Irrigation & Water Rights – How They Sell Feat. Bruce Warkentin
The Farmland Exchange, the official podcast of CLHbid.com. Expert insights on buying and selling farmland in Western Canada. Welcome back to the Farmland Exchange, the official podcast of CLHbid.com, where we provide expert insights into the process of buying and selling farmland here in Western Canada. I'm Devon Davidson, your host and digital media strategist for CLHbid.com. And today we've got an exciting topic. We're going to be talking about irrigation and water rights and how they sell. And to help me with that conversation today, we've got with us Roy Carter, CEO of CLHbid.com. Roy, thanks for being here. Thanks, Devon. And also special guest, Bruce Workington, National Leader of Horticulture and Irrigation at MNP. Bruce, thank you so much for being here. Great to be here, Devon.
Bruce Warkentin:I understand it's your first podcast interview. Yes, it is. I'm a longtime listener, first time on the podcast, so I'm excited to help you out here with uh exciting topic here. Love it. I'm really glad we could be your uh your first shot of podcast.
Roy Carter:Totally. Thanks for making the trip, Bruce.
Devon Davidson:Yeah, really appreciate it. Um I guess maybe let's just start a bit about yourself, maybe provide a bit of background, who you are, what you do, and and uh kind of your authority on the on the topic.
Bruce Warkentin:Well, one of the reasons why I'm here is there's been a lot of talk about productivity in Canada and how it's been lagging. And I believe irrigation plays a pivotal role in increasing our productivity in in agriculture. And part of this is because when I was growing up in a little town called Vauxhall, about a thousand people, um, I looked around and there were lush green fields of potatoes and sugar beets grown there, when a town not that far away called uh uh Retlaw was was still dry, just dryland farming in that area. Right. So originally, as I understand the history of the area, Retlaw was supposed to be the center, but it they changed their mind and it was Vauxhall. So you see the contrast between how irrigation has brought a significant uh influx of activity, water to that area, because as you know, Southern Alberta doesn't get a lot of regular water or precipitation. So growing up, it was uh my grandfather that immigrated here in in around the 1930s, and he was an irrigation farmer, and he was sure he grew sugar beets for many, many years. I helped him out on his farm. It's it's something that's near and dear to my heart, being part of irrigation and seeing how it has changed communities and how it can change different uh how farmers grow their crops. And I just had a passion for it. And as both of you know, farming sometimes uh legacy isn't about the farming, it's about the people who uh work with farmers, whether it be advisors, whether it be lawyers and accountants and bankers and all that, together we collaborate into making our industry better and to increase the productivity of our land. And that's kind of why I'm here. I'm excited to be part of this conversation and to provide a little bit of background. My background came circumvent through Calgary. I was doing finance stuff in Calgary. I got my CA, got my CBV uh valuation, a bit of finance uh work I did there. And that background gives me a little bit of different perspective than a lot of accountants in the area because I prov I bring a different uh point of view. So when my clients come to me and say, you know, what do you think about irrigation and how it's how what we need to do to make it better or more productive, I can provide that more uh business type of perspective to them. So my passion is helping the industry grow, and I think there's significant opportunity uh to grow in Canada.
Devon Davidson:Absolutely. And I guess just for uh some background too, as to how you're connected to CLH, um, you had written some information on a on a water rights sale we had down in uh the Bo Island area or Taylor. That's right, yeah.
Bruce Warkentin:Uh water rights is a very interesting and and uh very specific uh topic for not a lot of area in Canada. And as national leader of irrigation and horticulture, I try to lead that conversation in our firm, which has offices across Canada. And understanding how water rights are bought and sold and taxed, and how we can expand our industry is critical. And working with advisors who know how these things are is is critical in the success of any farm.
Devon Davidson:Yeah. I I maybe just for the context of this conversation, too, we should dive into some of the differences between irrigated farmland and dry land, um, technical and risks associated with each.
Bruce Warkentin:So going back to early days of irrigation, um Captain John Palliser named the Palliser Triangle, which is a land formation which is mainly in southern Alberta, southern Saskatchewan, and southern Manitoba. It's an area he called uninhabitable. And he did that, he said that because the precipitation didn't come at a regular interval. It came in the spring and maybe in the fall, and it was it just ran over the land, and you didn't you couldn't really plan to grow crops because um they didn't the water didn't come at the right time. Right. So in the that history started uh over a hundred years ago, and the infrastructure involved in in irrigation has been uh been built being built since then. And it's been a collaboration between government, farmers, and all industry participants in a very collaborative approach to build uh an irrigation system. So I'm speaking specifically about Southern Alberta because Southern Alberta is a different type of uh organizational structure because we're structured in 13 irrigation districts, which is opposed to a private ownership of water rights in other areas. So, in in contrast, if you own uh your water rights privately, you take the water out of the river and you store it and you manage it. Whereas in an irrigation district, um they provide the conveyance and the irrigation system to get it to the edge of your land and then you get to use it. You have the pleasure of using it. So the costs associated with the private is a little bit more unknown, whereas the irrigation districts have a little bit more uh ability to predict what the costs are going to be from year to year, which I think is a big value add in in irrigation districts.
