Either way, it’s harder than anyone outside of agriculture might think to make it a coldly rational decision. Emotion can so easily get in the way.

But that’s only other farmers, right? You wouldn’t let that happen to you. Or would you?

Additional land can bolster your farm business, but its acquisition isn’t a guaranteed boon, especially if emotion governs your expansion decisions.

“Farmland and buying situations will invoke emotions,” says Saskatchewan agricultural realtor Tim Hammond. “Producers are human and, as such, subject to emotions.”

Even the most accepted strategies can be based as much or more on emotion than on shrewd strategy.

For instance, Farm Credit Canada vice-president and chief agricultural economist J.P. Gervais says location can stir up emotions and colour your assumptions.

“There is still the feeling that when something becomes available that’s located near where you are, that that’s an opportunity,” Gervais says. “Farm operators feel that if they’re not at least considering it, then that piece of land’s not going back in the market for another 40 years or so.”

Maybe this is one slice of the land market that technology is taking care of, though. While location remains a significant factor, farmer and accountant Lance Stockbrugger says it’s not as much of a driver as it was years ago. Producers are more willing to move to different areas in part because equipment, thanks to higher speeds, has becomes more mobile.

But other factors still matter, including the size of the farm on offer, Stockbrugger says. There’s greater attraction to, say, 2,000 acres than two quarters.

The scaling argument

Also stirring emotions is when farmland that’s been leased goes up for sale.

“You farm that land; you know that land better than anybody else. Maybe it’s not worth what they’re asking for, maybe you should let it go, but typically guys will just pay the price, as long as they can,” Stockbrugger says.

After all, the argument goes, no one’s making more land.

There’s also a business scaling argument to consider, Stockbrugger says. Can you afford to lose those acres after equipping yourself for that size in terms of machinery and manpower? If you don’t end up buying it, how do you replace those lost acres?

It’s important to acknowledge and be aware of your emotions to reconcile them with the business case, says Hammond.

“It is okay to pay a premium to secure certain farmland if you understand it is a premium and it is worth it to you,” Hammond says. “Sometimes the risk of paying a little too much is better than the risk of losing the opportunity to farm that land.”

Open auction or sealed bid

The farmland market is a combination of rational decisions, emotional discounts and motivated premiums, Hammond says. And that’s not just on the buyer’s side. He’s seen sellers take discounts for reasons that are more emotional than business rational.

In one instance, a seller had no family member to take over the farm, but still retained a strong desire to leave a farm legacy.

“The seller would rather help out the young neighbour who they really like by giving him a break on the price than achieve a premium from the non-local farmer already farming 50,000 acres,” Hammond says. “The seller is happier knowing the young buyer is going to pick up where he leaves off and that they helped him do that.”

He’s also seen sellers experience a significant emotional event in their life — such as divorce, death, foreclosure proceedings — and, as a result, take a discount for a straightforward, immediate, low-profile sale.

Emotion can also get the better of people in a bidding situation, leading to overpayment.

“Under the right circumstances, that can happen at a public auction,” Hammond says. “I have seen a quarter sell for twice its market value at auction.”

Both buyers bidding on the parcel had an emotional connection to it and, as such, they were both prepared to pay a premium for it.

“In this case, it resulted in a huge premium,” Hammond says.

Another example where big premiums can occur is in a closed (sealed) tender process.

A potential buyer is at a great disadvantage there, not knowing the price the seller expects, what competing buyers are prepared to pay, or even if there is another buyer interested.

“They only get one chance to make an offer and they don’t want to lose the opportunity,” says Hammond. “I have seen tenders where a 30 per cent premium is achieved with only one offer submitted.”

Become a better buyer

Farmers are already shrewd. To go the next step and to actually excel, however, the experts say it’s essential to draw up a plan and have it in place before land even comes up for sale.

“Be prepared. Be in a position where you can respond and act quickly on an opportunity should it present itself,” says Hammond.

Gervais agrees, and adds that a good place to start is by making a list of different factors to consider, including why you want more land in the first place.

“You’re tying a good part of your wealth in an asset that is not very liquid,” Gervais points out. “You have to have a plan that matches up to your strategic goals.”

Stockbrugger stresses the value of focusing on cash flow before making any bids, and says farmers often look at a property’s price compared to other pieces of land, as well as historical values. Current low interest rates have made farmers keener on buying as they’ve lowered the cost of payments on land.

But what producers must address is if they can cash flow their purchase over the long-term, say, 25 years, says Stockbrugger.

Prices of commodities and inputs change and so do yields, and you can’t use your cash-flow numbers from three years ago to justify buying today. Also, as you buy more, more of your cash flow will be taken up with making payments.

“On every purchase, you should look at, ‘Can my cash flow sustain the payments?’” Stockbrugger says.

It’s crucial, too, to factor in how much more you might have to spend on equipment and manpower if you buy that ground. Be realistic, Stockbrugger says. It’s too easy for farmers to talk themselves into thinking more acres always means greater efficiency and lower costs.

Sometimes it doesn’t.

Consult your team

To ensure your plan is as thorough as possible, work with professionals who can provide the help and support needed in areas you don’t feel equipped to deal with on your own.

“I see the need to behave as CEOs,” says Gervais. “If you think of any CEO in a company, they usually don’t have all the answers, but they know how to surround themselves with people who do have the answers for them.”

An accountant and a lender are two of the experts to consult first, says Stockbrugger.

Yes, it’s more effort, but there’s a pay-off, says Hammond. Producers who understand the metrics of their capacity can make decisions and act quickly. “That will involve having up-to-date financial statements, and having regular discussions with members of your farm management team, including your accountant and financial institution,” he says, but adds, “Acting quickly will give you an edge over competing buyers who need three weeks to talk to their credit advisor first.”

Farmland advisors and realtors can also assist producers in weighing the cost of the opportunity with their capacity, risk tolerance, and long-term goals, says Hammond.

“I say we have never sold a parcel of farmland; it always sells itself. Our role is to help people make the decision that is right for them,” Hammond says.

If you’ve found you can afford it, then you can work on what the land is really worth, and if it will make your operation more efficient and effective, Stockbrugger says.

There are the obvious productivity considerations. Consult your agronomist to consider the property’s soil profile. What’s the drainage like, the salinity levels, and what’s the history of production and chemical applications?

