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Flood warning

Will Canada’s land market drown in a torrent of new listings as more farmers get to retirement age? The truth is… nobody knows

We’ve all heard the predictions. They say that with so many of our farmers reaching their 60s and 70s all at the same time, we’re soon going to see the biggest rush of land onto the market that this country has ever witnessed.

Will it happen? Will the land market get flooded sometime in the next 10 years? And if it does, will prices sink, or surge?

Some farmers and some market watchers are betting the flood will come, and it’s easy to see why. Just as Canada’s overall population is aging, so are farmers. According to the latest Ag Census, over 148,000 farmers across the country were 55 years or older in 2016, representing well over half the farming population.

But Louise Stuart isn’t convinced. The trends are national, but they’re composites. It’s what happens in countless localities that creates the market, so Country Guide interviewed Stuart, who is a real estate broker and owner of Lake and Country Realty in northwestern Saskatchewan. Her husband, Leigh Stuart, farms in the area, and we met both recently in Louise’s bright, high-ceilinged office building in the nearby town of Glaslyn.

Given the aging farm population, Louise had thought there should already have been more farmland coming onto the market over the last 10 years. But instead of selling, she sees many farmers renting to neighbours.

“And then, as they’re ready to sell, it seems like the people renting it have been buying up a lot of that land,” she says.

In other words, the land is slow to come to the market, and when it does, it comes with conditions.

In her area, Stuart explains, such sales tend to come from retiring farmers who don’t have a successor but still want a buyer who is going to move into the community and “love their home just like they did.”

In 10 or 15 years, when many more farmers will be getting ready to retire, she wonders, “who’s actually going to be there to take over those tracts of land?”

Today’s non-farming landowners are another consideration. Quite a few of Stuart’s clients inherited their farmland and have never farmed it themselves. There are also people who bought farmland years ago as a long-term investment.

“If they’ve had it as an investment and they’ve been using it as their retirement, they might be more willing to sell that land as they’re getting to that age,” she says, meaning they might not hang on to it as long as farmers.

Or, they might look at land as a strong investment vehicle, and decide to weather any tough markets.

But others have different perspectives. Ben Van Dyk, for one, thinks there will be quite a bit of land on the market in the next five to 10 years.

Van Dyk immigrated to Canada from Holland in 1980 to start a dairy farm. In 1989, he started working as a realtor, and today manages the farm and ranch division of Real Estate Centre. Van Dyk works out of Coaldale, in southern Alberta, and also handles real estate transactions in central Alberta. Some of his team members are also licensed in Saskatchewan.

Farmers buying land in Van Dyk’s area are mostly competing against other farmers, he says. There are still some investment companies in the market, but outside investors only make up 1.5 to two per cent of the market, he says. Hutterite colonies were the largest farmland investors for a while, but “that has slowed substantially.” Urban expansion is also a factor in southern Alberta, but he says it’s slow and steady, rather than dramatic growth.

Van Dyk thinks farmers who have been renting out land for years after retirement will be selling quite a bit of land in the next five to 10 years, and he suspects there will be more supply than demand.

“Most farmers can expand only so fast and… they only will be buying so much land,” says Van Dyk.

And then there is Tom Eisenhauer, based in Toronto and president and CEO of Bonnefield. Bonnefield buys farmland and leases it on a long-term basis to farmers. Bonnefield’s mandate is to invest in farmland and preserve it for farming, says Eisenhauer.

Eisenhauer says the company doesn’t invest in pastureland, or in areas dominated by supply management. But otherwise its holdings are quite diverse, including land used to grow potatoes, canola, wheat, pulses, corn, soybeans, vegetables, and orchards, and it owns land in most provinces.

Back in 2008, when Bonnefield’s founders were getting started, they did the same math on the aging farm population that we’re doing today. If you look at the average age of farmers, cross-reference it with the land ownership numbers, province by province, “you come up with some ridiculously large numbers for the amount of land that has to change hands over the next decade,” Eisenhauer says.

But farmers have been aging a long time, he says, and we haven’t yet seen a flood of land on the market.

“I think the reason for that is that farmland is such a different asset than housing or commercial real estate or infrastructure,” Eisenhauer says.

The emotional pull that farmland exerts on the generations is strong. A quality farm can take decades to assemble, so farmers are reluctant to put them on the market and their first choice is usually to keep them in the family. Or the land might be sold to the young farmer down the road who’s expressed interest.

