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A shadow on land prices

Purdue University survey offers a stark look at farmland values south of the border

Harvest Aerial View

This past fall, harvest stumbled to a finish. In parts of Ontario, combines chewed through spindly, drought-stricken corn on the same days that Prairie farmers drove their machines into swathes that had been buried in snow.

It was enough to make those sporadic reports of feedlots shutting down, U.S. crop farms going bankrupt, and Midwest farmland prices dropping seem all the more foreboding.

Compared to 2013, Chapter 12 bankruptcy filings across the top grain-producing states in the U.S. climbed 50 per cent in the 12-month period ending on June 30. In Iowa, the biggest corn producer of all, they jumped a massive 125 per cent. (These Chapter 12 bankruptcies involve farms with less than $4.03 million in debt.)

Then in August, the 2016 Purdue Farmland Value Survey revealed that Indiana farmland values had plunged another 8.2 to 8.7 per cent after having fallen five per cent in 2015.

Declines this big have not been seen since the mid-’80s, the university said. And now, farm surveys were also reporting similar drops across the Midwest in cash rents.

These ugly reports contrast wildly with the bullish news from Canada, where last year’s average net farm income set another record, and where land prices are still strong, and cash rent is still in the stratosphere, topping $300 an acre in eastern grain regions.

How can that be?

FCC economist J.P. Gervais is cautious. He says his team is monitoring land values very carefully, and he plows his way through a list of recent internal FCC reports, with land values in B.C. and Ontario stable and in Saskatchewan and Manitoba slightly up.

“Land values are generally fairly stable and up in some parts of the country,” Gervais repeats.

But why the disparity in land prices compared to south of the border?

Among other factors, Gervais says, the most significant is the drop in the loonie, which pushed our 2015 farm receipts to record levels and gave farmers here more ability and appetite to buy.

That drop in the Canadian dollar basically cushioned the fall from the bull market that has dominated grain farming for the last seven years.

Farmers south of the border didn’t have that cushion, and they fell hard, Gervais says.

It also helps, he adds, that we have a different lending structure, and that farms are generally a smaller scale here so they didn’t expand in the same size chunks as some of the U.S. mega farms.

However, this year the change in the dollar had already been assimilated into the market.

“Actually, we are in the beginning of a softening in the ag commodity cycle,” says Gervais. “Definitely, in the overall agriculture economy, we are seeing tighter margins.”

Gervais conservatively forecasts a potential five per cent decrease in farm receipts in 2016. Since land prices tend to follow trends in net farm income, appreciation will likely slow down with the expectation of lower crop prices over the next two to three years.

In Ontario, land prices this year were still well above the 20-year average, ranging from $5,000 to up to $25,000 per acre, says Ryan Parker, partner with the London, Ont.-based appraisal company Valco.

The value of farms in Ontario has stalled. But it definitely has not gone down.

Although the volume of trades shrank slightly from last year, there’s still a good number of trades going on, says Parker.

“Farmers are not being reactive to their change in incomes,” Parker says.

But there have been significant, trend-inspiring changes to the fundamentals. The disparity between good and bad land is becoming more normalized, with untiled and poor land getting discounted more heavily than during the market peak.

“There’s smarter buying now,” says Parker.

In southwestern Ontario (which has a reputation as a bellwether for the direction of national land markets), land prices have flatlined or in some cases are slightly higher. Parker says this demand is being driven by the intensive livestock operations in the area, including supply managed livestock, beef, and hog farms.

Livestock farms are also building and renovating barns at a record rate this year. “2016-17 is the year of construction,” says Parker.

Broiler barns are being built to accommodate continued allocation of additional quota, sow barns are being expanded, renovated or built from the ground up to accommodate sow loose housing, while beef farmers are reinvesting after a few years of good prices and dairy farmers are renovating or building to improve and prepare for potentially tighter margins in the future.

These livestock farmers say if they’re going to continue in business, they need to make improvements when their balance sheets are strong and interest rates are low, says Parker. “Between BSE and the sow buyout program, we are left with some very strong livestock farmers. They have good balance sheets now and along with the dairy and broiler business, they make it competitive for land.”

In Ontario, rental rates are tough to track as most are handshake deals and there’s no register or survey. When Parker does farm assessments, he asks what rents are in the area to get a general idea of rental trends. His anecdotal summary is that this year rents have not moved. “Cash rents here are just as inelastic as land values,” he says.

Parker chalks up both these buying and renting inelasticities to farmers who “cost-average” their land and other fixed assets, and who rely on land values continuing to increase, or at least not decrease.