Other professionals, though, will raise questions you might not have considered. Your lawyer who will then consider important questions related to zoning, possible underground pipelines, easements and if a mortgage is already registered against the property.

Deeper into your buying transaction, your accountant can assist again, determining exactly what you’re paying for, Stockbrugger says. Are you buying raw farmland, or assets as well, such as buildings and grain storage?

It’s important to allocate the purchase price to those different assets at the time of negotiation because you can’t do it after the fact, Stockbrugger says. Whereas the seller wants to put little of the price toward the buildings, it’s in the buyer’s interest to do the opposite in order to take advantage of tax depreciation.

Also, if from a tax perspective the seller prefers to receive the proceeds over a period of time, it could save the buyer in interests costs, but also make the buyer willing to pay a little more, Stockbrugger says. Again, your accountant can serve your interests here as well.

Mistakes to avoid

Numerous pitfalls face potential farmland buyers, and our experts point out a few common ones they’ve seen over the years.

For three decades, Hammond has heard producers say, “That farmland won’t pay for itself!”

Yet, somehow, it almost always does, he says.

“Do not wait for farmland values to drop. Look for ways to make it work at the current price. Be flexible,” Hammond says.

When you’re determining the price that you’re willing and able to pay for land, first establish how much cash you have available, if the transaction will allow you to make a profit, and if you can cover losses if they appear, says FCC’s Gervais.

But more important than price is how a property fits into your strategic plan for your operation, he stresses.

“To buy or not to buy just based off of what you expect price trends to be like in the next little while doesn’t look to me like a path to strategic goals in your business,” Gervais says. “If you’re buying just to build wealth, it lacks a strategic plan for where you take your business.”

If it’s only about investing, there might be other wealth-building strategies that are more attractive or make more sense from the point of view of diversification. Nevertheless, “historically, there’s no denying that land’s been a good investment,” Gervais says. “Returns have been good lately and for a long time. And there’s been very little volatility in the land market, which has been good compared to other investments.”

Another mistake to avoid is expanding to a new location and not knowing how farming works in that area, and that practices are going to be different there, says Stockbrugger.

He’s seen people moving into his province to farm from different parts of the country and even abroad.

“Farming is different in every area of the country, even the province,” Stockbrugger says. “Just because you can do it where you were, doesn’t mean you’re going to be able to apply the same practices to where you’re going.”

Productivity is also likely to differ elsewhere. Land’s value typically reflects its productivity and, if it comes cheaply, the reason may well be because it doesn’t produce as well or generate the same profits as the acres you own elsewhere, Stockbrugger says.

Hammond notes that another error that farmers sometimes make is to only make an offer on a seller’s most productive land.

“Typically, when a farmer sells out, they have a combination of more productive and less productive farmland,” he says. “A common approach that buyers have is only offering to purchase the more productive farmland.”

The issue for the seller, though, isn’t finding a buyer for his most productive acres, but disposing of his less productive land too. Hammond says agreeing to purchase both improves a buyer’s odds.

Says Hammond, “All-or-none offers can be powerful negotiating tools if you have the ability.”

Maybe you should just rent

Producers looking to expand also need to determine if it makes more financial sense for them to lease the land than own it.

Around his area of central Saskatchewan near the community of Englefeld, Stockbrugger says renting is much cheaper from a cash-flow standpoint than buying it.

Gervais adds that leasing comes with considerable flexibility in managing financials, and it frees up cash. But having said that, it also exposes producers to risk if they’re unable to negotiate a long-term lease.

“What happens if you lose the land and you’re stuck with extra equipment you intended to use to farm more acres?” Gervais asks.

It’s part of the risk-reward tradeoff in owning versus leasing. Neither exclusively owning every acre you farm, nor leasing it all, is optimal, he says.

But there’s still the prospect of a big long-term win with owning, says Gervais. “Building equity within your operation is still a good strategy.”

Robust demand

Canadian farmland demand remains robust, with values continuing to rise, in spite of the COVID-19 pandemic, as producers continue scooping up acres.

Through the first half of 2020, farmland values in Canada rose 3.7 per cent on average, thanks largely to major gains in Alberta (4.9 per cent) and Saskatchewan (4.2 per cent), according to Farm Credit Canada.

The results are better for the 12 months between July 2019 and June 2020, when the national average increase reached 7.1 per cent, heavily influenced, again, by Alberta (8.5 per cent) and Saskatchewan (7.9 per cent), two provinces that account for 72 per cent of farmland, FCC recently reported.

The federal Crown ag lender tied the demand strength to historically strong returns on farmland, low interest rates, and grains, oilseeds and pulse receipts.

In a release, FCC put it in a nutshell: “The limited supply of farmland available in the market and producers’ confidence in the sector’s long-term outlook are also key drivers of land prices.”

The post Making a smarter deal for farmland appeared first on Country Guide.

But today, a new kind of tension has emerged as the trajectory of land management changes. We’ve tended to focus on escalating land prices as farms attempt to consolidate acres. But perhaps more disconcerting is land scarcity, farmers left to jockey over the few acres actually offered for sale and increasingly turning to leasing from landlords who have expectations about the return on their investment.

Leasing does work for many farmers in many ways. Young farmers in particular find many advantages in renting land. The authors of Saskatchewan Agriculture’s Land Rental Arrangements (2018) argue leasing is really a means of “financing” a land base. They also point out that when funds are limited, which is often the case with new and young farmers, it is more profitable to spend money on inputs and machinery. Investing scarce funds in land may restrict operating capital, thus lowering the efficiency of the farm. Renting allows farmers a gradual entry into the industry.

Based on 2016 Stats Canada numbers, farmers new and old are taking advantage. While the total number of acres farmed in the country decreased by just under two million, the percentage of rented acres increased from 23 to 25 per cent as a proportion of all acres, with the actual number of rented acres increasing by nine per cent over the period.

In Saskatchewan that number is even more significant, with leased land rising to 27 per cent of total farm acres. As Ken Evans reads it, larger farms in the province are picking up leased acres while smaller 1,500- to 2,000-acre farms are cash renting theirs out. “I’m surprised how many large-acre farms have significant leased acres,” says Evans, an agriculture program specialist with Saskatchewan Agriculture’s Weyburn office. “I often wonder how those acres are obtained, given that there is a lot of competition from similar sized nearby operators also seeking leased land.”