Devon Davidson:Yeah. And so how would you say that water rights and water infrastructure affects the value of irrigated land?
Bruce Warkentin:Now, when somebody's not familiar with irrigation land, they go and they look at, let's say, uh FCC land report or something like that, and they see this little um asterisk that says irrigation land in in Southern Alberta is growing for a significant amount of money more than other land. And there's there's uh two main reasons why. And coming from a valuation background, uh anything to devalue anything, you need to have cash flow and a required rate of return. And it's a mathematical calculation. You take the cash flow, you divide it by the required rate of return, and you get the value. So to drive the value of irrigation land to where it is, the cash flow from the land needs to be a lot higher, which is driven by different crops that are grown, different agronomy practices, uh different customers, and different processing, different ancillary industries that have been developed. So you see there's a significant amount of more cash being created per acre on an irrigated piece of land. But I think one of the things that most people don't understand is the other part of that, in that irrigation provides the risk is a lot lower in your cash flow. So you have a drought in other areas, your cash flow is a lot lower. Whereas irrigation, we have the ability to manage where where water is stored and applied, you have a lot less volatility. So when you have lost less volatility, banks are happier. Banks can lend more money, which means it's usually cheaper than equity. They'll their risk premiums on their debt of irrigated farmer is lower because they're more likely to get paid back. And also there's a lot more equity participants in the market. So you'll see pension funds, you'll see financial players participating in the market. And when you have more people in the market, you have a lower expected rate of return on equity. So all those things combined result in a lot higher value for irrigated land.
Devon Davidson:Okay, so definitely higher value. Um, but with that, probably higher cost too, right? Associated with the infrastructure. Maybe talk a little bit about the you know, how that's unique to irrigated farmland.
Bruce Warkentin:So, irrigated farmland, if um you look at it, it's not the same as just taking um regular farmland crops and adding water. I think that we have to make sure there's a distinct uh difference between those two. Because if you just take wheat and oil seeds mix and add water, you'll get better yields, but you probably not get enough return to justify the investment because the investment is significant to build a reservoir. If you see the how the size of the reservoirs the Bassano Dam has created and upstream, those are not million-dollar projects, those are billion-dollar projects. So to justify the the the added cost, there needs to be um more uh upside to uh to having the irrigation land for sure.
Devon Davidson:Okay.
Roy Carter:I think uh talking about inputs there and obviously Bruce's background on a CBV business and that is where a lot of that value comes there with clients. What I hear with dryland people, they're because of the risk, they're not willing to put the full inputs uh to maximize the highest yield because they just don't know if they're gonna get the rain. So some of them will try and do, you know, top dressing and nitrogen and basically increase the inputs during the growing season, having a regard to where the crop's at. But obviously, a lot of Bruce's clients where they can turn on uh water with their iPhone, they could they don't have to uh get into that input scenario where do I spend it or not? They know they can get the input returned. Does that make sense, Bruce?
Bruce Warkentin:Exactly. And it's about getting it's that last acre that you need to get productivity from. So if you're familiar with irrigation pivots, you can't do the entire the square of 160 acres. You can do 130, 135, maybe a maybe a bit more with a corner arm. But it's that one or two extra acres that you're going to get the uh being productive, whether it's a low point in the field or or a part of the land that you need to have a little bit more TLC to, you that yields a significant change in your return on investment on that particular field because it costs so much to buy each acre. You need to make sure each acre is productive to its capacity. It's highest and best use, as we call it. Yeah. Okay.
Devon Davidson:Uh changing gears a little bit, where do you see growth opportunities in Western Canada for irrigated farmland? And what conditions favor that expansion?
Bruce Warkentin:So there's there's uh there's a few reports out there that I that I read. OmniGen's uh asset management put out a report recently saying that they forecasted that the there's a potential to increase irrigated land by 400% in Canada. And that's a significant amount. Of course, that is a a uh a hopeful goal, uh a realistic goal would be somewhere between what we have now and that number. Right. And there would be significant opportunity across the Palace or Triangle. And the reason I say the Palace Triangle and not all of Western Canada is because that area has the weakness of having not uh reliable moisture at the right time. It's coming in the spring and the fall more with more weather events. As you see, there's there's down south, there's floods and these things that are happening more often. And in order to capture that water, we need reservoir systems to do that. And once you have the water in the reservoir, you can manage it and put it on the land when you need it. And you can grow optimal crops at that point. So um having the ability to manage that water is critical in being able to grow irrigation. Um, maybe your question also is what are some of the reasons, the things that'll stop the development of irrigation? Yes. And some of it is the about education. And I'm a big firmer, firm believer in educating the public about about irrigating more water. You'll see news articles about there's drought and shortage of water, and why are we expanding acres? We're expanding acres in the south. And how why are we doing that? Now it comes back to technology. If you look at the history of our irrigation system, we went from flood irrigation. If you're with flood, it's it's you just have a shovel and you and you put a boundary here and the water goes on the field and then it flows down to the crops. And it wasn't very, it wasn't very consistent because at the top you get more at the bottom, it would pool and you'd have alkaline pieces and stuff like that. So we went from uh place where we were doing a lot of flood irrigation to if you remember those wheel move, we had those wheel moves uh where you get go every eight hours and you turn them and you there's still a few of those around. And we also had, I used to do hand move. They didn't have the wheels. You could you had to get out there and pick them up a hand and hook them up again, and and you do that every few hours. So it was a little bit more inefficient than currently we have pivots. And like Roy, you mentioned, um, all these farmers can hit their iPhone and put a half inch or a quarter inch or whatever it was required. Yeah, but the other thing is the history of pivots was that you just apply the same amount all across the field.
