Farmland called hedge against stagflation


Canadian farmland has shot up in value, but a long-time investor thinks it is still undervalued.

As well, the post-pandemic economy might make it seem more attractive than ever.

“If we see stagflation, then farmland will be one of the better performing investments you can be in,” said Stephen Johnston, who operates Veripath Partners from Calgary.

Johnston isn’t certain stagflation is coming, but the recent deluge of government spending during the pandemic has created much excess money in the economy, and if that is combined with weak economic growth, stagflation could occur.

That was the situation in the 1970s, when a combination of weak economic growth and surging commodity prices left millions of people relatively poorer. One of the prices that surged was farmland, which soared in value during the decade.

Farmland’s value is primarily based upon its ability to produce crops, which are mostly immune to the effects of inflation. In inflationary times, crop prices tend to rise, reflecting their value as a store of value when currencies are weakening.

Johnston has created open-ended investment funds that buy Canadian farmland. He has been operating closed funds, ones with finite sizes and lifetimes, for 14 years, but has only recently begun operating an open-ended form, which allows investors to enter and leave more easily, and is not designed to be wound up at a predetermined date.

“That’s extremely rare in the farmland space,” said Johnston, who once worked in London and was involved in investing in the former Soviet Union.

The open-ended fund has about 75,000 acres of Canadian farmland.

The main interest he’s seeing from investors is for inflation-resistant assets. For decades inflation has been falling, but many speculate that era might end with the combination of economic growth following the pandemic and large amounts of government money being sent to citizens during the crisis.

The surging supply of money could lead to increasing prices for many goods with limited supplies, including commodities.

“Most investors haven’t really structured portfolios in the past two decades to hedge inflation,” said Johnston.

Investing in Canadian farmland can be challenging. Manitoba and Saskatchewan have restrictions on non-Canadians, while others don’t. That’s led Johnston to divide investment pools into one for Canadians only and one open to others.

The farmland is rented to farmers.

Johnston said he recognizes that some farmers believe rising prices of farmland in recent years are due to outside investors like him competing for the same acres, but he said there has been far too little outside money to make much of an impact.

“It’s just not true. We’re not driving up prices. We’re a tiny, tiny part of the market,” said Johnston.

“Prices are going up because when you look at Canadian farmland through the lens of productivity-adjusted price, like how much are you paying for a tonne of productive capacity, prairie farmland is deeply discounted to the world average. That’s been driving up prices.”

Regardless of how the world economy develops, Johnston expects to see more interest in farmland investing. But if stagflation occurs, “it’ll accelerate that process.”

However, he doesn’t think outside investment money will come to dominate the farmland market any time soon.

“My expectation is that even a decade from now, this will still overwhelmingly be a farmer-to-farmer market,” said Johnston.

“It’s still a very, very new asset class.”