One way farmers are obtaining more land is to travel farther from home, but Evans isn’t sure how they’re penciling it out. “Some are going 40 or 50 miles to lease land and I’m not sure how efficient that can be. They need huge tracts of land to be worth it.”

There’s a lot of risk for those leasing a lot of land, and the potential for a huge setback if a farmer gears up with machinery for those extra acres and loses them.

“It’s hard to find 3,000 acres overnight and the producer will find themselves with excess capacity,” Evans says, although some of that risk can be mitigated with longer-term contracts. “Lots of operators taking on substantial land will negotiate a three- to five-year lease with the ability to renegotiate the annual lease rate but not the availability of the land.”

Sticky rental rates

Efficiency and security are parts of the land equation, but the hit to cash flow from escalating lease rates is another. “It’s counterintuitive,” Evans says. “There’s more land available for lease, but I think that is countered by a lack of available land for sale so rental rates are rising.”

J.P. Gervais, chief agricultural economist with Farm Credit Canada agrees. “Rental rates are notoriously sticky. Despite a couple of years of depressed (commodity) prices, the rental rates are only starting to shift now, and not everywhere, and not by much.”

In recent years owning land has been very profitable, and not just for investors. Retired producers who might have once sold and invested the capital are choosing to keep their land and rent it out.

“The FCC Farmland Values Report shows there are fewer (land) transactions generally,” Gervais says. “Demand has weakened a bit, but I think it’s more a question of supply because of the profitability of owning land relative to investing.”

While Canada does not have good stats on land rental rates, the U.S. does. There, the evidence shows that even after their major downturn in the farm sector, it took almost four years for any significant downward shift in land rental rates, says Gervais. He expects the same slow response in Canada.

It’s only been this past spring that Tim Hammond has seen resistance from farmers to the annual rental rate increases expected from the 50,000 acres he manages for investors at Tim Hammond Realty in Biggar, Sask.

“These are sophisticated investors with perhaps 15 different contracts. These investors are return specific (as opposed to location), and might eventually divest if they don’t get that four or five per cent they’re looking for. At $2,000 per acre, that means an $80 per acre rent. And they can’t necessarily get that anymore. Saskatchewan still has a better rate of return than anywhere in the world, let alone in Canada,” Hammond says. “A $3,700 investment in Saskatchewan generates $500. You can spend $11,000 in Ontario for that same return. Prices scare people in Saskatchewan but they’re still low.”

Hammond believes investors filled a gap in land ownership the past few years.

“Six or seven years ago investors were a higher percentage of our business. Farmers were suffering and slowly accumulating capital until they became more confident. Investors who bought 10 years ago expected a four per cent return with two per cent depreciation. They met their 20-year objective in five years and are selling and moving on… The guy buying the land is the farmer previously leasing it, so the investors filled a role there when the tenants couldn’t afford it. By investing they gave the farmers time to build capital (while renting) until in a position to buy.”

Since January, Hammond has seen more land hit the market with values holding. Leasing or buying, he understands the pressures on farmers; “You stare at that half section across the road every day and know it’s only going to go up for sale every 25 years. You’re going to do what you can to get it. That’s why in sales there’s a high end and a low end. Sometimes it’s worth more to one person than another and it would be the same with rental rates.”

Indeed. So, leasing land is working for landlords keen on investor return in an otherwise weak investment market, but just how do those farming it determine rental agreements that allow for business expansion and growth? It’s a question top of mind as competition for available land becomes fierce, and not always friendly, the days of renting almost exclusively from family and neighbours rapidly coming to an end.

Determining the rate

“On the face of it, the decision to rent should be based on margins,” says FCC’s Gervais. “Am I making a profit off this land. Obviously it is more complicated than that. It is not that static.”

The rental rate matters to cash flow, but the Catch-22 for producers is knowing those acres might never become available again. So despite a possible loss at a particular cash rent, a producer might decide to take on those acres to fulfill part of the farm’s strategic plan, to spread fixed costs over, or for succession purposes.

“Ultimately, the land contract has to allow the farmer to make a profit so it can’t be an emotional decision,” Gervais says. “It has to be part of a larger strategy and be made objectively.”

Farmers should have realistic expectations of yields and costs, he says. From a lender perspective, FCC would look at the debt service capacity and whether there is room for an unexpected shock, such as weather volatility, commodity prices or trade disputes, all of which we’re seeing at present. “If a farmer is signing (rental) contracts that would impede the ability to service debt, then FCC might say that’s not the best plan for us as a lender. We’re not in the business of setting up the strategy for the farmer, but we can help point out flaws.”

Landowners want to tie the value of the land to the rent regardless of the land’s productivity because they’re looking at a simple percentage return on investment. It’s up to the farmer to know the productivity of the land and determine if the rent is worth it.

While Ken Evans feels most operators are good at analyzing their costs, at some point they’ll go backward if they’re paying too much rent, and he shares a rough guide for calculating a start point for lease rates: take four per cent of the value of the land, add taxes, and divide by the number of acres.

“Most farmers would be willing to pay more for heavy clay than for sandy, light soil,” says Evans. “It only makes sense from a risk and business perspective. But it doesn’t always work that way. It comes down to making sure you’ve done your analysis so you know what you can afford and putting a risk management strategy in place.”

Is insurance the answer?

Escalating cash rents drive cost of production up, having an impact on the bottom line and necessitating new ways to mitigate risk on those acres.

“Land rent takes a lot of cash out of the operation. Cash flow is the number one driver behind how farms make risk management decisions,” says David Sullivan, chief marketing officer with Global Ag Risk Solutions. “If you’re a larger, growing farm, you’ll likely have thinner margins and so mitigate risk differently than an established low-debt farm with declining cash needs.”

Based in southern Saskatchewan, GARS is a quickly growing player on the farm insurance scene, offering private, revenue-based insurance. A multi-peril product, GARS insures input costs on fertilizer, seed and chemicals, plus a specific amount of revenue per acre. As input costs increase so does coverage, with no ceiling and no effect on premium, the idea being that farmers can then use best practices at optimum timing.

Sullivan says mitigating risk on rented acres depends on how the rent is structured. Cash rents mean higher COP on that land, both fixed and input costs. Producers then need higher insurance levels and separate insurance on those acres and that’s where private insurance like GARS fits, filling the gap between what is needed and what government programs can provide.