Devon Davidson:Right.
Bruce Warkentin:We have the technology now to apply it's sent, it can sense where the water is needed. The higher points need more, the lower points need less, and you're gonna get optimal growing uh experience in any piece of that land. So it's not a matter of just hitting the button and it starts to apply water. Right. It's sensing with artificial intelligence that technology is there, that that it can sense where the water is needed.
Devon Davidson:Do you see AI being a larger part of the technology associated with it moving forward? I you know, that's just a buzzword that everybody seems to talk about right now.
Bruce Warkentin:Well, I believe that as irrigators, we need to obtain the social license to expand in a sustainable and reasonable way. And not like we were talking about before, not just taking more water out of the river. Society thinks that by expanding, it just means more. Right. It doesn't mean more, it means the same and using it better. Right. And part of that is technology. And if you look at a low-flow irrigation pivot using artificial intelligence compared to flood irrigation, which is still used a lot around the world, and even these other forms of irrigation, they're significantly more efficient. And the what we call the turnout, the water that goes through the system and out back into the river is seen as inefficient. If we can use that more efficiently, we can expand our acres. And you'll see that over the last 20 or 30 or 40 years, a lot more acres are being irrigated with a similar amount of water. And they track this. I mean, each irrigation district has a self-governing board that uh decides in a sustainable way how much water they can use and how much is in the reservoir. And each farmer can uh use that amount to grow their crops. And it's a very sustainable model where they look at how much we can grow and by implementing things like pipelines. So instead of having in when I was a kid, they had these ditches. Well, they still have a few ditches, but they have ditches where you go swimming in. Unfortunately, they're all disappearing because they're all turning into pipelines, but it has no seepage, no evaporation, and all the water goes right from the main canal through the pipeline to the pivot and out the pivot onto the plants. Right. And how much waste is there?
Devon Davidson:Very little.
Bruce Warkentin:Very little waste.
Devon Davidson:Interesting.
Bruce Warkentin:Because even in California and other places, you have these open ditches and it's 45 degrees. How much are you losing to evaporation? Of course. So I believe that the irrigation districts and and and people who are irrigators know that there's only a certain certain amount of water we have. And with droughts and all, it's very important to use everything, every drop wisely in terms of using it to grow crops in our area.
Devon Davidson:Okay.
Roy Carter:What I f and what I found interesting is we uh got to know the area and just obviously don't know it nearly like Bruce does down there. But what I find quite quite amazing is the irrigation often is on uh, you know, can be four or five uh CLI soil. So it it can actually take soil that we would generally consider as sort of marginal. And CLH bid did sell for the province four or five years ago, some by Tabor, that was like a five soil and uh pretty hard to grow grain on. But you add water to it, and it's amazing what can happen. You don't need the the real high-end soils, the one or two that you might find at Bentley, Alberta, or someplace to really get these big crops. And it from what we hear, and I again Bruce knows way better than us, but you know, the potato guys in that almost like the lighter soil, sandier, and throw water to it, and it gives you all kinds of cropping options.
Bruce Warkentin:That's exactly right, Roy. And I go back to a few years ago when when there was this arbitrary reduction in inputs that the government put in. Our farmers don't want to put more than they need to. They put the optimal amount. And part of it is using agronomists, whether they have the knowledge in the farm themselves or they hire agronomists. Agronomy is key to growing these different crops, sugar beets, potatoes, uh, any manner of other types, especially crops. It's about raising the bar in how in how these farmers understand different cropping. And each crop has different, a lot of different ways of growing too, and storing, and it's just a different way of farming. It's not that, like I said before, take other crops and add water. It's about changing the aspect of what you're growing and building the infrastructure around it. And some of the ancillary uh industries that develop too. If you see, if you were down in Lethbridge area, you've got the feedlot industry, which is only there because we have a reliable source of feed. Forage is grown in our area and we have irrigation. So it can develop there because in a drought year, you know you're still going to get the forage to feed to the cattle. And you have the potato processors. There's a reason they're there because they have a reliable source of potatoes to process. And we'll go back to, I don't want to just focus just on southern Alberta, but in order to develop an irrigation area, it's a collaborative effort amongst more than just one farm. Because one farm applying water to just their land is great because it helps their yields, but creating the infrastructure to develop ancillary industries, secondary industries, that's how you get more value per acre.
