Selling Farmland for Future Good

Demand for farmland is skyrocketing - as it is for positive ecological outcomes. Values are starting to reconcile between short-term profits, and long-term environmental goods & services.

Good professional support to aid in family farm transition planning is hard to find, and even harder to execute on. When farmers don’t have children interested in taking over, finding the right buyer becomes a paramount first hurdle.

Farm succession planning, in practice, looks like comprehensive tax and cash flow management strategies for liquidating assets, to enable the owners to retire. If the new owner is a young farmer, a period of mentoring and slower asset/cash transfers are usually worked in to the plan.

When values and long-term farming goals are aligned, the expectations are set out clearly, and the terms are acceptable to all parties, these types of succession plans can go well. But it’s rare everywhere in modern agriculture for retiring-age farm owners to find keen young farm operators with the ability to finance and manage the transition in.

Enter: Farmland Investment Funds

Thus, many retiring farmers sell to investment funds, with cash to make asset transfers happen much quicker, and at higher values. In general, farmland investment funds favor pre-determined, tried-and-true extractive production methods that lead to the highest short-term operating margins… and environmental harm.

There are signs that the traditional paradigm of investment structures is shifting. Two new examples of regeneratively-focused models for deploying capital have come to our attention recently.

Fractal

Fractal, in partnership with the Nature Conservancy, launched in the U.S. in 2022 to take minority investments in farmland and to help farms grow. Fractal offers investors a share in the land’s long-term appreciation, and takes a percentage of the value in annual rent.

One of Fractal’s goals is to use remote sensing and tech-enabled soil health intelligence to more accurately value land assets as its functionality and resiliency improves. To this end, their capital cost structure rewards farmers over time for adopting better practices.

First, they select farm partners who have already implemented one or two beneficial soil health strategies, such as a diverse crop rotation and no-till. Then they will discount the cost of financing in subsequent years as additional tactics are deployed on the land, like intercropping and rotational grazing.

Climate Farmers

Climate Farmers is a European business that has recently attracted a novel private equity investment that supports its mission towards large-scale transition to regenerative agriculture. In structuring a steward-ownership entity to manage a subordinated loan, this equity investment in Climate Farmers did not put at risk any capital or assets, and safeguards the company’s independence.

According to Purpose, “Steward-ownership ensures that companies prioritize their long-term purpose over short-term profits – by legally enshrining two principles: self-determination and purpose orientation… Self-determination (ensures that) power over the company cannot be speculated with but is held by people directly connected to the company’s operation and mission: stewards, not absentee owners.”

In Contrast…

There is a farmland investment fund based in Toronto that has been buying up land in western Canada for the past few years. This firm is relatively more involved in production decisions compared to other Canadian farmland investment funds… with mixed results.

For example, a farmland investment drive in the community of Oak Lake, Manitoba, has driven up prices preventing most local farms from acquiring the new land that has come to market in recent years. The firm has been converting some of these fields from pasture, native grasslands and marsh into high-input monocrop fields, because this is the quickest and easiest way today to maximize the return on investment (ROI).

To describe the local community as ‘concerned’ would be an understatement. Once the newly-acquired fields have produced a crop or two and are ‘prepared’, the firm plans to produce potatoes under new pivot irrigation, according to permit applications said to have been submitted for access to nearby Oak Lake.

Community members and neighboring farmers do not believe that the lake can support irrigation of potatoes on the scale of farmland that the firm has acquired. Oak Lake also enjoys a small local tourism industry that could suffer.

Resentment is growing, often between generations. Younger farmers and recreationalists typically want to see more conservation and grazing in the area, and older farmers wish to take the highest offer on their land as part of transitioning into retirement.

Who’s Accountable?

While there’s certainly hope that investors restructure in ways that empower local communities and reward environmental stewardship, it’s not happening extensively yet. Thankfully, there are other stakeholders with a say in how projects like this are managed going forward.

Government. In order to purchase this land and become involved in farming it, the investors would have been granted an exception for a corporation to own farmland from the Manitoba Farmland Industry Board. The terms of reference of bodies like this are somewhat outdated, but where exemptions are granted to corporations based on environmental claims, it is reasonable to ask for follow-up monitoring of outcomes.

Food brands. Today’s buyers of the canola, wheat and soybeans first produced on these virgin fields can easily hide the origin story. Once it’s in potatoes, companies with commitments like McCain’s would be well-advised to source elsewhere. There are already demands building for companies to produce multiple years of crop history in order to access some markets.

Private investors. The managers who make decisions for pension funds, which are said to be substantial investors in Canadian farmland, should already be well into a process of tracking and reporting on ESG metrics. It also stands to reason that some high-net worth individuals in this fund would appreciate knowing the true social and environmental impact that their capital investment is having.