Crop-share arrangements are another beast entirely with a variety of structures such as percentage of crop or percentage of margin. “Lots of these structures are thought to be more flexible,” says Sullivan, formerly an accountant with MNP, but most end up more expensive for farmers than cash rents. “For eight or nine years the crop share is higher than cash would have been so when you have a bad (production) year you’ve been pre-paying on that. It’s a business decision, but the numbers indicate the farmer ends up paying more over the long run and foregoing a lot of profitability.”

Working capital, cash flow and equity all influence insurance needs. On rented land a backstop is more important than ever, Sullivan says. “You’re not paying grandma and grandpa anymore. They would wait a few months for the cheque.”

Renting comes with risk and farmers need to know the worst case scenario for their farm and clearly articulate a plan to deal with that scenario. That means knowing the farm’s working capital, refinancing and mortgaging options, and what risk mitigation programs are available. “Then if it happens, you simply execute the plan and it’s not a scramble because the banks and insurers and farmer all know what’s going to happen. The plan can kick in seamlessly and you avoid financial disaster,” Sullivan says.

From an insurance perspective, he believes it is often a combination of crop and hail insurance and GARS that works best, especially as cost of production rises, partly due to the rent on leased acres. While government insurance provides coverage on yields, GARS insures cash, which is generally what the banks want to see.

But lenders have yet to embrace insurance as security and that is another less obvious risk of leasing land.

One of the downsides of leasing is a lack of credit available to the tenant farmer who usually has a more difficult time obtaining intermediate and long-term credit than does the owner. Lenders require land as security; leased land does not build equity.

“Traditional bank securities don’t allow for expansion on new land,” Sullivan agrees. “In the future there will be more rented than owned land. Operating credit will be needed but without a lot of land (for farmers) to mortgage, the banks will need to figure that out and will need to recognize insurance as security.”

This is especially true for young farmers trying to enter a market with few options for land purchase. Sullivan points out that in the U.S., half of all land is leased, and in Europe many farms are 100 per cent rented. He sees Canada headed in the same direction, which means young farmers will need a new way to access credit, perhaps using insurance as security.

With land prices escalating, available land scarce, and land owners expecting a return on their investment, the competition for acres is real and growing. It’s time for a cool head, an eye on costs and keeping the tools of risk mitigation handy.

The post The ever-changing landscape of farmland rentals appeared first on Country Guide.

Will it happen? Will the land market get flooded sometime in the next 10 years? And if it does, will prices sink, or surge?

Some farmers and some market watchers are betting the flood will come, and it’s easy to see why. Just as Canada’s overall population is aging, so are farmers. According to the latest Ag Census, over 148,000 farmers across the country were 55 years or older in 2016, representing well over half the farming population.

But Louise Stuart isn’t convinced. The trends are national, but they’re composites. It’s what happens in countless localities that creates the market, so Country Guide interviewed Stuart, who is a real estate broker and owner of Lake and Country Realty in northwestern Saskatchewan. Her husband, Leigh Stuart, farms in the area, and we met both recently in Louise’s bright, high-ceilinged office building in the nearby town of Glaslyn.

Given the aging farm population, Louise had thought there should already have been more farmland coming onto the market over the last 10 years. But instead of selling, she sees many farmers renting to neighbours.

“And then, as they’re ready to sell, it seems like the people renting it have been buying up a lot of that land,” she says.

In other words, the land is slow to come to the market, and when it does, it comes with conditions.

In her area, Stuart explains, such sales tend to come from retiring farmers who don’t have a successor but still want a buyer who is going to move into the community and “love their home just like they did.”

In 10 or 15 years, when many more farmers will be getting ready to retire, she wonders, “who’s actually going to be there to take over those tracts of land?”

Today’s non-farming landowners are another consideration. Quite a few of Stuart’s clients inherited their farmland and have never farmed it themselves. There are also people who bought farmland years ago as a long-term investment.

“If they’ve had it as an investment and they’ve been using it as their retirement, they might be more willing to sell that land as they’re getting to that age,” she says, meaning they might not hang on to it as long as farmers.

Or, they might look at land as a strong investment vehicle, and decide to weather any tough markets.

But others have different perspectives. Ben Van Dyk, for one, thinks there will be quite a bit of land on the market in the next five to 10 years.

Van Dyk immigrated to Canada from Holland in 1980 to start a dairy farm. In 1989, he started working as a realtor, and today manages the farm and ranch division of Real Estate Centre. Van Dyk works out of Coaldale, in southern Alberta, and also handles real estate transactions in central Alberta. Some of his team members are also licensed in Saskatchewan.

Farmers buying land in Van Dyk’s area are mostly competing against other farmers, he says. There are still some investment companies in the market, but outside investors only make up 1.5 to two per cent of the market, he says. Hutterite colonies were the largest farmland investors for a while, but “that has slowed substantially.” Urban expansion is also a factor in southern Alberta, but he says it’s slow and steady, rather than dramatic growth.

Van Dyk thinks farmers who have been renting out land for years after retirement will be selling quite a bit of land in the next five to 10 years, and he suspects there will be more supply than demand.

“Most farmers can expand only so fast and… they only will be buying so much land,” says Van Dyk.

And then there is Tom Eisenhauer, based in Toronto and president and CEO of Bonnefield. Bonnefield buys farmland and leases it on a long-term basis to farmers. Bonnefield’s mandate is to invest in farmland and preserve it for farming, says Eisenhauer.

Eisenhauer says the company doesn’t invest in pastureland, or in areas dominated by supply management. But otherwise its holdings are quite diverse, including land used to grow potatoes, canola, wheat, pulses, corn, soybeans, vegetables, and orchards, and it owns land in most provinces.

Back in 2008, when Bonnefield’s founders were getting started, they did the same math on the aging farm population that we’re doing today. If you look at the average age of farmers, cross-reference it with the land ownership numbers, province by province, “you come up with some ridiculously large numbers for the amount of land that has to change hands over the next decade,” Eisenhauer says.

But farmers have been aging a long time, he says, and we haven’t yet seen a flood of land on the market.

“I think the reason for that is that farmland is such a different asset than housing or commercial real estate or infrastructure,” Eisenhauer says.

The emotional pull that farmland exerts on the generations is strong. A quality farm can take decades to assemble, so farmers are reluctant to put them on the market and their first choice is usually to keep them in the family. Or the land might be sold to the young farmer down the road who’s expressed interest.

