Two summers ago, I visited Regina, the capital of Saskatchewan. I’ve been writing about investing in farmland there since 2008. I showed readers how to invest in Assiniboia’s farmland partnership. The price was about $26 per unit. Today, it’s about $58 per unit – plus investors have received $2.66 per unit in distributions. All-in, that’s a 140% total return.
This new idea could be even better…
In fact, a friend of mine and reader — a teacher — invested in the new company in November. It looks like he will about double his money before the summer. This new company will be public soon. It could generate returns of 20–40% annually for its investors, with fat 50% cash flow margins. And it has a lot of room to grow.
Brad Farquhar is the co-founder of Assiniboia Capital. He is our man in Saskatchewan [you may remember my two-part write-up from last year, "A Breadbasket's Great Comeback" and "How to Double Your Money on Cropland."] When I visited Regina, Brad drove me around and showed me several farms and I got a feel for what it’s like there and what makes it all work.
At the time, Brad’s firm was in the second year of running a partnership created to invest in canola farming. The idea was to supply farmers with their “inputs” like fertilizer and whatever else in return for a set percentage of the crops. That all ended in 2012, when Brad and his business partner Doug Emsley had an even better idea.
In November, they launched Input Capital Corp. [Editor's note: this company now trades on the Toronto Venture Exchange under the ticker "INP"] It would provide financing to canola farmers in exchange for a fixed tonnage (not percentage) of that farmer’s canola crop. You may recognize this as a streaming deal.
The most famous streaming companies are those related to mining. Silver Wheaton, Franco-Nevada and Royal Gold are three of the largest such companies. They don’t do any mining themselves. Someone else owns the mine and runs it. The streaming companies usually get a percentage of the gold and silver that comes out of the mines they’ve invested in at some fixed price. Input Capital is similar.
So say there is a farmer that wants to expand. Annual inputs for fertilizers and the like can set them back $200 per acre. For a 4,000-acre farm, that’s $800,000 right there. Equipment could be another $1.3 million for this farm. The farmer doesn’t have that kind of money. Enter Input Capital. It can give the farmer an upfront payment for these things in exchange for a crop interest.
It works for the farmer on many levels. One, the upfront payment allows him to save by buying his fertilizer off peak season. This alone can bring a savings of $25–30 per acre, cutting fertilizer costs by 20–25%. Second, the money also allows the farmer to improve the productivity of his farm by purchasing precision equipment he wouldn’t be able to afford otherwise. Input Capital targets a 50% increase in average yield. So he gets a lot more out of his land. These are just a couple material advantages.
It works for Input Capital too because Input sets its fixed tonnage at a level where it will make an attractive return. Input gets a set tonnage and makes money depending on the pricing of the canola. Input uses crop insurance to cover its downside. Currently, canola trades for over $600 per tonne. Input would make 20% annual returns at just $500 per tonne. Even at $450 per tonne, Input’s rate of return on its investment would be over 15%.
Streaming companies are great businesses. They generate lots of cash with low amounts of capital and do so with less risk than the underlying businesses they invest in. Thus, the stock market values such firms highly.
Each of the big streaming companies I mentioned earlier is worth billions. They trade for 18 times 2013 cash flow guesses. Input Capital is set up along the same lines… except it is much earlier in the development curve. In 2012, the company raised $25 million to start.
Today, Input has eight streaming agreements in place at an average investment of $1.75 million. (The agreements are for six-year terms.) The company is now looking to raise $100 million through a private placement. The aim is to go public. Once that happens, anybody can buy it. [Editor's Note: more on that below!]
Input also has a long runway. Canada is the largest canola exporter in the world. It made up 72% of the export market last year. Most of it wound up in China and Japan. Over the last five years, exports to China and Japan have grown at 333% and 21% clips, respectively.
There are over 20 million seeded acres in Western Canada devoted to canola. That’s over 52,000 farmers. Brad estimates that Input’s addressable market is about 20,000 farms. Input needs only about 75 of them to sign streaming agreements to put that $100 million to work.
I love this idea. You are investing with proven owner-operators who know the market. And the upside is tremendous. Even at half the valuation of the public streaming companies — and assuming Input invests the $100 million it is raising now — Input Capital could be worth $200 million.
Once public, it could be one to sock away in the old coffee can and forget about.
July 25th Editor’s Update: I wanted to write you and let you know that Input Capital began trading this week. The ticker is INP and it trades on the Toronto Venture Exchange. As I write, the price is around C$1.60 per share.
That analysis above still stands. I believe the stock is both a compelling value and a long-term growth story on an innovative business model applied to agriculture. It is truly unique.
I’ll give you the same guidance I gave my paid-up readers, in case you decide to pursue the idea on your own: Use a limit order as the stock is not very liquid. I would aim to pay somewhere as close to C$1.60 per share as possible, and I would not pay more than C$2 per share, at least at the outset.
Also, start small and look to add to your position over time. The model, as compelling as it is, has not yet proven itself as a public company.
Chris MayerOriginal article posted on Daily Resource Hunter
The short-term (1-3 year) outlook for agricultural commodities is bullish enough. When you start looking out decades, the picture becomes one of an epic bull market.Feast on the following highlights from an August report by the United Nations Food and Agriculture Organization, working with the Organization for Economic Cooperation and Development…World population will grow 2.3 […]
Chris Mayer is managing editor of the Capital and Crisis and Mayer's Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012, Chris released his newest book World Right Side Up: Investing Across Six Continents.
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