Rainfall totals, unseeded acres and spraying progress were some of the leading topics of discussion as producers gathered last week at Canada’s Farm Progress Show in Regina.
However, lurking just behind those conversation starters was the issue of farmland prices.
“How can you ever afford to pay for land the way prices have gone?” was a commonly asked question.
Many producers shake their heads at the prospect of buying land that in many cases has doubled in value in just a few short years.
Others expressed the opinion that land prices are unlikely to ever decline.
“With incredibly low interest rates expected for the foreseeable future, land is a great investment,” they claim.
Sure, land prices dropped like a rock from the early 1980s until the early 1990s in much of the Prairies, but interest rates were high back then and commodity prices were soft. That won’t happen again, right?
Logic dictates that eventually rates have to rise, but a major increase certainly doesn’t appear imminent.
Commodity prices are another story. Many analysts claim we’ve moved to a new higher plateau and won’t see $3 wheat, $2 barley and $7 canola again. However, we’ve also seen prices come down a long ways from their highs of 2012, and we’ve seen what logistical problems can do to delivery opportunities.
On top of that, many expenses continue to rise. It takes a lot of capital to farm big with large, new equipment. Still, those who haven’t expanded their land base often feel that they’ve missed an opportunity.
Crop insurance will offer significant support in the event of crop failures, as long as grain prices remain reasonable. AgriStability, although scaled back by the federal government, would also cushion losses for a year or two if the grain economy suddenly went bad. Income assurance is farmland price assurance.
It’s noteworthy and perhaps even comforting that some of the mega corporate farming models have floundered despite the generally good times in the grain economy.
There are also the usual sporadic reports of regular sized producers getting themselves into a financial bind, particularly if their seeded acreage has been cut by flooding.
Even in good times, there will be operations that aren’t financially solid. And with the input costs involved, it doesn’t take long to run through a tremendous amount of money.
However, when you consider all the factors, the most likely scenario for land prices over the next few years is what Farm Credit Canada chief agricultural economist J.P. Gervais likes to refer to as a soft landing.
According to FCC’s analysis, Sask-atchewan farmland prices led the nation last year with a massive 28.5 percent increase. Speaking at the Farm Progress Show, Gervais predicted a single digit price increase in the province for this year.
Pent up demand remains and a lot of farms have healthy balance sheets, but the drop in crop receipts is expected to make buyers somewhat less aggressive. Many farm real estate agents agree.
This soft landing would be a healthy scenario. Too many years of rapid price escalation and the worries over a farmland price bubble would gain credibility. If we get a soft landing, those waiting for a major dip in prices are likely to be waiting a long time. It would take prolonged financial losses and major economic pain to completely turn the tide.
That isn’t beyond the realm of possibility, but it’s an ugly scenario to contemplate.
Kevin Hursh is an agricultural journalist, consultant and farmer. He can be reached by e-mail at [email protected]
Many already know that farm land prices will drop, it is only a question of how far. In the 1980′s land prices in the west dropped nearly 65% over 10 years and took another 10 years to return to those lofty levels. It may not be as severe a drop in numerical terms this cycle but it will be far worse in real terms. Interest rate do not have to go to 21.75% like they did in 1982. How would 9 or 12% work for many grain producers today. How about a more moderate 25-35% land price drop for only 10 years, not 20. Oat prices where at 60 cents/bu., barley at 90 cents/bu., poorer and now hard to sell #2 and #3 Red Spring Wheat was at $2/bu. and there was a 3 bushel delivery limit on $5 canola at the elevator.
Without the CWB single desk, mythical logistical concerns can drive farm gate prices to the floor and we have lost other collectives like the Prarie Pools and mechanisms to keep our costs in order like the Crow Rate on rail service. When this all becomes serious enough and people wake up, no one will buy land at even zero % interest and much more importantly you will not be able to sell it.
Crop insurance offers little in the way of protection with increasing production costs and like mentioned Agristability was intentionally gutted adding to the lack of any financial risk mitigation for producers. Of note too is the fact that large farms have floundered even when running a so called efficient corporate model with little interest obligations. The ability or will to constantly throw off farm money at these larger situations to maintain financial health is virtually non existent.
With grain prices adjusted for inflation now the lowest they have been in decades farmers gravitate with easy credit and low interest to bidding up the best land to gain some kind of perceived size efficiency. When this happens the average price of land that “is” selling goes up in an attempt to offset low returns when in actuality land may not be worth more at all. If you benchmark all land prices off these values and theories you will invariably be in big trouble. This is what happens on the leading edge of a price bubble. The denial and the fiction that is spread to the contrary in an attempt to have you think otherwise and the small hints that there is a remote chance it could happen so everyone can wash their hands of any and all responsibility at a future point are all other early indicators of the pending dilemma that is in the works. The claim that everyone saw this coming and it kinda playing out as predicted has already been previously self validated.
The loss of the small and reasonable sized family farms as we know them and the national food security and sovereignty that they provide is ultimately the end game solution here. Vertically integrated corporate models will and are taking over and will flourish as they divert some portion of the newly priced $8 or $10 loaf of bread in the back door of their farm operations to back fill the losses that are needed to finish off any of the remaining family farm hold outs.
Take heart however. In our new modern world this is just business. Cheap and abundant credit and the stories of how wonderful it all is will help make it happen in due time. We can accept or deny the pain, suffering and blind sacrifice of the hard working men women and children who will lose much in the process of getting there, but there is no doubt, like many portions of the Agricultural business already, we will get there.