“The best farmland in this country generally trades without being listed publicly,” Eisenhauer says, and it might only become official after the handshake deal is done when the formalities need to be taken care of.

Eisenhauer says he’s one of the few at Bonnefield who wasn’t born on a farm, but he sees strong parallels with the small Nova Scotia fishing community where he did grow up, particularly in the work ethic, pride in ownership, and sense of value in one’s work. Rural communities are “tight, tight, tight,” Eisenhauer says, and just as fishermen know where to catch the best fish, farmers know where the best land is in their areas.

But what about non-farming landowners?

Statistics Canada doesn’t track the demographics of non-farming landowners, but as Leigh Stuart points out, tongue in cheek, they age just like farmers.

Stuart thinks we should know more about them. “That demographic breakdown is going to determine whether there is a glut or a dearth of farmland coming on the market,” he says.

Stuart’s gut feeling is that farmers in their 60s and 70s don’t own as much land as we might think.

“Just because they’ve farmed for 40 years doesn’t mean they grew exponentially during their careers,” he says.”

Outlook for stable prices

Like many farmers, Stuart wouldn’t mind seeing slow and steady growth, rather than leaps in farmland values. More stable land prices overall are good for farmers who want to improve their debt-to-equity ratio, he says.

And realtor Louise Stuart does think farmland prices are more likely to be relatively stable over the next few years. Commodity prices and margins would have to change for farmland values to surge.

The numbers back up Stuart’s understanding of farmland prices. For instance, Farm Credit Canada’s (FCC) latest farmland values report notes that Saskatchewan farmland saw an average gain of 7.5 per cent last year. A good lentil harvest pushed farmland values up 16.6 per cent in the southwest, and expansion of larger operations was a factor in the 10.3 per cent increase in the northwest. But adverse weather dropped land prices in some municipalities. And the slowed oil and gas industry suppressed prices in the southeast and east-central regions.

It’s a pattern Eisenhauer sees as well. For the most part, farmland values are driven by farm profitability, he says. It’s a “remarkably efficient market.”

The very high farmland appreciation rates in recent years were driven by “big, big jumps in farm profit,” he says. Eisenhauer expects farmland values to go back to a long-term, reliable uptick.

Southern and northern Ontario saw the biggest prices increases in 2016 (6.9 per cent and 6.2 per cent, respectively), according to FCC’s report. Drivers included demand for land to grow cash crops, expansion of supply-managed farms, and a tight supply of land. Overall, Ontario land value increases had slowed to 4.4 per cent, and the report states that demand for land is “only at a realistic price level that can be supported by crop production.”

Rising interest rates and a slightly higher Canadian dollar could cause farmland prices to fall in some areas, Eisenhauer says. “But if you look historically, those have not been big drivers of farmland value.”

Van Dyk thinks the average farmland increase will be four to seven per cent a year, in most cases. “And some areas might not go up at all, depending how the crop has fared, how the competition is for land.”

But there are hot spots. For example, irrigated land in southern Alberta has been hot this year, Van Dyk says, as there’s plenty of competition for it. FCC pegged the average farmland increase in southern Alberta at nine per cent in 2016, due to competition from farmers and investors.

Regions dominated by supply management will also see higher farmland prices, Eisenhauer says, as the supply management system tends to bump land values. Bonnefield avoids areas where supply management is king, he adds, and that’s part of the reason the company hasn’t invested in Quebec (although the province’s farmland ownership rules play a role as well).

Bonnefield also tends to shy away from areas where development has pushed farmland prices. And Eisenhauer says farmers on urban fringes will continue to see farmland values driven by development rather than farmland profitability. No province in Canada is immune to urban fringe development, but it’s particularly relevant to Ontario, he adds.

“The Golden Horseshoe is the glaring example,” he says.

Yet it’s not just urban areas where producers face competition for land. Stuart cautions that recreational buyers will push up costs of marginal land. That’s a common theme in northwest Saskatchewan, where lakes and forests draw in cabin owners and outdoor enthusiasts. A recreational user’s mindset is very different from a livestock producer who is likely to calculate stocking rates to figure out a quarter’s value.