Devon Davidson:That's interesting. I actually wanted to go back to your point about expansion. So you'd mentioned potentially 400% expansion over, I can't remember the time frame you mentioned, but um, what percentage of that would you say takes place in Saskatchewan? Because just being from Saskatoon, I hear about irrigated the irrigation projects, potential projects down south all the time. Um, but it, you know, where is that at? Where do you see that going?
Bruce Warkentin:So part of um I I follow the Saskatchewan projects quite closely over the years and and and they have had some stop and go kind of uh things that have happened along the way.
Devon Davidson:Yeah.
Bruce Warkentin:Um speaking uh proactively about it, I believe there's definitely an opportunity there because if you look at where potato growers are, they are in southern Alberta, they're in southern Manitoba, and there's not a whole lot in between there. Right. So the land is is similar. And and I'm speaking from an accounting business advisor, not an agronomist in all that. Sure. So there's other factors like infrastructure, like processing, like other things. But um the ability to use irrigation in a in a in a responsible and sustainable way, there's the opportunity there. The other thing to remember is we've had 120 years of history here. We've developed, like I said, from flood all the way to where we are now. What Saskatchewan has the ability to do right now, if they wanted to, and in other areas, other areas of Alberta and Manitoba, is use the technology we've developed or helped develop and start there. Wouldn't it be great to start at step eight instead of step one? Of course. Yeah. And um just the way uh the investments that's been made. And and there has some debate over whether the return on investments there and that sort of thing. And and I guess what I would say is, you mean we can math people can cut the numbers many different ways. Um, but at the end of the day, if Alberta's investing a lot into the infrastructure and of irrigation, there must be some upside to it.
Roy Carter:Yeah, for sure. Yeah, totally.
Devon Davidson:Okay, the next thing we want to talk about is taxation issues specific to irrigated farmland and purchase price allocations. So it, you know, if if someone purchases a parcel of land and it has water rights and it's got irrigation infrastructure and um all these types of things, how should the purchase price be allocated between those?
Bruce Warkentin:So one of the pitfalls I see a lot of time is that individuals who may or may not know irrigation that well, they allocate everything to land. Okay. So land, as we all know, is not deductible. It's a real property, it's a fixed asset, you don't, it doesn't deplete in value, it's going to be the same from now until forever. So, but there's stuff on there. There's there's things like uh irrigation equipment, like the pivot, like there's storage equipment, like potato storages, there's buildings, there's um pipelines, there's um standing crop, and and the last thing would be water rights. So, as a taxpayer, uh somebody who's buying farmland, you are obligated to do a proper purchase price allocation of what you bought, same with the seller. So, in this case, um justifying a high value for the depreciable assets as opposed to the real property provides something we call tax shield. A tax shield is something that helps a purchaser reduce the cost of that purchase because they can deduct it. So in this case, water rights. Before we wouldn't deduct anything for it, but now we have justification of what the value of these depreciable assets are, so they can go into a separate pool and actually become depreciable. And if you know farming, the name of the game is pushing your tax liability into the future. Now, I'm not an advocate to never pay tax. That's that's not I I believe there's a good reason to pay tax, and there's some good tax advisors out there that that you all are farmer clients should talk to. But if I can push this liability into my future life or into my kids' future life, the time value of money gets very powerful very quickly. Okay.
Devon Davidson:Uh what are some of the common pitfalls you've seen with purchase price allocation? Anything that listeners should be aware of?
Bruce Warkentin:So, like I said, uh Revenue Canada has an obligation for all taxpayers to do a reasonable effort. So, what's a reasonable effort is getting information on what these assets would buy and sell for. This is why I'm kind of excited about the CLH bid um selling those water rights recently. It provides support for an open and unrestricted market. Up until now, we there were water rights issued for four or five, four thousand. And that was what some people would consider an open, unrestricted market, but in my opinion, it would be more like a restricted market because there were only certain people who could buy it. This anybody could buy. It was open and unrestricted. So we saw, we you saw, you tested what people would actually pay for it. And that's exciting for me because then you can take the value of land and derive the value of everything else and come up with a reasonable allocation for all these depreciable assets, which, like I said, has a pretty powerful uh tax shield component because when you can deduct at 5% declining balance, it adds up at the prices we're paying.
Devon Davidson:Roy, do you want to expand on that at all? The the water rights sale?
Roy Carter:Um just for our listeners for context. Yeah, we were fortunate enough. We sold for uh two parties. Um the town of Tabor did an RFP requesting proposals to sell. Um Allie, uh my daughter, who's a lawyer in the office, did uh proposal. We were fortunate enough to get it. Um following that, I think I believe it was a boat for 170 acres. Following that, we had an individual farmer that saw it and approached us. And uh as a law firm, we have a duty to go to that first client first uh to avoid a conflict. But we saw economies of scale there of putting the two together, and should have probably called uh Bruce with his CBV, but we might have got a Bill. But uh he he probably would have saw the value there too. You know, I mean they were bid out separately, so people could, if you just needed 70 acres or 90, you could have bid on the one or 170. But having said that, they were both uh with our universal close. Uh I believe the average was over 15,000 an acre, and they came within pennies of each other, which to me shows the market works there too. Uh, one could uh, you know, the money could move from parcel A to parcel B, one or two and that. Uh it seems like it was a totally uh open market uh working. I I view it a bit, uh it's quite similar to uh a bit like quotas with supply management and these barns and that. You know, you got the barn, but you need to add the quota to it, just like water to the land. Right. And, you know, uh some of these quotas don't freely trade in either, they kind of have their own exchanges. But I suspect you might even see that going um into quotas, whether it be milk quotas and that type of deal, where the market sort of uh trades freely and determines the price and you get proper allocation for uh the asset.
