During a taxi ride in Winnipeg a few years ago, I got to chatting about agriculture with the cabbie, a fellow with a farm background who had emigrated from the Punjab.
We talked about yields, crop rotations, how different farming is in India, and land prices.
The latter was the most remarkable difference in his view. He couldn’t believe how unbelievably cheap land was here. We did some rough currency calculations and figured the price of Punjabi farmland might be 50 times higher than prime Red River Valley land.
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So what, you might say. There are lots of people in India, a high demand for food, and not enough land to go around. So what if prices are 50, or even 100, times higher? How does that affect my farm business?
In the past, not a lot. In future, a whole bunch.
The goal of this series has been to highlight simple but critical factors that play a pivotal role in your farming career. The first was that you need a long-term investment mindset when hedging or you can easily find yourself becoming a speculator or even a gambler. The second was that, on occasion, there are rising tides which overpower other factors (the inevitable end to today’s extremely low interest rates being one such occasion). The third was about periodic events — the Great Russian Grain Robbery of 1972 and ethanol in the last few years — which dramatically alter demand fundamentals.
This final piece is about another powerful force, one with the ability to profoundly affect land prices.
Let’s look at another example, this one closer to home.
In the late 1960s, two friends of mine bought some land in Manitoba’s Interlake region for $40 an acre. The land included a half mile of beach frontage which, at the time, had little value.
Farmland had value because it could produce food, but lakefront did not because it couldn’t. Today, an acre of lakefront property within a two-hour drive of Winnipeg sells for a six-figure sum, but my friends wouldn’t part with it even for that sort of price.
Of course, the recreational value of lakefront is pretty obvious today. But it wasn’t for a long time. That’s why, when considering how land is valued, it’s worthwhile to think about places like the Punjab.
At universities, we teach — as we always have — to value farmland on its expected earning power, as determined by its ability to grow food. In the past, Canadian farmland (the kind that only grows food and doesn’t have lake frontage or proximity to a rapidly growing city) has only shot up when farmers believed, sometimes irrationally, that rising or anticipated commodity prices would soon make farming a whole lot more profitable.
But that’s not the case in India and most other parts of the world. There, farmland seldom comes on the market and when it does, it could never be fully financed from the expected income stream. That’s because farmland is valued as a secure form of investment, something that has a store of value.
In this sense, farmland is like gold, a safe haven in a volatile world where inflation, currency swings, stock market crashes or a financial crisis can quickly rob you of your wealth. More and more investors are looking at farmland in this light, with the added bonus that — unlike gold — it does generate an ongoing return.
Who are these investors? Some are from the wealthy class in developing nations who prize Canada for its stability — especially in light of the near-meltdown of the global financial system in 2008. Some are gigantic so-called hedge funds (including sovereign wealth and large pension funds) which view farmland as a commodity-related play in which they can literally hedge their bets.
Some are international bargain hunters who look at farmland prices around globe — from the Punjab to Argentina — and see bargains in Canada, especially on the Prairies. Some will be retiring farmers and their heirs who want the keep the land long after the farm equipment has been auctioned off.
You may have noticed that I haven’t mentioned the demand factors for food. If a growing population and rising incomes increase demand for grains and grain-consuming livestock, and farmers conclude that will increase profit opportunities, then that will drive up land prices, too.
But this is something separate from that — a true paradigm shift. When farmland is viewed as a store of value, you no longer justify its price on its productive value alone.
You accept a more modest return in return for protection of capital.
For a farmer, a five per cent return might be considered reasonable today. But for an outside investor, two per cent might be sufficient. In that case, the outside investor would be willing to pay 2.5 times what the farmer could justify.
Now, I’m not urging anyone to go out and buy farmland in the expectation its price will soon skyrocket. That’s speculation.
But like the inevitable rising tide of higher interest rates, the store of value motive will take on a bigger and bigger role in the coming years. That will make it more difficult for farmers to justify new land purchases on the basis of cash flow alone. Renting and leasing will become the new norm for those wanting to expand (and the few entering farming), and the overall percentage of farmer-owned land will continue to drop as we move closer and closer to the Punjab.
The world truly is flat. CG
Currently head of the department of agribusiness and agricultural economics at the University of Manitoba’s Faculty of Agricultural and Food Sciences, Brian Oleson has had a ringside seat for major developments in the grain business over the past four decades as a policy analyst for Agriculture Canada and both sales rep and senior executive with the Canadian Wheat Board.
