As land prices ride high across Canada, it’s a struggle for young and mid-career farmers to compete against established farms and outside investors to buy land, or even to find it. They also need to ask themselves some tough questions. How much can I afford to pay? Can I service the debt?
And then there’s the most important question of all: Is this really the right investment to make?
“Each year you think the land price has topped out,” says Dustin Williams, a young grain and oilseed farmer who is the fifth generation to farm his family’s land near Souris in southwestern Manitoba.
“Then the year following, you get another 30 per cent increase,” Williams says. “You are tying up a lot of money buying land.”
Bullish factors are driving up the price of land from every direction. Low interest rates make mortgages attractive. High farm cash receipts mean there’s cash for down payments, especially on grain farms that went into the past five years with low debt.
Besides, the buying splurge, especially in the last three years, has seen farms invest big dollars in high-capacity machinery and on-farm bins, meaning they’re ready and able to expand their acreage base.
And then there’s the land market itself, where success breeds success. For farmers, it’s hard to find a more secure or more lucrative investment. Nor are farmers alone. With Statistics Canada saying farmland has averaged a return on investment of 10 per cent a year since 1950, investment companies are singing the praises of Canadian farmland, and financial advisers are encouraging more of their clients to become absentee farm landlords.
That said, over 60 per cent of farmland in Canada is still owned by the people who farm it. But that in itself presents a challenge, especially when the older generation wants to retire or pass the farm on to the next generation.
Succession often requires expansion to generate the cash flow needed to allow the outgoing generation to fund their retirement and the incoming one to be able to make a go of it, not to mention the years in between when there are two generations that need to earn a living income from one farm.
It all means that the only land that many young farmers can acquire is from retiring family members, friends or neighbours they have known for a lifetime.
Williams took over the family farm a few years ago and has only been able to increase his land base over the past couple of years by around 300 acres to its current 4,500 acres. He wants to expand further, but says it’s a continuous struggle to find more acres to move on to, and to compete against the larger established farms in the area.
Although he knows he’d only have to move one municipality over to find a lot of outside investors bidding at every sale, “it’s predominantly farmers in the neighbourhood who have been getting a majority of the acres here,” says Williams. “I guess maybe it speaks to how little land has actually transferred in our area and how close to home the seller can stay and find a buyer. At the moment it doesn’t stay on the market long enough for anyone outside to really get a hold of it.”
Across the country, tales of bidding wars are rife in the coffee shops, and with a lot of farmland purchases still being handled privately, it’s not always easy to get a good handle on the exact price being paid.
“It’s hard to know what land is selling for unless you go straight to the owner,” agrees Catherine Jordan, who farms with husband, Don, near Manitou in south-central Manitoba. Even then, you can’t always be sure, she adds. “People are still secretive about what they get for the land, but when you hear who has purchased the land, you can make an educated guess at what the price was.”
It’s equally hard for landowners to set a price, she also agrees. “Most owners will state a reasonable price, but when they look around at the middle-aged farmers driving new trucks and machinery, they have a higher price in mind.”
The Jordans want to expand upon their half-section of grain land, but they know it’s not going to be easy with land around them reputedly now selling for $4,200 an acre, well out of the reach of this young couple just starting out.
“We had an opportunity to purchase land that was of more sentimental value than anything, and of course we could not match or come close to the price that was offered,” Jordan says. “Naturally we didn’t get the land and now we see how it’s being bulldozed and cleared. It’s very sad to see a century farm gone for just that little extra bit (of crop land).”
Finding the land is the first problem. Being able to afford it is the next. Young farmers don’t typically have the deep pockets or the asset base to spread the purchase over. Then there’s the added problem of figuring out just what the “going rate” for land really is.
What’s the right price?
In many areas, it’s rare to see a real estate sign at the edge of a field or even a “for sale” notice in the local newspaper. More often than not, land purchases are private transactions and both parties are apt to be close-mouthed about the price they agree on. That makes it hard for a potential buyer to even figure out what he or she should offer for the land.