Bruce Warkentin:Yeah, I totally agree, right? What I'm excited about related to this specific it shows that a uh town of tabor or somebody who has extra water rights. So as I said, with uh an acre of or a quarter of land, you might have some extra water rights that you don't aren't using. Well, they're not providing any benefit to the economy because they're just sitting there, you're not using them. Town of Tabor probably wasn't using them to their full highest and best use. So now the town of Tabor got the proceeds from these individuals. They're gonna reinvest it in infrastructure and build the economy, I would assume. That capital is being latent capital is being reinvested. And the individuals who bought the water rights are, well, they paid a lot of money for them. Are they gonna let them sit around and do nothing? They're gonna use them for their highest and best use. So this is where I love where a market develops because it can redistribute assets to the people who value them the most. So if somebody needs to have water rights to grow their crops, they're going to find somebody who isn't using them or needs to redeploy that capital. And this is the other exciting thing about somebody, it's not that this farm over here isn't growing and isn't being successful, but maybe they could use that capital to reinvest in something else, like technology, like drones, like all kinds of different types of things that the overall economy needs, but are we just sitting there not being used. Right. Going back to productivity, this is easy productivity gains where we can redeploy capital to higher and bet better use assets.
Roy Carter:Yeah, it was interesting. Afterwards, I talked to the buyer. He wasn't happy about the price, but he was happy he got it. And he felt comfortable with what he could do with it. And he also felt comfortable that he didn't overpay vis-a-vis the market. He knew he bought at the market. It was quite an interesting call with him that yeah, I thought I could get it cheaper than that, but it at least I, you know, I knew I was at the market. I was one click more than somebody else, right?
Devon Davidson:Right.
Roy Carter:And and obviously they're they're not gonna sit. Yeah, it was he's going to work to to pay them off.
Devon Davidson:Uh I just want to take a second too, for anyone that's maybe not familiar, can you maybe explain what water rights are legally or the definition of them and maybe how they they differ from other sorts of property rights?
Bruce Warkentin:Well, this is interesting. Speaking to a bunch, uh lawyer and a bunch of lawyers here. Um, I am not a legal uh junkie or anything, but but there in my opinion, not my opinion, but the way Alberta is structured is there's two types of water rights. There's like, is it the private ones, which you can get water right out of the watershed yourself, or there's the irrigation where you're buying water rights in in the irrigation district.
Devon Davidson:Right.
Bruce Warkentin:And the difference is the irrigation district determines how you use them. Right. But you can buy them, you know how much they cost because you buy them with the land usually, or there has been some expansion, you know what the costs are to buy them in the in this market that was created. It's a fixed cost. And at that point, once you have those water rights, you have the right to use that water from then on. And you pay a conveyance charge each year after that as well. But the The certainty of a the cost is where I think it improves our ability to grow because when certainty meets innovation, you have the ability to borrow money or uh get investors to be in because they don't want to see this. They want to see this. They would rather see a good, reasonable return for their money than to one year lose money and the next year make a lot of money. So volatility allows us to access capital, which allows us to increase productivity.
Devon Davidson:Okay. And how do they differ from land rights in terms of transferability or any of those sort of considerations?
Bruce Warkentin:Well, when you're buying inside an irrigation district, as long as you meet the requirements of the irrigation district. So of course you can't sell water rights from one irrigation district and have them in a different one because the they physically can't move the water from one to another. So there is some limitations around that. There's also, we've seen in the some of these drought years that the irrigation district, which is governed, self-governed by farmers themselves, they also sometimes have to limit their amount of inches that they get. So there are some limitations there too, not unlike if you had a private license where you're limited to what you can take out of the river or the lake or whatever as well. Okay.
Roy Carter:But they're they're not tied to the surface title like a mineral title, say. Okay. Water rights, uh as Bruce talked about, they're movable within that district subject to subject to certain conditions. Right.
Devon Davidson:And then from a taxation standpoint, how are they taxed? How do income and capital gains taxes apply to water rates?
Bruce Warkentin:So this is has gotten a lot more relevant to what we do because the values have gone up so much.
Devon Davidson:Right.
Bruce Warkentin:So not to get too technical, but it's a class 14.1, which is a depreciable asset at 5% declining balance, similar to what other people would, other farmers would buy uh tractors and that sort of thing would be different classes. It's treated exactly like that. So let's say you bought water rights for 15,000 and you deducted it over time, and then in the future you sold it for 13,000. Well, you would have wouldn't have we wouldn't have recapture or or you would have the ability to deduct the difference. But if you bought for 15,000, you sold for 17, there could be some capital gain. But the benefit of a growing farm who's buying water rights is that as you add more to the pool, it's less likely for it to go negative. And when it goes negative, then you start having recapture. So in most cases, as long as you can sell land and buy others and offset each, offset it, like kind of like replacement property. But um you can defer, like I said, defer tax as far to the future as you can with uh using class 14.1.