“The best farmland in this country generally trades without being listed publicly,” Eisenhauer says, and it might only become official after the handshake deal is done when the formalities need to be taken care of.

Eisenhauer says he’s one of the few at Bonnefield who wasn’t born on a farm, but he sees strong parallels with the small Nova Scotia fishing community where he did grow up, particularly in the work ethic, pride in ownership, and sense of value in one’s work. Rural communities are “tight, tight, tight,” Eisenhauer says, and just as fishermen know where to catch the best fish, farmers know where the best land is in their areas.

But what about non-farming landowners?

Statistics Canada doesn’t track the demographics of non-farming landowners, but as Leigh Stuart points out, tongue in cheek, they age just like farmers.

Stuart thinks we should know more about them. “That demographic breakdown is going to determine whether there is a glut or a dearth of farmland coming on the market,” he says.

Stuart’s gut feeling is that farmers in their 60s and 70s don’t own as much land as we might think.

“Just because they’ve farmed for 40 years doesn’t mean they grew exponentially during their careers,” he says.”

Outlook for stable prices

Like many farmers, Stuart wouldn’t mind seeing slow and steady growth, rather than leaps in farmland values. More stable land prices overall are good for farmers who want to improve their debt-to-equity ratio, he says.

And realtor Louise Stuart does think farmland prices are more likely to be relatively stable over the next few years. Commodity prices and margins would have to change for farmland values to surge.

The numbers back up Stuart’s understanding of farmland prices. For instance, Farm Credit Canada’s (FCC) latest farmland values report notes that Saskatchewan farmland saw an average gain of 7.5 per cent last year. A good lentil harvest pushed farmland values up 16.6 per cent in the southwest, and expansion of larger operations was a factor in the 10.3 per cent increase in the northwest. But adverse weather dropped land prices in some municipalities. And the slowed oil and gas industry suppressed prices in the southeast and east-central regions.

It’s a pattern Eisenhauer sees as well. For the most part, farmland values are driven by farm profitability, he says. It’s a “remarkably efficient market.”

The very high farmland appreciation rates in recent years were driven by “big, big jumps in farm profit,” he says. Eisenhauer expects farmland values to go back to a long-term, reliable uptick.

Southern and northern Ontario saw the biggest prices increases in 2016 (6.9 per cent and 6.2 per cent, respectively), according to FCC’s report. Drivers included demand for land to grow cash crops, expansion of supply-managed farms, and a tight supply of land. Overall, Ontario land value increases had slowed to 4.4 per cent, and the report states that demand for land is “only at a realistic price level that can be supported by crop production.”

Rising interest rates and a slightly higher Canadian dollar could cause farmland prices to fall in some areas, Eisenhauer says. “But if you look historically, those have not been big drivers of farmland value.”

Van Dyk thinks the average farmland increase will be four to seven per cent a year, in most cases. “And some areas might not go up at all, depending how the crop has fared, how the competition is for land.”

But there are hot spots. For example, irrigated land in southern Alberta has been hot this year, Van Dyk says, as there’s plenty of competition for it. FCC pegged the average farmland increase in southern Alberta at nine per cent in 2016, due to competition from farmers and investors.

Regions dominated by supply management will also see higher farmland prices, Eisenhauer says, as the supply management system tends to bump land values. Bonnefield avoids areas where supply management is king, he adds, and that’s part of the reason the company hasn’t invested in Quebec (although the province’s farmland ownership rules play a role as well).

Bonnefield also tends to shy away from areas where development has pushed farmland prices. And Eisenhauer says farmers on urban fringes will continue to see farmland values driven by development rather than farmland profitability. No province in Canada is immune to urban fringe development, but it’s particularly relevant to Ontario, he adds.

“The Golden Horseshoe is the glaring example,” he says.

Yet it’s not just urban areas where producers face competition for land. Stuart cautions that recreational buyers will push up costs of marginal land. That’s a common theme in northwest Saskatchewan, where lakes and forests draw in cabin owners and outdoor enthusiasts. A recreational user’s mindset is very different from a livestock producer who is likely to calculate stocking rates to figure out a quarter’s value.

Recreational buyers, she says, think that “they’re still doing really well because they’re looking at a back-row (lake) lot that’s 50 x 100 that’s $80,000, and yet they can buy 80 acres for $80,000.”

Ultimately, she doesn’t think farmers need to be concerned about the availability of land in the future. If developers and investors are getting a chance to buy land, so are local farmers.

Is it a fair price?

So how can farmers spot trends and make sure they’re paying a fair price? They can take a page from a realtor’s playbook and compare sales values of similar properties to see what the market is doing.

Stuart buys farmland security reports regularly, which include the sale price, buyers, sellers, and soil class for each piece of land. She points out Saskatchewan farmers can buy farmland security reports for any rural municipalities that they’re interested in. Stuart also checks assessment ratings, available online at Farm Credit Canada.

Eisenhauer says Bonnefield spends “an enormous amount of time” spotting trends in land values.

“We do a lot of quantitative analysis, looking at farmland comparable transactions right across the country,” he says. They also look at land features such as soil quality, yield history, crops grown, and whether it’s irrigated. From there, Bonnefield employees parse out which of those factors are driving farmland values in a particular county.

To buy or not to buy

Farmland has been seen as an attractive, safe investment for many people, especially given low interest rates.

But, as Van Dyk points out, investors are always looking for the highest returns. If returns are higher outside of agriculture, they may shift their money. That is a real possibility as land price increases slow.

So should farmers with non-farm investors in their area be on the lookout for opportunities to buy? Though Van Dyk thinks there will be more land available in the next few years, he says that doesn’t necessarily mean it will be cheap. It will depend on the buyers in the market, he says. “If we have lots of investment money coming in, land prices will still go up as they have in the past. It’s hard to speculate what the land prices will do.”

Ultimately, if farmers have a chance to buy land, they should look at whether it fits into their operations and their cash flow, Van Dyk says.

“If it’s a detriment, don’t do it. You have to use your resources wisely to make sure that your farm stays healthy.”

Leigh and Louise Stuart have been buying farmland since the ’90s. The growing value from those early purchases let them leverage equity for the next buy, Leigh says. It wasn’t a strategy so much as good timing combined with a desire to farm, he adds. He assumes that’s how most family farm operations have grown over time.

