Agcapita 2011 Full Year Update to Investors
We are pleased to report to you on Agcapita’s progress over 2011 and to give you some background on the trends we are
witnessing in the Canadian farmland market. We are also pleased to announce that Agcapita Farmland Fund III has been
opened to investors. Agcapita Farmland Fund III is a $20 million, RRSP eligible offering. Farmland has been demonstrating
its unique features as an asset class since the financial crisis with solid absolute returns coupled with low volatility.
Investment Update:
Our investment premise remains unchanged. Western Canadian farmland provides:
lower volatility of returns linkage to emerging market growth
lower correlations to traditional asset classes reliable cash-flow generation
superior risk adjusted returns minimal counter-party risk
margin of safety
Taking each of these characteristics in turn:
Volatility: Correlation:
Farmland prices exhibit low volatility in general and Farmland has a low correlation to traditional retail
in particular when compared to listed equities. investments – public equities, bonds and commercial
Canadian farmland prices have experienced real estate. Most traditional retail investments
approximately 1/4 the volatility of the S&P 500 are exhibiting high positive cross correlations so it
over the last 20 years. is very difficult for investors to construct diversified
portfolios. For real diversification, allocations
to non-traditional and uncorrelated sectors like
Absolute Returns: farmland may make sense.
Farmland has typically generated higher absolute
returns than listed equities over most measurement Emerging Market Growth:
periods.
As emerging markets develop, the consumption
of energy and agriculture commodities increases
Risk Adjusted Returns: rapidly. However, it can be difficult to make
direct investments into emerging markets. Direct
Investors in the public markets are being asked to investments into farmland in developed nations
accept nominal returns below 6% over long periods provide linkage to emerging market growth in
but with increasingly high price volatility. Meanwhile, agricultural commodity demand but without political
farmland generates higher absolute returns but risk, opaque accounting, dubious legal systems –
with lower price volatility. The result is that farmland etc.
consistently generates superior risk adjusted returns
over public equities – often by a substantial margin.
1
Cash-flow: Margin of Safety:
By cash renting (i.e. leasing the land to farmers for Saskatchewan farmland trades at a demonstrable
100% upfront cash payment) an investor in farmland discount to global averages which we believe
can look forward to reliable cash-flow (in the order of provides a critical margin of safety. Recent
5-7% gross pa) without operational risk. Saskatchewan price increases seem to bear out the
existence of this “margin of safety”:
AB farmland returns (2007 to present, ex rents)
Counterparty Risk: - 6.4% per year
SK farmland returns (2007 to present, ex rents)
Recent events have shown that investors cannot - 11.4% per year
afford to be complacent about counterparties.
It is increasingly apparent that many financial
intermediaries (banks, brokerage firms, etc) only
appear to be well capitalized and solvent. In
contrast, a portfolio of farmland that is cash rented
with substantial up-front cash payments has minimal
counter-party risk.
Valuation Update:
Agcapita carries all its land on its financial statements at book value (i.e. its cost to acquire it) as currently required by
Canadian accounting rules. Here is some data from Farm Credit Canada about how the market has been doing generally.
Average farmland prices in Saskatchewan:
}
2007 – values increased 11%
2008 – values increased 15% Chart 1: AB vs SK Farmland Prices (1970 to present)
11%
2009 – values increased 7%
CAGR AB SK
2010 – values increased 6%
2011 – value increased 12% in first half of year
1200
On average Saskatchewan farmland has increased in value 1000
approximately 11% per year since 2007. It is closing the
gap with Alberta prices, but the differential between Alberta 800
and Saskatchewan is still quite large, as can be seen in 600
Chart 1.
400
The price trend being seen in western Canada speaks to
200
two critical characteristics of farmland – consistent long-
term appreciation coupled with low volatility (assuming 0
the investment uses limited or no debt financing, as 1970 1980 1990 2000 2010
such financing increases risk). Agcapita has avoided
the extensive use of debt – our portfolios currently
have modest amounts of (or no) leverage. Beyond limited levels, leverage may sometimes enhance returns but it almost
universally increases risk.
2
Operational Update:
Agcapita’s business model remains unchanged – we do not take farming operational risk (i.e. we do not operate farms).