Most farms have a part of their rented acres in long-term agreements. Often those agreements are at a lower rental rate because they have unwritten trade-offs for looking after the property, or they include provisions about managed inputs or farming practices, or things like cleaning out the driveway. Then, for the rest of their rented acres, some farmers are motivated to pay more, in some areas over that $300 per acre, says Parker.

Although most rental agreements are still cash deals, Parker is seeing a little more creativity so there’s some sharing of risk and reward. The number of farmers sharecropping, he thinks, hasn’t really changed.

Land “management”

Bruce Simpson, a founder and senior partner at Serecon, a large land appraisal and management company in Alberta, says flexible lease agreements are becoming more common there. However, cash rentals still dominate.

“Although some succession planners promote production-sharing joint ventures for tax advantages, most are still straight up cash rents for simplicity and less in-depth lease management requirements,” Simpson says. “Rental rates have not decreased this year as there has not been any softening in farmland values and commodity prices have remained decent throughout the year.”

Local competition, land values, soil types and increased productivity because of new technologies and crops are helping to sustain higher land rental rates.

Across the Prairies, the percentage of land that gets rented has increased significantly over the last 15 years. By 2011 about 45 per cent of farmland in Alberta was rented. This was an increase from 2001 of about four per cent, or more than two million acres. Similarly, the increase in Saskatchewan was about two per cent, the same as in Manitoba, where about 40 per cent of farmland is now rented.

About 25 years ago, Simpson and partner Don Hoover established Serecon as an agricultural appraisal and consulting practice in Edmonton, opening an office in Calgary in the early 2000s. Today, about half of their services are valuations, with 40 per cent in management consulting.

About 10 per cent of their portfolio is farm asset management, although this area is growing. Today, the joint venture company, FNC-Serecon Inc., “manages” land in Alberta and Saskatchewan, and the company plans to extend into Manitoba and Ontario in the future. In their first growing season they managed slightly less than 10,000 acres in Western Canada. However, with the large base their joint venture partners have south of the border, they feel they can take on the larger acreages when they become available.

In the U.S. companies manage millions of acres for absentee landowners, and demand for this service is spreading north. The trend to more non-farmer land ownership has spurred farm asset management services, like Serecon FNC. (In 2015 Edmonton-based appraisal business, Serecon, formed a joint venture with Farmers National Company [FNC], headquartered in Omaha, Nebraska, to give them additional experience and support tools and systems to work with in this field. FNC manages more than two million acres for about 5,000 landowners across the U.S. Numerous companies south of the border offer similar services ( but very few in Canada.)

In the Canadian west, Simpson says most rental arrangements have always been done between neighbours across the kitchen table. Yet management of farm assets for absentee owners is increasing through the Prairies because more land is being transferred, more land is being inherited by non-farming children, and more people are retaining the ownership of their land and having it as part of their investment/retirement income.

Besides, land values continue to increase, so there’s little incentive to divest.

“Our main customers are absentee landowners — sons and daughters who have inherited land but live remotely from the property and want to maintain the land as an investment,” says Simpson.

Part of the service Serecon provides is to match landowners to tenants and write lease agreements. Finding tenants is not an easy task, says Simpson. It boils down to three key factors — agronomic knowledge and land stewardship, financial competence, and technical skills. “We approach it by first talking to the previous owner or the vendor, neighbours and contacts we have across the Prairies.”

The appraisal part of Simpson’s business, he says, has become more complex with the level of technology involved with production agriculture. “The adverse effects, different easements, ever-changing market values, the lack of good solid information are all contributing to farming becoming a much more complex business,” Simpson says.

This fall Simpson said the price of land in central Alberta was at unprecedented levels, from $1,500 per acre to $7,500 per acre for dryland in the agricultural producing areas. By comparison, in 1991 these farms sold at $300 to $1,000 per acre.

And the demand does not seem to be abating, even though the Alberta economy is under duress.

This is due to some strong financial years on farms, but also to non-farm purchasers for acreage living, hobby farming and outside investors.

“The demand in 2016 is strong across the province for all forms of agricultural lands,” says Simpson, who expects land values to continue increasing, but at a slower rate.

A large part of Serecon’s appraisal business has been driven by the oil, hydro and gas industries. They use software called an Obstruction Mapper program which measures exactly how many acres are missed or how many multiple passes with equipment and inputs (seed, fertilizer, spray) are required when there’s an obstruction, like a hydro line or a oil pump, in a field. Then the software calculates how it’ll impact costs and revenue for the farm.

