Farmland remains a good buy

Despite some market signals, analysts see farmland as a stable long term investment


Analyst Don Hoover remains bullish even after sketching out farmland’s price volatility, its potential for double-digit declines in coming years and reasons why the market might be turning down.

“If I had a million dollars today, would I go invest it in farmland? The answer is, ‘yes,’ ” said Hoover, president of farmland appraisal company Serecon.

Terry Longtin, vice- president of the Farmers National Co. in Grand Forks, North Dakota, shared that view, even after seeing farmland prices in his area fall in the past year.

“I agree. I would do the same thing with it,” said Longtin.

The farmland value experts told Informa Economics’ annual Canadian farm outlook conference that farmland prices can fall when farm net earnings decline or interest rates rise.

However, they can be relatively stable compared to other investments.

“There is less variability and fluctuations in the land value than there is in gold,” said Hoover, who based his observations on decades of data.

“Investing in farmland is probably a more stable investment than gold or oil or the Canadian economy.”

Farmland has attracted money from many non-traditional sources in recent years, including the Canada Pension Plan, investment funds, wealthy oil industry workers and hobby farmers.

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It has created regional and local anomalies, with some areas of Alberta, for example, having smaller average farm sizes and higher prices than in Saskatchewan.

“That’s because of the dominance of the Highway 2 corridor (between Calgary and Edmonton), where you’ve got a lot of farms that are bought for hobby purposes,” said Hoover.

The land along the highway to Fort McMurray, Alta., which is in the heart of the oilsands, is also highly priced. It is divided into small parcels as oil industry workers buy properties on the way to where they work.

“We have a factor here that’s a little different than we would expect.”

Farmland values typically tend to grow with time, even if there can be major sell-offs over the medium term.

Farmland in Saskatchewan and Alberta slumped in value between 1980 and 1993, declining by more than 50 percent in inflation-adjusted dollars. However, today Saskatchewan land has risen back to its pre-slump highs and Alberta land is at record highs.

Prices have declined in many parts of North America in the last year, with Longtin showing good quality land declining an average of five to 10 percent. Marginal land has declined more.

That downdraft is likely to continue for awhile.

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“There is some pressure, with these crop prices, to bring it down,” said Longtin.

Farmland rent in his area of the U.S. Red River Valley increased from $100 per acre to $250 in recent years but have dropped 10 to 15 percent in the last year. Sale prices show the same trend as profitability weakened.

Hoover said farmland is now being valued highly compared to its ability to generate revenue from crop production, but there are many buyers, which keep valuations high.

Most of those buyers are nearby farmers, who will pay top dollar for neighbouring land. Longtin said the main sellers are estates of deceased farmland owners.

Hoover said the short-term trend for farmland prices in Western Canada is probably flat, or “net zero.”

However, different assumptions about interest rates, net profits and the Canadian economy sharply change that expectation.

Hoover said farmland values could fall 19 percent if interest rates increase half a percent per year for the next four years, farm revenue drops five percent per year, and Canadian gross domestic product and inflation rise two percent annually.

However, farmland values could rise 19 percent if interest rates are steady, farm revenue rises three percent per year, and GDP and inflation rise two percent per year.

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ed.white@producer.com

  • ed

    The way this article is written, it is not a wonder this guy has not got a million dollars to invest in farm land. If he ever does, hopefully he has the good sense to let this land bubble complex go thru it’s “worse than the 1980’s” style free fall that has started now before he heads into it. Lower interest rates will not stop this now and higher rates will increase the speed at which it is happening. Land adjusted for inflation is not worth what it was in purchasing power per acre at the height of the early 80’s and may never be again. Owning it has many ownership perils but if you bought it in the late 80’s, rented it out, (don’t farm it yourself) and sold a year ago it was not a bad hedge against inflation for your urban or government 9-5 job. This cycle will happen and is happening again. Investing is all about timing and ya better stay tuned on this one. Wheat prices and all grain prices adjusted for inflation have been dropping since for ever so operational loses should not tempt one who is interested in land as a hedge to do the actual work part of it that much, as long as you can find others to do it for you. Investing usually is associated with carrying on with what you do for a living, checking on the investment a few times a year, and deciding when to enter or exit the different parts of your portfolio all things considered. Unlike the Canadian Pension Plan that can simply increase CPP rates for any potential screw ups, individuals need to show more due diligence and be a little more careful with their investments.