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Farmland – On the Pulse of Capital

Touch the Soil News #451

The role of capital today is a double-edged sword. Yes, raising capital to launch an enterprise is important. After the enterprise is launched, it is cash flow that is the key. However, capital always seeks to take out more than it puts in. After extensive research, estimates are that in the U.S. there is about $95 trillion of capital seeking to feed off a $19 trillion dollar annual economy. This large volume of capital seeks to limit the largest contributor to a nation’s cash flows – cut wages, jobs and benefits. Payroll slips generate some 70 percent of a nation’s cash flows. So, anyone in business must be careful to not only have a plan to raise or earn capital, but a model that attracts cash flows.

In this news piece, we have another example of the almost limitless pools of capital out there that are available for investment, but not for free cash flow through pay slips.

Bonnefield is a Canadian investment company that pools investor funds to own and control farmland. Like other companies that are in the same business, they buy farmland from farmers wanting to retire or farmers needing cash from the equity of their land. The plan is to get an annual return to investors between 5% and 6% (plus overhead management costs). Ultimately, the investors will want out and the land will be sold in 10 years or so. Investors will then reap the gains on the increased value of farmland.

As a small investment company, Bonnefield has had no problems attracting investors with dollars that will actually fund the purchase of the farmland. Bonnefield hopes to make its money from management and administration fees.

Since the Great Depression of the 30's, 70 percent of farms have gone out of business due to low commodity prices and high input costs. Where then can the additional cost of investor management and returns come from?

Bonnefield recently announced that latest and its 4th round of raising capital netted $60 million from just one investor (perhaps a pension fund?). Similarly, over the past 5 years, every time Bonnefield needed more money to buy farms, investor’s lined up to invest. Bonnefield raised $32 million in round 1, $29 million in round 2, and $261 million in round three. Bonnefield leases all of the farmland it buys back to farmers.

So, for the consumer, investment capital flowing into farmland can mean higher costs for food and farmers struggling harder to pay for labor – that will ultimately buy food.

Following is a short video done by one of Bonnefield’s competitors extolling the virtues of owning farmland as an investment. Note the focus on industrial agriculture:

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