“When you try to bid and you look at what the municipal assessment value for the land is, and you look at the long-term productive capacity of the land, none of those values have really changed,” says Williams, so neither are very useful as a guide to pricing land value. “You are trying to throw a dart in the dark, and pick a number that makes sense for the banker who is looking at it and that is going to be enough so that the seller feels that they too have cashed in at the right time.”
More from the Country Guide website: How much can you pay?
In the end it comes down to a lot of negotiation, says Williams, and it may not always end up how you had hoped. “Where we start and where we end up can be quite a ways apart,” he says, speaking from his own experience. The question is really whether you chase land when it gets that expensive, but depending on the condition and the circumstance, it might be land that you can’t afford to walk away from.”
“Maybe from a business standpoint you were offering something initially that made sense and wasn’t going to triple your debt,” Williams adds. “But by the end of the deal, you might be back to where you didn’t want to be in the first place, and you don’t have a choice.”
Sometimes there is no option but to walk away from a deal, but that can be a lot easier said than done.
“To push yourself away from the table is hard,” says Williams. “From my own experience, I know it’s a tough call when it comes down to it, to back away from land that is in your heart or that you have farmed yourself for a long time. You’ll have a hard time seeing that land farmed by someone else.”
Although you have to keep a sane head in negotiations, Williams still believes that land is a good investment for the farm and it’s worth giving it every best effort to try and purchase the land that you need. “You are going to have to try your hardest to make those (land purchase) decisions first and maybe sacrifice a little bit on other parts of your budget, whether it’s the equipment or the extent of the crops you grow,” Williams says.
Options to secure land may come down to exploring some new and creative arrangements and approaches such as land sharing, long-term leasing or limited liability partnerships. Williams is open to any and all creative approaches to increasing his land base and has already used a few.
When he took over the farm from his own father he didn’t go the traditional family succession route. “We built our own farm company first, and then as my dad wanted to reduce the size of his farm and reduce his responsibilities, my farm company took his operation over,” says Williams. “In the end we purchased his company outright and now have a land-lease agreement with him and some other landlords to get us going.”
Agreements with retiring farmers don’t always mean that they have to sell the land outright on the spot. With the right relationship, agreements can extend the purchase of the land over a period of time, which has benefits for both parties. “From a retiring farmer’s perspective there is a significant tax advantage to rolling the operation out over a longer period of time and keeping active ownership of land or equipment, but not having to make the financial or risk decisions any more,” says Williams.
A new program from Farm Credit Canada is designed to assist young farmers to make these sorts of arrangements. FCC’s Transition Loan program assists young producers aged between 18 and 39 to purchase land or assets. The seller is paid in disbursements over five years and FCC guarantees the full sale price to the seller. Interest is charged only on the amount disbursed and FCC will, if the purchaser qualifies, finance the down payment for up to seven years. The purchaser can choose to make interest-only payments to improve cash flow or principal-plus-interest payments to help build equity.
High crop prices have undoubtedly had an effect in driving up the price of land. Now, they might spark some bargains, but only for those who are fast on their feet.
“The grain sector has always cycled and it’ll cycle again,” says farm adviser Terry Betker. “The young guys out there should be watching the grain market right now because if the grain market starts to go sideways or soften, there’s going to be some landowners who will want to sell now in case it goes down. So they should be watching for that to occur.”
Having a plan is vital in the search for land, Betker adds, so get out the municipal map and identify any producers in the area who may be retiring soon. Williams agrees. If you want even a chance to own more land, building relationships is vital, he says, and that happens over a lifetime. “My experience has been you have to keep a good rapport with your neighbours and you need to be on a first-name and a friendly conversation basis with everyone so they think of you when the time comes for them to move on.”
Most retiring farmers would still prefer to sell to a young person starting out who is from the local area, says Williams. “Those lifetime friendships are important and you shouldn’t be too shy or awkward about letting the farmers know your intentions,” he says. “And making sure that you put it out there that this is where you want to go and this is what you hope for the future, and that there’s no missed opportunities because the right conversation hasn’t been had.”
“No young farmer on their own has the equity to compete at these prices and make a go of it,” adds Williams. “It’s going to be a real struggle to try and keep the young farmer in the game.”