“The opportunity to purchase has to be combined with the ability to purchase,” says Stuart. And he tries to put himself in his banker’s spot before he decides whether to buy. “Would it be a risk that they would be willing to loan against?”

Renting or leasing is another option, and in fact the proportion of rented land on the typical farm has grown over the years.

The lease Bonnefield offers is “quite unusual,” says Eisenhauer. “And the reason it seems to work so well in these situations is that it’s a very long-term lease.”

A farmer’s number one concern is long-term access to the land, Eisenhauer says, so they offer five- to 10-year leases. Each year, if the farmer pays the lease on time and meets the lease’s sustainability requirements, the lease automatically extends for another year.

Farm families in the midst of estate or retirement planning also turn to Bonnefield. For example, farmers easing into retirement might negotiate a sale-leaseback and use the sale proceeds for estate planning.

Farm families planning for succession also do deals with Bonnefield. Eisenhauer says that while there are enough young farmers with the desire to farm, they don’t want to farm the way their parents did. They need to farm at scale to farm profitably.

A decade ago, farms generally had enough equity for parents to transition the farm to the next generation and finance their retirements, he says. Successors could acquire the farm through a combination of financing and sweat equity.

But today’s young farmers need to acquire the farm and expand it significantly, he says. “Farmland has obviously gotten a lot more expensive. And they would have to rely too heavily on bank debt to make it work.”

In those situations, parents might transfer some land to the next generation. They also might transfer some land into a sale-leaseback. Successors can lease that land rather than financing it and buying it. Or Bonnefield might lease the young farmer other land in the area.

Another common scenario that farm families face is how to buy out the non-farming siblings who own land. Bonnefield will work with the farmer to buy out the non-active siblings, Eisenhauer says, and lease it back to the farmer.

Despite the competition for farmland, Louise Stuart doesn’t think farmers need to be concerned about land availability in the future. But farmers do need to be willing to spend the money sellers want, and to let neighbours know they’re interested in buying.

“I think that there will always be opportunities,” she says. “It’s just whether or not you’re ready to jump on that when it comes.”

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Green Party leader Andrew Weaver on Thursday introduced the Property Law Amendment Act as a private member’s bill, which he said “would prohibit foreign entities from purchasing ALR land over five acres.”

The new bill is a reintroduction of a bill which Weaver proposed, and which died after first reading, in February last year. With three MLAs, the Greens are now supporting an NDP government tied with the opposition Liberals at 41 seats.

“One of the key reasons why young people are unable to pursue farming is due to the cost of land,” Weaver said in a release. “By allowing ALR land to be subject to international real estate speculation, we are limiting their opportunities to get into this vital, sustainable industry.”

Furthermore, he said, the province today imports about 70 per cent of its vegetables from the U.S., particularly from California, and “with these regions increasingly experiencing extreme weather events such as droughts and floods, it is more important than ever that B.C. take the future of our food security seriously.”

Alberta, Manitoba, Saskatchewan, Quebec and Prince Edward Island have set up similar laws to protect agricultural land, leaving B.C. as “the only western province without such a law,” he added.

In Alberta, a foreign entity can’t own or control more than two parcels of more than 20 acres in total, while in Saskatchewan, non-Canadian citizens can own no more than 10 acres. Manitoba’s rule limits foreign interest at 40 acres.

In B.C., meanwhile, Vancouver commercial real estate newspaper Western Investor on Thursday quoted Weaver as saying foreign buyers have been looking elsewhere, including farms, for investment properties since the previous Liberal government set up a tax on foreign investment in Metro Vancouver property last year.

The paper cited a survey last year, conducted by credit union Vancity, which showed farmland in B.C.’s Lower Mainland running for between $150,000 and $350,000 per acre on parcels of less than five acres.

The same survey showed Metro Vancouver farmland running around $110,000-$120,000 per acre for farms around 20 acres, and $50,000-$80,000 per acre for parcels over 40 acres. It also showed almost a third of actively farmed Metro Vancouver ALR farmland is leased by farmers from non-farmer landowners.

While ALR land’s usage is limited to farming, each property is entitled to a single-family dwelling and owners can apply for exemptions to building and land-use restrictions, Western Investor noted, citing an application submitted in 2016 in Richmond to build a nearly 40,000-square-foot house.

Weaver told the newspaper his bill’s restrictions wouldn’t apply to anyone who pays taxes in Canada.

“We want to encourage people to come live here, work here, pay taxes here. What we don’t want is third-party, offshore interests using our land, our homes, as tools for speculative investment,” he said. — AGCanada.com Network

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As well, farm real estate is often the main retirement fund.

There is no question, too, that farmland has been an incredibly good investment in recent years. If you purchased farmland in Ontario for the average price of $3,000 per acre in 1994, that land would have been worth about $11,000 per acre by 2012, essentially quadrupling your initial investment.

With these kinds of returns to ownership of farmland, how can there be any question about the value of investing in it? But with any investment, past performance is no guarantee of future returns. Instead we need to look to the fundamentals and at what gives land its value.

Is land still a good investment?

Dr. Michael Langemeier at Purdue University urges caution: “We are already seeing weakness in the farmland market in the U.S.”

If cash rents go down because of lower commodity prices, there will be an impact on land values, Langemeier says. In fact, Langemeier believes land values will go down faster and harder than rent.

As well, land prices may be sideswiped as the economy improves and interest rates inevitably go up interest rates can hurt land prices too.

Langemeier suggests farmers calculate a Price/cash rent ratio (P/rent) on land they are considering. In the paper, “Farmland: Is It Currently Priced As An Attractive Investment?” which Langemeier co-wrote with Dr. Timothy Baker and Dr. Michael Boehlje, the researchers say P/rent over the past 50 years has averaged 18.2. This is relatively close to the average S&P 500 price/earnings ratio of 18.7 for the same time period. However, since 2004 the P/rent has been well above the average. Land prices peaked in August 2014 at 33 times rent.

The authors also compared a running 10-year average of the S&P 500 P/E and the P/rent and found that this ratio (i.e. P/rent10) now exceeds the peak S&P P/E10 recorded during the dot-com stock bubble in the late 1990s.

Their study concludes: “Land buyers beware… current farmland values are now extremely elevated in relationship to underlying economic fundamentals. If we are correct, this means that those purchasing farmland at current prices have a high probability of experiencing buyer’s remorse in coming years.”

Should you buy now?

