio diversification by geography, soil type, crop and operator. Secondly, we construct large, contiguous land packages from smaller parcels to provide 5,000-acre 'efficient farming units' for renters. Efficient farming units are in greater demand and typically carry a rental and sale premium.

PFW: What opportunities are you currently looking at?

SJ: We have a 30,000-acre farmland pipeline across western Canada. Total acreage is targeted to exceed 60,000 acres by the 2010 growing season.

PFW: What differentiates you from other managers in your sector?

SJ: We have dedicated agriculture investment specialists as well as a well-developed agriculture field and operational team.

PFW: Do you have any plans for further product launches in the near future?

SJ: We are planning a listed Canadian agriculture fund not tied to direct land ownership.


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