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Black swans

What will it take to knock Canada’s farmland market out of its holding pattern?

Canadian dollar

“Excluding an extraordinary shock to production or commodity prices, a significant increase in the value of the Canadian dollar would have the biggest impact on the supply of farmland available for sale,” says Saskatchewan realtor Tim Hammond.

A weak Canadian dollar is beneficial overall to Canadian farmers as they export the majority of their agricultural products, he points out.

FCC reports for every movement of US$0.01 in the value of the U.S. dollar relative to the loonie, profitability to Canadian farmers is estimated to change on average by $1 per head per finished hog marketed, $13 to $16 per head in the cow-calf and feedlot sectors, and $5 per acre of cash crops.

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“If our dollar jumps from 75 to 85 cents, that represents nearly a $50 per acre reduction,” says Hammond. “This level of adjustment is significant. Demand would be reduced and the supply of farmland for sale would increase.”

Debt and interest rates

Other factors that could alter the landscape would be a return to farm debt the likes of which were seen back in the 1970s and early ’80s, Bonnefield’s Tom Eisenhauer says.

Adds Tim Hammond, “Any over-leveraged producers at that time would likely have to sell some farmland to remain viable, bringing more farmland to the market.”

But history offers remarkably few cases of farmers finding themselves in such dire straits that they would feel compelled to sell.

“We’ve had many years of good profitability in the industry, so a lot of farmers, their debt loads are low… It’s not like the 1980s when there were lots of farmers in trouble. We really see very few troubled farmers,” Eisenhauer says.

Another selling incentive would be a significant spike in interest rates to north of five per cent, he says. Although they’re rising, interest rates are still very low historically, and Eisenhauer doesn’t anticipate a massive hike.

“We don’t see anything that’s likely to shake the stability of the market, at least here in the foreseeable future,” he says, calling Canada’s ag industry robust and healthy. “And if you look forward five, 10, 15 years, it’s hard to see many clouds out there.”

“I believe interest rates will go up over time, yet the risk of a significant increase like that in the near-term is fairly low,” agrees Saskatchewan’s Hammond.

Ontario farmland sales over the years have only been a steady trickle, although an ongoing drive upwards in interest rates might motivate selling, says Phil Spoelstra of Remax in Ontario.

Low interest rates may be good for buyers, but not from a seller’s point of view, says FCC economist J.P.Gervais. Low interest rates aren’t attractive for investing capital from a sale, especially at a time of a positive outlook for agriculture.

Hammond says retired farmers who rent their property would find farmland a less attractive investment if they were able to obtain a six or seven per cent return from a liquid GIC. About a third of Saskatchewan farmland is rented and he estimates 75 to 80 per cent of that is owned by retired farmers and/or their families.

Lingering NAFTA

Hard-line NAFTA negotiations grabbed the ag sector’s attention for a time, and it’s still too early to predict whether Trump will end up affecting farmland prices and availability. A lot depends on whom you ask, and whether there will be future trade threats.

“This is a wild card,” says Hammond. “Ultimately, if Trump’s actions result in a reduction in farm cash income for Saskatchewan and/or Canadian farmers, it will increase the supply of farmland on the market, reduce demand, and decrease farmland values.”

“We’re sensing most people just want to hold right now and figure out what’s going to happen,” says Spoelstra. “The uncertainty is what stops the market.”

He isn’t expecting drastic changes to supply management and therefore doesn’t anticipate significant impacts to Ontario farmland.

“If there’s one area where farmland values have gotten ahead of themselves it’s in the dairy sector,” adds Eisenhauer. “And that’s just because dairies have had easy access to money and they’ve been very profitable for many years, so those farmers have been very aggressive in bidding up the price of farmland.”

Dairy supply management gets talked about, of course, but Eisenhauer points out Canada’s dairy sector is nowhere near in size to the crop sector, making the impact on agriculture as a whole a lot more modest.

And even for those who would be affected by an end to supply management, Eisenhauer believes the Canadian government would respond with very generous transition assistance.

Gervais also feels USMCA needs to be seen within the broader context of global agricultural demand. He doesn’t want to downplay the potential effects of the talks, but believes that the long-term outlook for ag is as positive as it was prior to tensions.

Capital gains

Another factor that may encourage farmers to sell their farmland is their concern about potential changes to capital gains exemptions. Family farms last October were relieved when the Liberals dropped their capital-gains tax proposals following loud protests from producers.

“Some farmers are nervous the existing federal government could change the rules at any time, and therefore they want to lock in their exemptions while they still exist,” Hammond says. “What good is another 10 per cent on price if the personal exemption is reduced? It’s all about after-tax dollars. Whether their fears are founded or not, these are concerns farmers have and it affects their decisions.”

It’s also a discussion with sellers in Ontario, says Spoelstra. They want to know how it will have an impact on them and how they apply for exemptions.

“And a lot of sellers who have run their land themselves in years past that have turned to renting it the past few years have that question,” Spoelstra says. “Will we still qualify for the capital gains if we had our land rented or sharecropped the past few years?”

Weather

Especially on the Canadian Prairies, weather may play an additional role in how much more land comes onto market.

“I believe there will be more farmland for sale in Saskatchewan this winter compared to last,” says Hammond. “Some areas are experiencing their second consecutive drought. This could flush out some sellers who will have had enough of farming and want to cash out at current values.”

Hammond believes Saskatchewan farmland availability will increase over current levels, but will still remain below the surplus levels of the early 2000s.

“I think it will become more balanced. Overall, the fundamentals for agriculture in Saskatchewan, and therefore, farmland are quite positive moving forward,” says Hammond. “Demand may soften, but it will likely keep even with supply.”

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