Devon Davidson:Do you want to just expand quickly on recapture just for illustration?
Bruce Warkentin:So I'll use my example again. You buy for 15,000, you deduct down to 13, but you sell for 15 again. You've deducted the difference to $2,000. So when you sell for 15, you have $2,000 of recapture. Okay. So so you can't have your deduction and your cake and eat it too. You got if once you have the deduction, you sell it, you have to have recapture it back.
Devon Davidson:Gotcha. Um, are there any risks associated with ownership of water rights, whether it's regulatory overusage?
Bruce Warkentin:So when you look at our system of water rights uh and our water management systems in Canada versus other places, and I and I listen to a lot of other places where drought is uh very much a problem, um, over subscription of water rights, overuse. Um, there's a lot of uh people arguing over who gets what and first use and all that kind of thing. Uh, I believe Canada's and Alberta's specifically water usage has been managed more responsibly. There's not as much being pulled out of the river as they're not oversubscribed like they are. And if you look at these self-governing bodies, they do a very good job of watching forecasts. They do, they look at the snowpack, they look at all this. And keep in mind that the water in Alberta is not from aquifers, it's not from groundwater. We're not well, we're not getting it from wells, we're not sucking it deeper and deeper into the into the ground, like some places around the world where eventually you suck down to the bottom and there's nothing left. This is surface water. So we know how much is coming over the mountains, we know how much is in the reservoirs, so we know how much we can use.
Devon Davidson:Right.
Bruce Warkentin:And so it's a matter of managing, okay, this is how much is in the reservoir, this is how much we can use this year. Sometimes we get a little bit more rain than other years, and that's kind of help keep more in the reservoir. But the key is that the system is sustainable because it's the water that comes uh surface water. Okay.
Devon Davidson:Uh I think you sort of alluded to it already, but do you want to talk about the potential benefits of having a market for water rights, just you know, capital investment and um optimizing?
Bruce Warkentin:So I think the the biggest benefit of having a market is to determine uh arm's length, uh, an open unrestricted price. And that helps redeploy capital in the marketplace. Because if I'm sitting there with 10 extra water rights, let's say, and I need to put a down payment on a tractor or something like that, and I'm not using them, and now I can sell them for 15,000 apiece if I just choose to do that, then I can redeploy that capital in something that will make me money, whereas this is just sitting idle. And that is the main thing is increasing productivity of everything and getting to the individuals and the farmers who are using it for the highest best use. Because eventually a market that develops moves the asset to the people who will use it the most. That's how price and supply and demand works. The second benefit is a taxation benefit in that you can justify a higher deduction using class 14.1. And uh Revenue Canada requires uh sufficient evidence to show what how things are what things are worth. It's not just putting your thumb up there and guessing, it's actually got some evidence what it's worth and it's legitimate, and it helps the tax shield helps farmers invest more of their money back in the farm. So I know there's this joke that uh farmers never pay tax, but they use that money to reinvest. It creates jobs, economic economic growth. So I believe that the way that uh taxation works for farmers, it helps the overall economy, helps agro processing, and the more money that gets reinvested, it just helps the economy grow. And those are the two main reasons why I think that a market that's developed helps um both buyer and seller, because it's it's just a way of redeploying uh uh capital. And like I said, I'm big on productivity gains and quick, not quick wins, but wins in my lifetime. I like to see uh progress, and and I've seen a lot of progress from when I was a kid to now, and I would love to see more.
Devon Davidson:One thing we want to talk about too here was is there a trend you're seeing where farmers are divesting themselves of poor land um and trying to purchase better land and optimizing margins? Roy, I think you had an example about uh a farmer out in Manitoba somewhere where he was trying to get rid of some poor land, and you talked about um potentially looking at some irrigation uh infrastructure. And uh you got a good memory.
Roy Carter:Yeah. Yeah, I had a call from a fellow last week and he was looking at selling one of what he called the more marginal quarter, which probably a lot of us would like to have, uh Southern Manitoba, nice stuff. But he was actually kind of what Bruce is talking about, looking to deploy that capital into building his own dam and then irrigating the balance. So just exactly what Bruce was talking about, reallocation of capital. Uh, he had a quarter that it wasn't uh able to irrigate and uh had some issues with salinity and that, thought he'd dispose of it, and then roughly his cost to build his dam, he was telling me was a million bucks, but he had the permits. And again, what Bruce talks about in Manitoba and Saskatchewan, you see more of that private uh stuff similar to northern Alberta, Lacrete, where you're starting to see some private permits going to the Peace River, uh lagoons and that type of deal.
Devon Davidson:Yeah.