For many farmers, owning land is more an emotional decision than an economic one. As long as they can make the payments, they are willing to purchase land. They justify their purchase, saying, “if I don’t buy it now, I will never get another chance.”

That may be true, but is ownership of that particular piece of property worth the risk that you will not be able to make payments if interest rates go up or commodity prices go down? Are you willing to tie up equity you already have in other owned land in order to secure an overvalued mortgage, especially since you will then not have that equity available for other needs? Are you willing to forgo the returns you are receiving on current investments which will have to be liquidated to meet the down payment for a land purchase? Can you live with the reduced cash flow?

Then there are also the “economic” arguments. We often hear that land has always gone up and it has outperformed the stock market. Lenders and those selling real estate or investments in farmland like to remind us of this, and over the long term it may be true. But like all investments, land appreciation is not smooth, constant, or guaranteed. We have seen land drop in value, as happened in the early ’80s, after which prices took a decade or more to recover.

Unlike investments such as stocks, you cannot easily liquidate overpriced land if land values begin to fall. It is much harder to sell to cut your losses on land than many other assets. You are making a long-term ownership commitment, so you better be sure you are not buying at the market peak.

With a P/rent of 40 or more, as it is right now in central Alberta, is this a wise time to purchase? Would you buy a stock with a P/E ratio of 40? Maybe you would if you felt it had good growth opportunities and had safe earnings, but can you say that about land today, given falling commodity prices, the risk of rising interest rates, and record-high land values?

Not making it anymore

Next there is the argument that “they aren’t making land anymore,” so it will always be worth more. But is that true?

U.S. farmers harvested 20 million more acres of corn and soybeans in 2014 than they did in 2005. A good portion of that land came out of the Conservation Reserve Program. We are also seeing large increases in seeded acreage in South America and Eastern Europe, and there is a large untapped potential in Africa.

But what about the two billion more people who will need to be fed by 2050? Interestingly, CNBC reported FAO estimates that while there is 0.218 ha of farmland per person today, that ratio will only decrease to 0.181 ha/person by 2050. If this is true I wonder if increased efficiency and production could easily compensate for this reduction in land per person.

Finally, potential buyers will argue that if they own the land, they do not have to pay rent. But rent is actually the return on your investment in land. You should still be paying rent to yourself on owned land, at least on paper. You are fooling yourself if you are allocating all your returns on owned land to the farm operation and paying yourself nothing for your investment in land.

This article was originally published as “Our other business” in the April 2015 issue of Country Guide

The post The business of owning farmland appeared first on Country Guide.

As an investment strategy, in fact, that might be a wise choice.

All eyes are on the market, wondering if prices are about to sag, but for Mike Boehlje of Purdue University, there’s no “if” about it.

With expectations of a rising interest rate meeting bearish commodity prices, American land values are softening. “We have been saying for the last year or more that we would expect them to decline over the next two to three years by 15 to 20 per cent,” Boehlje says. “It looks like that process is already underway.”

• More Country Guide: Has the price of farmland flatlined?

Canadian prices may be supported by the weak loonie, says Bob Thompson, an appraiser near Calgary who works in nearly all of Canada’s central and western provinces, but he’s concerned about the effect of lower commodity prices on future land values. And he doesn’t believe he’s alone.

A flat market has emerged in his area, though farm sales may not really show that until April since most deals go down in February and March.

In the U.S., there are myriad regional factors that make it difficult to point to clear trends. eastern Corn Belt (Indiana and Ohio) land values, for instance, tend not to ratchet up or down as much as western Corn Belt (Nebraska, Iowa and Illinois) values.

Still, recent survey results also suggest to Boehlje that this may only be the beginning of the decline. Yet land in the United States has been a wise investment, Boehlje adds. When part of a 20- to 50-year buy-and-hold strategy, it is a rare asset that offers both portfolio diversification and also an excellent hedge against inflation. But these economics haven’t favoured non-farm investors.

“Land, properly purchased, is a very good investment, but, like anything else, you can pay too much for it,” Boehlje says. “Land historically generates a four to six per cent earnings return, and if I pay for land and it only generates three per cent earnings return, I probably paid too much.”

Right now Indiana and Iowa farmland is only generating about a three per cent return he says, so investors just haven’t been able to stay in the game when farmers with long-term horizons start bidding prices up.

“Farmers have had the purchasing power and a willingness to bid land values away from many disciplined investors,” Boehlje says. “But they (investors) can still buy successfully in permanent crops in Florida, California, and other parts of the country.”

Not everyone shares Boehlje’s balanced outlook, however.

Based in Omaha, Farmers National Company manages properties for nearly 6,000 landowners across the country and a significant number of them have been non-farming investors. “For years while I’ve been with this company, we’ve had investors call and want to buy land,” says Jim Ferrell, company president.

That pace picked up starting in 2006, with investors taking over properties, improving them, and renting them out to local farmers. “Over a billion dollars’ worth of farmland was sold in 2012 in that class that we’re aware of,” Ferrell says.

But some people would say that’s when smart money started to get out of the market.

“I sit on the Federal Reserve Board here in the States, so I’m involved enough in interest rate discussions to know that we have fuelled an exuberance in land values that I think probably pushed land values at least 25 to 30 per cent above where they should have gone,” Ferrell says. “If you buy my theory, even if we just normalize interest rates, we’re going to pull a lot of money out of this market.”

The counterbalance, however, could prove to be the strong Chinese market and ongoing government support for the ethanol industry. “If you want to put three legs under a stool and set the ag market on top of it, it’s monetary policy, the influence of China that hit this market in 2006, and the ethanol market that hit in 2006 that created the perfect storm,” Ferrell says. As long as the Chinese market holds at six or seven per cent growth, it will support U.S. land prices. Projections for the ethanol business also look positive for the first half of 2015, and Ferrell also thinks biofuels will offer similar results.

“Land values are a symptom of what’s going on,” he says.

The post Is it time to sell your land? appeared first on Country Guide.

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.

• More on Country Guide: Is it time to sell your land?

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.”

The post Has the price of farmland flatlined? appeared first on Country Guide.

But is renting most of your acres financially sustainable in the long run? For that matter, if the only other option is purchase, is that sustainable either?

To find out how farmers are expanding their land bases in a fiercely competitive farmland market, we went directly to those farmers, along with a farmer-turned-realtor.

