Slower increases in land value may heighten risk

Producers should be mindful that the slowdown in land value growth could increase their risk and that land values must be in synch with variables such as net income, interest rates, commodity prices and productivity, experts say.

As land values soften across the country, it’s increasingly important to keep a watchful eye on other farm variables.

Farm Credit Canada’s annual farmland values report, released April 29, said farmland values increased an average of 6.6 per cent nationally.

That’s the lowest growth recorded in eight years.

And there’s speculation the 2019 increase rate could be reduced by as much as half, mostly as a result of various trade agreements in the works and the ripple effect on Canadian agriculture.

So what happens if farmland values outpace the productive capacity of the land?

Understand the implications

“Fundamentally, if rising farmland values reflect higher profitability in Canadian agriculture, it’s a positive trend,” says Canadian Federation of Agriculture President Mary Robinson. But, she says, if farmland values begin to diverge from the underlying productive capacity of the land, “some producers may face a difficult situation.”

Robinson says the federation encourages farmers to make purchasing decisions based on a clear understanding of their cost of production and profitability implications.

Land values and productive capacity that are out of synch “can create real challenges for expanding operations in a rising interest rate environment,” she says.

Lower-value land attractive to buyers

Land values – and their implications and underlying causes - vary across the provinces. For example, in Saskatchewan, farmland values increases were above the national average, at 7.4 per cent. While that increase remains healthy, it’s down from last year, when Saskatchewan led the country with a 10.2 per cent jump.

Tim Hammond, owner of the province’s largest agricultural real estate company, Hammond Realty, of Biggar, says the lower 2018 values point to a situation found there and in other parts of Canada – that is, more buying activity on lower value land.

“In 2018, the market was hot for high value land, but there was little of it for sale,” he says. “So buyers started looking for less expensive land that they were prepared to improve. It’s a strategic investment.” 

For example, land values are lowest in east central Saskatchewan, at $1,321 per acre. But interest from buyers saw values increase more than 11 per cent to $1,475 per acre.

High values slowed realtor activity

In Saskatchewan, that strategy by farmers is keeping the market active. Hammond says that through the first quarter, he and his nine agents experienced 20 per cent more sales volume than during all of 2018.

“When values were high, sales were down,” Hammond says. “Many sales were going directly from owner to farmer. Now, we’re being asked to get more involved, to bring more buyers and sellers together.”

Some of those buyers are from out of province – Alberta, specifically, where farmland costs 80 to 120 per cent more on average than Saskatchewan.

A different story in Ontario

In Ontario, farmland values are already among the highest in Canada. So, there’s not as much room as in other provinces for prices to move higher, especially if commodity prices aren’t keeping or setting the pace.

That means the 2018 farmland value increase in Ontario of just 3.6 per cent – well below the national average – may not be as dramatic as it sounds, says agricultural economist Brady Deaton at the University of Guelph.

Deaton says there is considerable variation in farmland values within Ontario, depending on the location and the quality and quantity of farms coming up for sale in their area.

Price pressure from Golden Horseshoe

Many Ontario farmland owners are non-farmers, particularly in regions close to the Golden Horseshoe. In these areas, the appreciation of farmland values is entangled with the growth and wealth of urban areas.

As well, many Ontario farmers rent a significant portion of the land they farm. Deaton found changes in rental rates appear to be relatively stable when compared to price changes.

Deaton conducts an annual survey of farmland value and rental value. Nearly half of the 1,550 respondents to a question about projected farmland values in 2019 say they expect values to stay the same.

Bottom line

Farmers’ experience with changes in farmland values and appreciation varies considerably across and within provinces. Experts recommend farmers be aware of a general slowdown in land values since the softening of markets could heighten financial risk. Net income, interest rates, commodity prices and cost of production are some of the areas in which to keep an especially sharp eye.

Article by: Owen Roberts