Bruce Warkentin:Bruce, would you say is that is that a trend you're noticing as well? Yeah, in our in our area, there are farmers who sell and buy replacement property other areas and um redeploy what they've what they sell for. And it goes to how you maximize profit on each acre. So individuals who have higher margin crops are generally going to be the ones buying at the higher price. And then individuals who may or may not be growing similar crops may see opportunities elsewhere. So we see a trend from Southern Alberta to Saskatchewan or from Southern Alberta to central and northern Alberta. And uh just it's different, it's a different farming mentality. I had a client who said to me, and this goes back to the differences between irrigation and other areas, is I can grow a whole quarter of rhubarb, but who's gonna eat it? So it goes to the fact that we can grow lots of stuff, we have the ability to, but it also has to go hand in hand with creating a market for it, a customer that needs that what we're producing. And that's where you see kind of like Silicon Valley in Southern Alberta, where where a lot of different ideas and entrepreneurs and processors and and are coming together in one area. And that in it doesn't have to be southern Alberta, it could be Southern Saskatchewan, it could be other areas in Southern Manitoba, but it has to be this hub mentality where if you get uh colonies of scale, you get a lot of people on board, you're gonna get processors coming into the area because then they go, well, I can reliably source fresh peas or corn or or any manner of crop. Unless you can reliably source it, they're not gonna spend, I don't know, hundreds of millions of dollars building a processing facility. And that's how you get top dollar for your crop is is growing the crops and processing them locally and then selling them to customers.
Devon Davidson:Okay. Uh for farmers, they're looking at investing in their own private infrastructure. Are there tax considerations that they should be aware of or or risk associated with that?
Bruce Warkentin:I know you kind of talked about the cost certainty and things like that, but definitely it's it's it's there's a lot of money to invest in it. And I think it's a definitely a good investment. As if you run your numbers and you make sure, like I said, irrigation success is not crops plus water equals success. It's got to be different than that. You have to look at it differently. And you could get a return. I'm not saying it wouldn't help, but it needs to go hand in hand with changing how what crops you're growing in in what in secondary industries are developing in the area, like feedlots and and hybrid canola and and all these other process in processing plants. Yeah.
Devon Davidson:Um, are there any policies that would help make this easier, less risky to invest in infrastructure?
Bruce Warkentin:Interesting question, Devon. Um, last few years um we had this special policy where we could deduct $1.5 million of capital additions to spur on the economy because we went through a little bit of a hiccup there.
Devon Davidson:Yeah.
Bruce Warkentin:And that really, I saw, helped farmers invest in new technology, new tractors, new combines, new the new even pivots they could buy with this $1.5 million. And they really doubled down and they invested in it. That's coming to an end, or it has come to an end. So I think government could could change tax policy to encourage that type of thing. I'm a small government kind of a person. I would rather have them have the private industry invest than do grants and things like that, because I don't think that necessarily helps as much as providing the right incentive for private money to be invested. So changing tax rates and deductions provides some incentive to do that. There's also shred scientific research and development credits that are out there. I think it's an underused area in agriculture that probably should be more open to more farming activity. Um, and then of course, there's grants available too. You see a lot of different grants for developing water resources and stuff. Of course, I'm not going to say no if the grants are available, and everybody should uh talk to their advisor to make sure they're aware that these grants are there. And the grants aren't there just as handouts, because if you think about it, if uh the government's giving you money to change your pivot from an old one to a new one and there's less water being used more efficiently, then it's a win-win for everybody. Okay.
Devon Davidson:Uh if you're advising a farmer planning for the next five to ten years, what should they keep an eye on when it comes to irrigated land, water rights, taxation, land portfolio optimization, anything like that?
Bruce Warkentin:I'm really bullish or I'm really positive about how what irrigation can do in Canada. And I think that with changing in weather patterns, um changing how I listen to a lot of different podcasts and forecasters and things like that. And I everybody has said that in our area in western Canada, we're gonna see more precipitation in the in the shoulder seasons in the spring and in the fall, but not in the in the summer time in July and August when the crops are all growing. So what's perfect is irrigation then, because you store it when it's when you're getting it, and you can apply it when you need it. So I I believe that that there's a lot of upside potential still, a lot of tailwinds for for irrigation in in our area. And it's about developing more than just it's developing the the ideas and the the entrepreneurs that in the and the farmers that have the technological or technology, the ability to grow these different crops. Right. But also having the individuals who process those to come alongside. It's a collaborative effort to build an irrigation industry. What would you say are the biggest downside risks to the future of irrigation? Well, I think the the biggest downside is if we don't educate the public in terms of water usage. Okay. Because I believe that urban people have a different opinion of how we use water. And I believe it has more to do with um social media and maybe other countries, because I think a lot of people look at things that are happening in the States, things that are happening in between uh Texas and Mexico and things like that, and they attribute those those problems to our area. And then that's the truth to them. And I think it's a matter of the irrigation industry, all of us, advisors and farmers and everybody, saying, you know what? We we live here, we work here, we we want this to be successful. We're not mining this out of here. This is going to be sustainable from now on. And uh there is uh this mentality that we're just trying to get what we can for the short amount of time and then get out. It's not how it is. Uh irrigation farmers, just like other farmers, are there for the generations. They want their farms to pass down to the next generation. They want to do better, they want their land to be better than it was before. You see things like cover cropping, you see things like low, less more organic type of application, less chemical and fertilizer use. We're we're trying, the industry is trying to do things better. And I think that is teaching, teaching customers or people that are going to buy the the produce is critical because um they're the ones who, if there's nobody gonna buy the stuff, then there's nothing we can there's nothing to produce, right?
