By John DePutter & Dave Milne – April 7, 2021
There has been lots of buzz the past several weeks about rising farmland values. Some media coverage came from Farm Credit Canada’s annual report on land prices, released March 23. Lots of talk has been generated by the fact land prices in many parts of Canada have recently been caught up in a similar frenzy to the one gripping the housing market.
Lost in some of the coverage of the FCC report was an important follow-up comment: “Despite low interesting rates and high farm revenues in 2020, affordability was at its second-lowest level in the last 20 years.”
What it means:
There is perhaps no greater double-edged sword than Canadian farmland.
On one hand, already established farmers are no doubt happy to see their greatest asset consistently appreciate in value. Indeed, farmland in Canada has gained in value each and every year since 1993, posting astronomical advances of 19.5% and 22.1% in 2012 and 2013. Gains cooled during 2014 through mid-2020. More recently, the last several months have brought a big step higher in many areas of Canada and especially in Ontario, helping to push farm equity higher and higher.
According to Statistics Canada, the total collective value of farm assets at the end of 2019 (the last year for which figures are available) stood at $649.7 billion, an increase of 4.2% over a year earlier. Of that increase, almost 81% of it came from rising land values. That percentage could rise even more when 2020 figures become available.
Clearly, as farm debt has continued to rise over the years, it has been land that has been largely responsible for keeping producer equity in the black.
The other side of rising farmland values
There is another side to strengthening land values, too. This side is not as positive.
As highlighted by the FCC article, the affordability of farmland is declining – meaning the price of land in general has gotten too high compared to the revenue that can be generated from it. FCC noted that, despite low interesting rates and high farm revenues in 2020, affordability was at its second-lowest level in the last 20 years.
That will probably change in 2021, given rising commodity prices. Same time, though, the high commodity prices are injecting a lot of cash into the pockets of farmers across Canada. Some of that cash will be put into farmland, pushing land prices up so high that affordability turns back down – with major implications.
One implication is that established farmers, trying to expand their operations, must consider the probability that newly acquired land will have a negative cash flow and will have to be subsidized by other sources of revenue or earlier-purchased land. That’s nothing new. But it’s worth bearing in mind.
A greater implication involves young farmers. It has always been difficult for would-be farmers, who own little or no land, to make a start. Now it’s getting all that much harder.
Yet another implication of a downturn in affordability is the vulnerability of the land market at the higher price levels.
Whether farmland prices will keep trending up for several more years will be partly contingent on commodity prices. What if crop prices turn sharply lower? The team at DePutter Publishing is not predicting this will happen, only pointing out that any sharp and lasting downturn in the big three commodities (corn, soybeans and wheat) would have a significant impact. Just 50% to 60% retracements of the past year’s run-ups for those crops’ futures markets would mean, for example, that paying up to almost $33,000/acre for prime Ontario agricultural land would not make financial sense.
Another factor in the affordability of land is interesting rates. The current low interesting rate environment has been a primary driver for the strengthening farmland demand for quite some time, including recently in late 2020 and early 2021. And as FCC warned, there are signs that interesting rates could be on the move higher as the economy recovers from the COVID-19 pandemic.
Some buying has also been spurred the past several months by farmers and investors who believe an inflationary economic environment is developing. Owning assets such as land is widely perceived to be a hedge against inflation. It will be very interestinging to see whether this affects farmland prices in the years ahead. Remember that an inflationary environment could support farmland and commodity prices, but would also bring with it rising input costs, including rising borrowing costs and potentially tightening margins.
Three conclusions and parting thoughts:
- Rising farmland values are obviously a boon to the asset-liability sheet for many farmers. But remember the old saying about too much of a good thing.
- In the world of markets, there are always two sides to every story. High and rising markets can be great from one person’s standpoint (the owner); not so great from another’s (the buyer).
- No market is a one-way street and no trend continues in perpetuity. Some would say land is not a market; it is a unique asset, in its own special category, essential to world food and energy production. Yet history does show that there have been times in the past when farmland values lulled for many years without appreciating.
Factors going forward: three big ones
Many factors will affect land prices in the future, including such things as the extent of farm consolidation, the swings of non-ag economic recession and recovery, weather/yields, demand for land by immigrants and offshore buyers, and demand by supply management farmers… to mention a few.
Over-riding them, there will be three primary factors to monitor as leading indicators for farmland prices:
- Commodity prices – both crop and livestock.
- Interest rates.
- Tied up with both of those, the big “I” word with a question mark: Inflation?
The DePutter services keep tabs on all three of these issues and indicators in the DePutter Market Advisory Service newsletter, Ag-Alert, and Interest Rate Alert.
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