Recreational buyers, she says, think that “they’re still doing really well because they’re looking at a back-row (lake) lot that’s 50 x 100 that’s $80,000, and yet they can buy 80 acres for $80,000.”

Ultimately, she doesn’t think farmers need to be concerned about the availability of land in the future. If developers and investors are getting a chance to buy land, so are local farmers.

Is it a fair price?

So how can farmers spot trends and make sure they’re paying a fair price? They can take a page from a realtor’s playbook and compare sales values of similar properties to see what the market is doing.

Stuart buys farmland security reports regularly, which include the sale price, buyers, sellers, and soil class for each piece of land. She points out Saskatchewan farmers can buy farmland security reports for any rural municipalities that they’re interested in. Stuart also checks assessment ratings, available online at Farm Credit Canada.

Eisenhauer says Bonnefield spends “an enormous amount of time” spotting trends in land values.

“We do a lot of quantitative analysis, looking at farmland comparable transactions right across the country,” he says. They also look at land features such as soil quality, yield history, crops grown, and whether it’s irrigated. From there, Bonnefield employees parse out which of those factors are driving farmland values in a particular county.

To buy or not to buy

Farmland has been seen as an attractive, safe investment for many people, especially given low interest rates.

But, as Van Dyk points out, investors are always looking for the highest returns. If returns are higher outside of agriculture, they may shift their money. That is a real possibility as land price increases slow.

So should farmers with non-farm investors in their area be on the lookout for opportunities to buy? Though Van Dyk thinks there will be more land available in the next few years, he says that doesn’t necessarily mean it will be cheap. It will depend on the buyers in the market, he says. “If we have lots of investment money coming in, land prices will still go up as they have in the past. It’s hard to speculate what the land prices will do.”

Ultimately, if farmers have a chance to buy land, they should look at whether it fits into their operations and their cash flow, Van Dyk says.

“If it’s a detriment, don’t do it. You have to use your resources wisely to make sure that your farm stays healthy.”

Leigh and Louise Stuart have been buying farmland since the ’90s. The growing value from those early purchases let them leverage equity for the next buy, Leigh says. It wasn’t a strategy so much as good timing combined with a desire to farm, he adds. He assumes that’s how most family farm operations have grown over time.

“The opportunity to purchase has to be combined with the ability to purchase,” says Stuart. And he tries to put himself in his banker’s spot before he decides whether to buy. “Would it be a risk that they would be willing to loan against?”

Renting or leasing is another option, and in fact the proportion of rented land on the typical farm has grown over the years.

The lease Bonnefield offers is “quite unusual,” says Eisenhauer. “And the reason it seems to work so well in these situations is that it’s a very long-term lease.”

A farmer’s number one concern is long-term access to the land, Eisenhauer says, so they offer five- to 10-year leases. Each year, if the farmer pays the lease on time and meets the lease’s sustainability requirements, the lease automatically extends for another year.

Farm families in the midst of estate or retirement planning also turn to Bonnefield. For example, farmers easing into retirement might negotiate a sale-leaseback and use the sale proceeds for estate planning.

Farm families planning for succession also do deals with Bonnefield. Eisenhauer says that while there are enough young farmers with the desire to farm, they don’t want to farm the way their parents did. They need to farm at scale to farm profitably.

A decade ago, farms generally had enough equity for parents to transition the farm to the next generation and finance their retirements, he says. Successors could acquire the farm through a combination of financing and sweat equity.

But today’s young farmers need to acquire the farm and expand it significantly, he says. “Farmland has obviously gotten a lot more expensive. And they would have to rely too heavily on bank debt to make it work.”

In those situations, parents might transfer some land to the next generation. They also might transfer some land into a sale-leaseback. Successors can lease that land rather than financing it and buying it. Or Bonnefield might lease the young farmer other land in the area.

Another common scenario that farm families face is how to buy out the non-farming siblings who own land. Bonnefield will work with the farmer to buy out the non-active siblings, Eisenhauer says, and lease it back to the farmer.

Despite the competition for farmland, Louise Stuart doesn’t think farmers need to be concerned about land availability in the future. But farmers do need to be willing to spend the money sellers want, and to let neighbours know they’re interested in buying.

“I think that there will always be opportunities,” she says. “It’s just whether or not you’re ready to jump on that when it comes.”

About the author

Field Editor

Lisa Guenther is a field editor for Country Guide.

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