Devon Davidson:Yeah, yeah. Would you say there's any opportunities that are currently being underappreciated right now, whether that's new technology or investments in infrastructure?
Bruce Warkentin:I think when people look at farming, they they wrap it all in one bow and call it the same risk.
Devon Davidson:Right.
Bruce Warkentin:I think you need to understand when you talk about irrigation that there's a lot of risk mitigation with irrigation. And the risks associated with owning irrigated land are a lot lower because of the droughts, there's no drought anymore because you can apply water when you need to. Um, you do grow different crops, um, you have higher margins, you have a lot of the risks associated with farming in the in the with water or irrigation are mitigated significantly. And when you look at the price versus price elsewhere, a lot of people might look at it and go, well, how come? Why would I buy there versus somewhere else? But you get what you pay for. And I think a lot of people will be surprised how stable that has made a lot of uh cash flow in in the area. And that's has rippling effects to lower crop insurance premiums because I mean, with lower ups and downs, you have lower risk, lower interest rate cost because the bank knows that you know it's pretty stable. And there's a lot of ability to pay higher dollars because you have a lot less risk.
Devon Davidson:Okay. Uh last question here sort of what gives you optimism or concern for the future of irrigation and high-quality land utilization in Canada?
Bruce Warkentin:Well, I don't really have too many concerns. Um, I'm pretty optimistic. I think it comes down to really four main things. And um one of the first one is attracting entrepreneurs. There's a lot of um talk about farm transition, right? In Canada. Yeah. There's hundred, there's hundreds of eighty thousand farms, and and they're all older and and they're all I didn't mean to point out you, Roy. Um, and they're all and they're all uh they don't have a transition plan. Right. Yeah, we've had entire episodes around that. In my opinion, in the irrigation, we have a bit of younger profile in in our area because um in order to adopt all these new technologies and stuff, sometimes you got to be a little younger. And I see a lot of multiple generations working together in our area to to do that in attracting the next generation to be excited about farming is about providing new and different ideas, new different crops.
Devon Davidson:Right.
Bruce Warkentin:You see a smile on guy's face when when he's like, I just tried growing this this year and it worked out really well. I mean, we were growing garlic and mint and and all kinds of different things. Um, it sometimes it's a matter of just trying something out and and seeing if you can build a market, especially if you're paying that much for land. Yeah, ideas are super important implementation. I mean, I've seen some really cool things like laser weed removal systems, things of Star Wars, in my opinion. But I I've I saw these things arriving in fields where they're just zapping out the weeds. Think of the the benefit of that. No, you don't have to apply as much chemical, and chemical um it also hurts the crop too when you apply chemical. So you have increased yield, you have lower input, lower input and chemical costs, and also I'd rather eat something that doesn't have a whole bunch of chemical on it, of course. So investment in technology like that is critical for the future of irrigation. And then developing customers, whether it be, I've seen people develop their own online customer base where they're trying to do uh deliveries and stuff, things like that. But to grow economies of scale, it's about attracting the processors and being able to promise them that we can produce this much produce each year so they can build a factory and have a bunch of risk associated with that. They need to have the reliable produce to process. And then finally, capital. Capital, as Roy and Devon, you've seen the price of land in in Southern Alberta is just skyrocketed. And in capital is needed, whether it's in the form of debt or in the form of equity. It it is it is the pinch point of the growth in our area. And I believe that um providing more context to financial institutions, to investors, um, the more people to the party, the more we can collaborate and make irrigation grow even more. Excellent.
Roy Carter:Yeah, the industry's lucky to have somebody like Bruce as a leader and forefront in it. Well, and we were very fortunate to have you here today, Bruce.
Devon Davidson:I appreciate your time.
Bruce Warkentin:I I hope you learned something. I hope you're not going to be able to do that. I learned lots from following you on uh on CLH bid, and and I'm excited about future offerings and and just just us working together as advisors, as farmers. I think it's a good thing that uh we're providing to the market. And we all can't be farmers, so uh let's do the best we can with what we got. Totally. Thanks, Bruce.
Devon Davidson:Okay, thanks a lot. Appreciate it. That's gonna do it for another episode of the Farmland Exchange. Thank you for tuning in. It's very much appreciated. If you haven't already, please take a minute to like, rate, and review the podcast. As I said, those five-star reviews really help us, and uh we appreciate that support. If you have any questions or there's topics you want us to cover, um, or if you're interested in selling farmland yourself and you want to have that conversation with us, please send us an email, info at CLHbid.com, or give us a call, 866 263 7480. Um, all of the information about this podcast is on the website as well at uh CLHbid.comslash farmland exchange. That's it for now. Thanks for tuning in. I hope this has been a positive exchange for you. Take care.
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