We operate on a cash rental basis and most of our leases
require 100% upfront payment each year. Our investment
model assists in protecting you from the volatility of farming Chart 2: Sample Agcapita Land Holdings
operational returns. Across our funds we are currently
generating over 6% gross rental rates in addition to the
appreciation in the farmland itself.
Agcapita remains the only RRSP eligible farmland fund
in Canada and as of December 2011 we have a portfolio
of 34,000 acres and growing. Our land holdings are
geographically dispersed across Saskatchewan to hedge
weather and crop risk as can be seen in Chart 2.
Summary:
Our belief that the prairie price discount and increased
demand for “food, feed and fuel” will exert additional
upward pressure on regional farmland values over the next
decade remains unchanged. Farmland in Saskatchewan
continues to trade at a substantial discount to similar
farmland in neighboring Alberta on a productivity
normalized basis – i.e. price per bushel of productive capacity.
When we launched our first fund over four years ago we predicted that all prairie farmland would increase in value as
commodity prices increased, but Saskatchewan would increase more rapidly because of its unjustified discount to similar
land in Alberta and Manitoba. We are pleased to report farmland across the prairies has been increasing in price and
Saskatchewan has been increasing the fastest – more than 50% faster than either of its prairie neighbors. We believe
that farmland is a superior long-term investment – one of the few, genuine “buy and hold” assets that investors can add
to their portfolios. We continue to work as good stewards of your investments and look forward to a prosperous and long
relationship with each of you.
3
Contact Information:
Corporate Address:
#205, 120 Country Hills Landing NW
Calgary, Alberta T3K 5P3
www.agcapita.com
Tel: 1.587.887.1541
Important Legal Information – Disclaimer: The information which is contained in this document is presented for informational
purposes only and certain of the information contained herein is based on or derived from information generally available to the
public from sources that we believe to be reliable. Although AGCAPITA has used care and diligence in sourcing and compiling
this information, no representation is made, nor any responsibility assumed, in respect tot he accuracy, completeness or
correctness of such third party information. This document is not intended and is not to be construed as an offer to sell, or a
solicitation to buy, any securities including those of the Agcapita farmland funds or their affiliates (AGCAPITA), nor a solicitation
to buy, any securities including those of the Agcapita farmland funds of their affiliates (AGCAPITA), nor shall such information
be considered as investment advice or as a recommendation to enter into any transaction. There shall not be any sale of
AGCAPITA securities outside of Canada or in any province of Canada in which such offer, solicitation or sale would be unlawful,
and any such sale may only be made to prospective investors who meet certain eligibility criteria and who first receive any
applicable offering documentation.
AGCAPITA securities have not been, and will not be, registered under the United States Securities Act of 1933, as amended
(the “US Securities Act”) or the securities laws of any state, and may not be offered, sold or delivered within the United States
or to, or for the account or benefit of, US persons (as defined by Regulation S under the US Securities Act). This document is
not for distribution on U.S. wire services or dissemination in the United States.
FORWARD-LOOKING INFORMATION: This document may contain certain information that is forward looking and, by its nature,
such forward-looking information is subject to important risks and uncertainties. The words “anticipate”, “expect”, “may”,
“should”, “estimate”, “project”, “outlook”, “forecast” or other similar words are used to identify such forward looking information.
Those forward-looking statements herein made by AGCAPITA, if any, are given as of January 10, 2012 and reflect AGCAPITA’s
beliefs and assumptions based on information available at time (including, without limitation, that (i) the demand for agricultural
commodities will continue to grow at a pace that is unlikely to be matched by growth in agricultural productivity, and (ii) investment
demand for tangible assets such as agricultural commodities and farmland will continue to increase for the foreseeable future).
Actual results or events may differ from those anticipated or predicted in these forward-looking statements, and the differences
may be material. Factors which could cause actual results or events to differ materially from current expectations include, among
other things: risks associated with the ownership and operation of farmland, including fluctuations in interest rates, rental rates
and vacancy rates; general economic conditions; local real estate markets; supply and demand for farmland; competition for
available farmland; weather; crop diseases; the price of grain and other agricultural commodities; changes in legislation and
the regulatory environment; and international trade and global political conditions. Readers are cautioned not to place undue
reliance on any forward-looking information contained in this document. Although it is believed that the expectations conveyed
by any forward-looking information contained herein are reasonable based on information available at the date such statements
were made, no assurance can be given as to future results or events and so AGCAPITA undertakes no obligation to update
publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise.
4