Farmland values appreciated more last year than they have in any year since Farm Credit Canada began tracking them in 1985.
However, they’re about to cool.
The average value of Canadian farmland increased 22.1 percent last year, up from 19.5 percent in 2012, according to the FCC’s annual report on farm properties.
“Most of the increase was driven by strong commodity prices,” FCC chief economist J.P. Gervais said in a video accompanying the 2013 report.
Most of the increase occurred during the first half of the year before crop prices began to falter. A surge in cattle prices and a record harvest in the second half of the year helped maintain optimism in the farm sector.
However, the outlook is for a cooling off in farmland values because of lower crop prices, large carryout, rising input costs and high rental rates for land. That combination will reduce farm profits and the prices that farmers are willing to pay for land.
“We do really expect a slowdown in farmland values in 2014 and beyond,” said Gervais.
The “beyond” part comes from long-term outlooks prepared by the U.S. Department of Agriculture and Agriculture Canada.
Average crop prices over the next 10 years are expected to be lower than they have been in the 2005-13 period, although they will be higher than they were in the 1990-2005 period.
Interest rates are the other main driver for farmland values. Gervais expects short-term rates to remain low for the next 12 to 18 months, which will provide a “soft landing” for farmland values.
He expects the national average to mimic what has happened in British Columbia, where farmland values have been fairly stable every year for the past five years.
Saskatchewan experienced the biggest increase in 2013 with farmland values soaring 28.5 percent, up from a 19.7 percent increase in 2012. Manitoba finished second with a 25.6 percent increase. Farmland in Alberta appreciated by 12.9 percent.
Agricultural Producers Association of Saskatchewan vice-president Arlynn Kurtz said the FCC numbers appear to be accurate based on what he has seen in his area near Esterhazy.
He thinks the numbers are worrisome for the future of agriculture.
“It’s going to make it very difficult for young producers to get into the business,” said Kurtz, who recently retired from farming.
“It’s also going to make it very hard for smaller farms to be able to justify purchasing anything more than maybe a quarter.”
Kurtz is old enough to remember the 1970s and 1980s, and the current situation is somewhat reminiscent of what became dark days for Canadian agriculture.
Commodity prices in the 1970s were higher, on an inflation adjusted basis, than they have been in recent years, which drove farmland values to astonishing levels. The difference was that interest rates became sky-high in the 1980s, eclipsing 20 percent per year. And then crop prices tanked.
Farmers were destitute and FCC, the banks and credit unions ended up owning a pile of farmland.
“Heaven forbid if we ever see double digit interest rates. That is just going to kill the economy and kill agriculture again,” said Kurtz.
It scares him to hear that long-term interest rates are already on the rise and short-term rates could follow in a year or two.
His advice to young farmers is to become extremely good managers and hire crackerjack financial advisers to help them navigate what could be stormy seas ahead.