“This tool has many applications, from impact studies, to identifying the best field pattern to minimize impacts, to calculating the acres in fields and acres impacted by spray drift or animal intrusion onto crops,” says Simpson.

Go-go farmers

In the Midwest, they’re called “go-go farmers,” a group of farmers who borrowed heavily to expand their farms soon after grain markets began to boom in 2007, and then borrowed more to plant their way out of the following commodity price slump.

These are farms that tended to be driven by a younger generation that had not had previous exposure to the bottom of a commodity cycle, and many of them based their buying decisions on super-strong financial statements from 2008 to 2012.

However, when grain prices fell and cash flow tightened, they borrowed to rent land and also to buy equipment, seeds and pesticides, which meant that they were even more exposed to crop prices as they continued to fall.

According to the latest USDA data, the proportion of extremely leveraged grain and other row crop farmers in the U.S. (those with debts totaling more than 71 per cent of assets) doubled, to 2.4 per cent, between 2012 and 2015.

As well, delinquency rates on farmland and production loans are rising sharply.

Michael Langemier, Timothy Baker and Michael Boehje, agricultural economics professors at Purdue University, Indiana, further examined the worrying trends in farmland prices and cash rents, using data from surveys by Iowa State University (Ag Decision Maker), the Illinois Society of Professional Farm Managers and Rural Appraisers, and Purdue (Dobbins and Cook).

They compared declines in cash rents and farmland prices to what happened in the grain price bear market of the 1980s, which lasted six years after the initial crash.

Over the first year of the six-year decline back then, average cash rents in the three states increased two per cent, and average farmland prices declined 5.3 per cent.

This time, however, from 2014 to 2015, average cash rents and farmland prices for the three states both declined, falling 2.1 per cent and 2.2 per cent, respectively.

In the 1980s, earnings per acre were relatively low for five straight years (1982 to 1987) and similarly, earnings per acre have been relatively low in 2014, 2015, and 2016. Continued weak earnings currently appear likely, and will put further downward pressure on cash rents and farmland prices, say the reseachers.

One major difference between the two periods is interest rates, so there’s much more cash flow now. Also, they note that inflation is much lower, and they say the percentage declines in cash rents and farmland prices in Iowa, Illinois, and Indiana are not expected to be as large as those experienced in the 1980s, unless earnings per acre collapse even more, or inflation and interest rates increase dramatically.

When they analyzed farmland price per acre divided by cash rent per acre and then cyclically adjusted this P/rent ratio for interest and inflation, they found it continued to be substantially higher than historical values in the 1980s. This means that to maintain current high farmland values, cash rents would have to remain very high, or even move higher, while inflation and interest rates would have to remain very low.

However, rental rates have tracked land values at about three per cent of land values in the last three years. The survey in 2015 was the first since 1999 to report a statewide decline in cash rents across all land qualities. Statewide cash rents in 2015 declined 1.3 per cent to 2.4 per cent. Again this year, the survey found another statewide decline in cash rents. Cash rent dropped about 10 per cent in the last year, with average land renting for $204/acre.

More than half of the respondents expected cash rent to be lower in 2017, decreasing from one per cent to 35 per cent.

To read the full Purdue Agricultural Economics Report articles as a pdf, click here.

Property assessments multiply

It was a beautiful busy summer day when I received this year’s MPAC farm value assessment from Ontario’s Municipal Property Assessment Corporation. But when I opened the nondescript envelope on my way back from the mailbox, the birds seemed to stop singing.

I shook my head and closed my eyes, tight. Could this be right? My new MPAC assessment said my farm had more than doubled in value since buying it 10 years ago. This would likely mean a massive property tax hike.

Farmland assessments in Ontario and Manitoba took a huge jump this year. And usually when assessments go up, so do taxes.

The new MPAC assessments in Ontario are actually more accurate, closer to market value now, says Ryan Parker, partner in Valco, a company that focusses on real estate appraisals in southwestern Ontario. “Generally, they were undervalued before, and in 2012 the new assessments weren’t aggressive,” he says.

MPAC does the assessment for the province and individual municipalities set the net tax rate. So potential increases in property taxes will still have to be set by individual municipalities.

“The tax rate is a separate issue,” adds Parker.

So here’s to hoping for reasonable councils that keep a limit on tax rates, because now that the MPAC assessment is actually fairly accurate, assessment appeals are not likely to win except for the odd case with a standout situation.

About the author


Maggie Van Camp is BDO national agriculture practice development lead, co-founder of Loft32 and CEO of Redcrest Farms Ltd.

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