Indisputably, a slowdown of sorts now unspools across the markets of the world. But you’d never know it looking at Saskatchewan. What follows is another look at the great boom taking place here and a couple of ways to participate. There are more wrinkles to explore in what is shaping up to be a robust investment idea.
To begin, let’s add a bit of color to this unique story. As far as natural resources go, Fortune has smiled broadly on this land between the 49th and 60th parallels. It is the world’s largest producer of uranium and potash. The former is a critical component in the “nuclear renaissance.” The latter is a key fertilizer that sells for $1,000 per ton, compared with only $300 per ton a year ago. Saskatchewan is the world’s largest exporter of chick peas and lentils. And it is also rich in oil and gas. The U.S., in fact, buys more oil from its northern neighbor than it does from Kuwait.
The riches so far earned stagger the mind. At a time when governments everywhere face gaping budget shortfalls, Saskatchewan is awash in cash. On a budget of only $9.4 billion, the province reports a surplus of $3.1 billion. Of this, some will go toward highway repairs, better hospitals and improved schools. Not needing so much money, the government announced its largest cut in personal income taxes in its history.
It also paid off 40% of its provincial debt. Prudently, the government also decided to sit on a $2 billion cash cushion, just in case.
Many of these notes come courtesy of Brad Farquhar, vice president of Agriculture Development Corp. Hailing from Regina, the capital of the province, Farquhar has a front-row seat. “My house has about tripled in value in the last five years,” he says by way of illustrating the relative immunity of the province to the global ills that chill other markets. No housing bust here. In fact, values are rising for nearly everything, including farmland, which is Farquhar’s metier as an investor. His firm invests in farmland through its investor-owned funds.
Farmland stands to benefit from trends that you are now well familiar with if you’ve been reading this letter for any length of time. Some of the most important points bulls will commit to memory are these:
• World wheat consumption has exceeded production in six out of the past eight years
• World wheat stocks are at a 30-year low.
Greater prosperity in China and India lead to shifting diets consisting of more protein - eggs and meat. As reported in Farquhar’s farmland prospectus, to produce 1 pound of meat requires 10 pounds of grain: “Therefore, the dietary shift from grains to meat significantly increases the demand for grains.”
By tradition, China has usually produced and exported large amounts of grain. That is no longer the case. Rapid urban expansion and “desertification” of existing arable lands, along with water shortages, have all led to lower levels of supply. The same is happening in India.
The global urge to produce more biofuel also creates competition for a smaller base of farmland acreage. More acreage devoted to corn for ethanol, for example, means less devoted to soybeans or other crops used for food for people or livestock.
Saskatchewan is in a particularly good spot to gain from these broad trends. Almost half of all the farmland in Canada is found in its golden prairies. Wheat, canola and barley represent three-quarters of the crop acres in the province.
Even the icy-cold fingers of the credit crisis seem stunted here. Canada’s big agricultural lender is backed by the state. Farmers still have access to credit to plan for a big harvest next year.
The primary attraction of Saskatchewan farmland is cheapness. On that front, Farquhar offers the following jigsaw puzzle look at farmland prices in the region. Saskatchewan is the cheapest of the lot, at $405 per acre.
Shortsighted government policy was the main villain. From 1974-2003, you had to be a resident to own farmland. (”During this period, Saskatchewan was also a net exporter of people,” Farquhar’s prospectus points out. “It was a province whose population was in decline.”) Doing away with these restrictive ownership requirements in 2003 unlocked some of the value already. Annual declines in farmland values immediately began to reverse.
Saskatchewan farmland has a lot of ground to make up, though. Only 22 years ago, farmland here was more valuable than in neighboring Manitoba. But today, Manitoba’s farmland is more than 50% higher than Saskatchewan’s, at $668 an acre. The discount is attracting ranchers and grain farmers from neighboring Alberta, as well as immigrants from abroad. The government of Saskatchewan actually has a fast-track program in place to assist immigrants looking to farm in the province.
Statistics compiled by the Canadian government show that the average farmer in Saskatchewan is 52 years old. That leads Farquhar’s team to conclude in its prospectus: “The aging farming population in Saskatchewan has created a buying opportunity that [we] believe may not return for another generation.”
The next generation is less interested in farmland. The older generation will, in many cases, have to sell to folks beyond kith and kin.
For all of these specific reasons - and for the broader global trends affecting the grain markets - I expect that gap between Saskatchewan’s farmland and that of its neighbors to close quickly. Farmland values rose 11% last year in what I think are still the early stages of a multiyear boom.
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