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Has the price of farmland flatlined?

It may seem like the life has gone out of land markets, but don’t call the morgue just yet

Aerial view of farmland, Canada

If you get most farmers and landowners to talk about it candidly, most will admit to being a bit awestruck by just how far and how fast land prices have risen.

Simon Ellis, a young fourth-generation farmer from near Wawanesa, Man., says he and his neighbours have watched over the past decade as land prices have roughly tripled.

“These days it’s about $3,000 an acre, 10 years ago it was about $1,000 an acre,” Ellis tells Country Guide. “As a young farmer, you look at that and you wonder how you can possibly afford it.”

Another young Manitoba farmer echoes that sentiment. Chris McAllister farms just north of Portage la Prairie, where higher-value crops like potatoes and edible beans cover a lot of the ground. He says the price of land depends on who’s buying, who’s selling and what day it is, but he’s hearing values quoted in a range from $4,000 and $6,000 an acre.

“Even with those higher-value crops, it’s tough to justify buying land at these prices, and to make it pencil out,” McAllister says.

It’s seldom a good idea to bet the farm on conclusions you draw from looking at just one area, or just one season of grain prices.

After all, land markets are always largely local markets too, but a lot of farmers throughout North America are seeing similar trends over the record-setting past few years.

Even so, grain prices have fallen, and it raises the question: are land prices experiencing a Wile E. Coyote moment?

Have they just run off a cliff, and are they currently suspended in mid-air, blissfully unaware of what’s about to happen?

Or are today’s land prices actually supported by a strong foundation?

Few people in Canada are better situated to answer that question than J.P. Gervais, chief agricultural economist for Farm Credit Canada, the country’s largest agricultural lender. He says the answer to the question of farmland values isn’t a blanket one that covers the entire country. Instead, it can roughly be split into two regions, east and west.

In the West, it’s largely driven by the productive value of the land itself for crop producers, as there are few competing land-use industries. In places like southern Ontario, however, extraneous factors, like a preponderance of supply management producers competing for the same land base, can make the picture a bit muddier.

“The ratio I always look at is crop receipts to farmland prices,” Gervais says. “Across Western Canada, that number is right about where it’s been for the past 40 years. Saskatchewan, for example, is right on that trend line. In Ontario, where you have those other factors at play, it’s a bit higher, but even at that, it’s not dramatically overvalued based on this ratio. It is possible, depending on what happens with commodity prices, that you could see a slight decline in Ontario.”

Gervais cautions that the 2014 income numbers aren’t yet fully included, but says that for all the sound and fury about what might be happening to farm incomes, the numbers to date aren’t as discouraging as the headlines may have led many to expect.

“It certainly wasn’t the best year, but I don’t think it was a complete disaster either,” Gervais said. “Looking forward to 2015, forecasts are expecting about a five per cent increase in crop receipts over this past year, which would support farmland values.”

In no small part, that’s because domestic incomes are calculated in Canadian dollars, while international grain sales are denominated in U.S. dollars. As the Canadian dollar has softened and flirted with the 80 per cent mark, it has served to cushion the blow for grain producers.

Generally, however, farmland values seem to be flatlining as the entire industry catches its breath and adjusts to the new paradigm that’s emerged over the past few years, Gervais says.

One person who’s been writing and speaking bluntly about North American farmland value for the past few years is Brent Gloy, first as an agricultural economics professor at Purdue University in West Lafayette, Indiana, and now from the family farm in Nebraska, where he and his wife have returned to farm. He’s been calling Midwest farmland overinflated for a few years now, but even he’s stopping well short of calling for an outright crash, saying instead there’s likely to be a modest adjustment downward over time.

“If the question is, ‘Is this a Wile E. Coyote moment?’ I would say the answer is, ‘Yes, quite possibly, but he’s not hundreds of feet above the canyon floor, he’s just a few feet above it,’” Gloy responds. “It might drop a bit, but it’s not going to be the big impact and puff of dust.”

Gloy said he wouldn’t be surprised if, over the next few years, a scenario of sideways commodity prices and a modest reduction of about 10 per cent in Midwest U.S. land prices were to unfold.

When asked to comment on Gloy’s well-known position on the market, Gervais says parts of this country could possibly see the same sort of a pattern, but he’s also quick to add that anyone’s predictions are going to depend on a number of variables, such as when and how much crop prices rebound.

“In Canada, southern Ontario is much like what he’s talking about in the U.S. Midwest, with the same crop mix,” Gervais says. “If we do see a longer period of lower grain prices, I think there is the potential there, based on the crop-receipts-to-land-price ratio, for a small move downward.”

One thing nobody is predicting is an outright crash, not even the young farmers who are wistfully eyeing the now-expensive land surrounding them.

“I just can’t see it coming down,” Manitoba’s Ellis says. “I think it’s more likely to stay where it is.”

In no small part, Ellis says, that’s because larger operations, which are becoming the norm, can typically put the resources together to purchase land without needing it to instantly generate net revenue.

“They can just spread that risk out over more acres,” Ellis says.

Ellis also notes that if farmland doesn’t fetch current values, many sellers aren’t under a lot of pressure, so they’d simply take the land off the market rather than settle for less than they think the land is worth.

The recent 2015 Canadian Agricultural Business Outlook, an annual survey of producers co-sponsored by Country Guide, backed up the appetite to continue to acquire assets. In that report agricultural economist Al Mussell reported a declining sense of optimism within the sector, but noted that most farms were still comfortable making capital investments to grow productivity, writing in his report “…the larger the farm the more comfortable they are.”

Down the road at Portage la Prairie, McAllister has the same sense of how the market is shaping up, saying non-traditional land buyers and even non-farming members of farm families inheriting land are going to likely keep values up. In the end he says his preference — and that of many young farmers — would be to own the assets rather than rent or lease land, but that may not be possible, at least for now.

“I’m definitely an ownership guy,” McAllister says. “To me ownership is control and stability. But if that’s not possible, I do think there are creative ways to structure rental agreements, things like long-term rental agreements, that can do the same thing, especially if you can structure them so they’re win-win situations.”

Gloy adds that it’s inevitable some producers will struggle through this period of lower prices, and he says the industry appears to be entering a period where good financial management will be rewarded.

“There will be some pain, I don’t doubt that,” Gloy says. “The people who will be hurt are the people who are out of position — they’ve paid a lot for land recently and they’re heavily indebted, and they need the higher prices.”

If all other things remain equal, however, what Gloy describes is more of a soft patch than a total wipeout — but he does admit there is one outlier he’s definitely keeping an eye on.

“If the EPA were to start monkeying with ethanol mandate, that could really be significant,” Gloy says. “There’s little doubt that it was ethanol demand, in large part, that drove higher prices. If that were to be significantly altered, that would be bad news. I think there’s a very low likelihood that will happen, but it’s certainly something we should be watching.”

Barring any significant policy changes, however, he says what producers are now facing is the typical up, down and sideways of commodity markets over time, something most famers understand well and will be able to manage through.

FCC’s Gervais has been spending a lot of time on the farm-meeting circuit this winter, and says there’s no doubt farmers are a little nervous. One question that keeps popping up is whether the business is in for a replay of the terrible times of the 1980s. He says a bit of caution isn’t a bad thing, but also says he’s still optimistic about the sector for the most part, and key ingredients for a real train wreck are so far missing, such as high interest rates.

“I always compare agriculture and the broader economy,” Gervais says. “When you put the two side by side, agriculture still looks like a pretty good place to be.”

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