Competing with the world for farmland

For 18 years, Jeff Kwochka was a full-time dairy farmer near the Saskatchewan village of Clavet, a short drive down the Yellowhead highway southeast of Saskatoon. But for the last year and a half Kwochka has worked as a real estate agent with realty executives Saskatoon while winding down the dairy business.

Kwochka had expected he’d mainly sell city houses, but finds there’s demand for realtors who have a good understanding of the business side of modern farming.

The market for farmland has changed, Kwochka explains, and increasingly, farmers have new competitors, including developers, speculators and investors.

“When somebody puts land up for sale now, basically the whole world is looking at it,” says Kwochka.

“The foreign investors, they’re not outrageous,” Kwochka adds. “They’re not expecting huge returns. They’re happy with three or four per cent returns on investment.”

Farmers around Saskatoon aren’t the only ones facing competition for farmland, of course. for instance, there’s Melissa Leischner, who returned to the family farm about half an hour east of Olds, Alta. last fall after earning her agricultural science degree and minoring in business agriculture at the University of Saskatchewan and spending seven years in Saskatchewan, working in the agriculture industry.

Along with farming with her father, she holds down a full-time job with Cervus equipment, Leischner says. “I can farm and I can still be an agronomist. I never wanted to do anything else.”

Leischner and her dad currently own about 70 per cent of the land they farm, renting the balance. As a young farmer, Leischner needs to expand if she wants to stay in the farming game long term. But expansion is easier said than done.

Even though it’s an hour to Calgary, commuters are buying, Leischner says, and others want land for ATVs or horses.

Leischner puts the average cash rent in her area at about $75 per acre. But six miles west of her farm, she says rent hits $120 per acre.

Of course, acreage owners, investors, and developers aren’t the only ones boosting farmland values.

The siren song of high grain prices over the last few years has lured more young farmers back to the land, and this new generation of farmers means more competition for the same piece of ground, says farmer Lee Markert.

“It’s so competitive, especially in a time when there’s enough unreserved capital floating around bank accounts that producers can afford to make those down payments,” says Markert. “It might almost break them when they do it, but they can do it. And there’s enough competition that you kind of have to be in the right place at the right time.”

Markert earned a management degree from the University of Lethbridge and interned with DuPont Canada before returning to the farm. Today he runs a seed retail business, Markert Seeds, with his parents, near Vulcan, which sits between Calgary and Lethbridge. He also farms his own land, most of which is currently rented.

“Gone are the days where a neighbour from down the road who’s retiring decides to phone you up one day and say, ‘I’m selling that piece of land for this amount of money. Do you want to buy it?’” Markert says.

Quick to sell

Even finding out about land coming on to the market can be tricky. Leischner says people in her area are very hush-hush about land sales.

“It’s quick to sell. You’ll hear something’s on the market on a Wednesday. It’ll be off the market by Friday,” she says.

Markert says farmers need a long-term perspective when looking for land. “You kind of have to identify who might be getting out of business in the next five years, or wanting to slow down, and sort of start to court them ahead of time in anticipation of when they’ll be renting it,” says Markert.

Both Markert and Leischner believe finding more farmland depends partly on building goodwill in the community. Leischner says it’s good to keep neighbours happy with you: “If they’re getting behind, I’ll send a combine over.”

Markert works with other farmers through the seed business, talking everything from varieties to disease. The end goal is to build a solid business, not endear himself to farmers on the hope that they might rent land to him in future. But if the opportunity comes up,“at least they might think of me.”

Both the Leischner and Markert families have long-term rental agreements with extended family and former neighbours. But they don’t take those relationships for granted either, and both have offered to pay more in cash rent before their landlords asked.

While some might shake their heads at the idea of offering more than a landlord is asking for, Markert and Leischner have sound reasoning.

“You want to stay competitive, too, so someone else doesn’t come rent it out from under you,” says Leischner. “You never know, right? Money drives a lot of things.”

When prices picked up, the Markerts also decided to offer more to their landlords. He says it helped build trust and assure the landlords they’re being taken care of. “And they kind of know you’re not trying to take advantage of them.”

Rent or buy?

Kwochka says land is always a good investment. “But if it stresses your cash flow, then it’s not, because you do need 25 per cent down to purchase land, or be able to use 25 per cent equity from someplace else to put towards that.”

In today’s market, cash flow can be a worrisome consideration. For his part, Markert says he’d love to own the land his family started renting last year. He’s at a relatively early point in his farming career, though, and he says he doesn’t have to flow to purchase a lot of land right now. But he knows his costs, and knows he can afford the cash rent.

Leischner isn’t necessarily willing to cough up the money to purchase farmland either. If a nearby piece of land comes up, she’s keen to buy. but otherwise, “at $4,500 an acre, I think I’m going to rent,” she says.

But renting most of one’s farmland isn’t necessarily financially sustainable, either.

Kwochka says renting provides an easy exit for farmers planning to retire in 10 years. But farmers in it for the long haul need to build their owned-land base every year, he says. That equity provides stability in the rough years, he adds.

Nor does Markert think leaning heavily on rented land is financially sustainable in the long run. “At the same time, you’ll probably need less actual physical land to make up that equity because the price of land has exploded the way it has,” he says.

Leischner is on the same page when it comes to rented land.

“Honestly, no. I don’t think a lot of rented land is sustainable,” Leischner says. But she adds the rental rate makes a difference whether it’s even sustainable in the short term.

“When you’re netting a whole 10 bucks an acre on a canola field at $120 an acre, that’s not sustainable,” she says. “You’re just farming it to farm it, not to make money off of it.”

Markert doesn’t jump at renting everything that comes on the market either. Along with price, he looks at the land’s productivity, whether it’s a block or lone quarter and how far it is from his current operation. He also tries to keep the emotion out of business decisions.

“And sometimes you decide, because it’s available, I don’t care what I have to pay but I’ll make it work,” he says. “And I think those are the situations where you end up having regrets in the end.”

Kwochka has noticed fewer farmers buying land, which he attributes to both sinking prices and grain movement problems. but that doesn’t mean land prices have dropped, Kwochka says.

And Kwochka thinks the prospect of more good years ahead is enough to entice farmers back into the market. “They’re actually very optimistic. They do put seed in the ground every year and you’d better be optimistic if you’re doing that,” says Kwochka.

“They’re probably the most hopeful people out there.”

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