Sky-high land prices and slumping profitability means farmers need to be more hard-nosed when buying or renting land.
Experts at an all-morning session of Manitoba Ag Days said the margin for error on land values is disappearing because little profit margin is expected in 2015-16 crop prices.
“A lot of decision making has been done seat-of-the-pants, gut instinct,” Roy Arnott, a cost-of-production and farm management specialist with Manitoba Agriculture, said in an interview after his presentation.
“I’m not saying it’s wrong, or has been wrong the last four years … but I think we need some tools to make some better decisions.”
Arnott and Alberta farm management consultant Merle Good laid out a series of calculations and approaches farmers can take to analyze not only reasonable purchase and rental rates but also ways to understand if their particular farm business can handle land purchases and rentals.
“Can your business support it? That’s the question,” said Good.
“We’ve got to be careful when we’re getting to the end of the spike.”
Rent and land prices are intimately connected because both are attached to the profits that can be made from farming that land.
However, Good said the spread between rent and purchase prices can vary greatly. For example, farmland in Alberta was selling for 30 times rent values in 1981 but fell to half that in following years.
Some Manitoba farmland is currently selling for 50 times what it would cost to rent, based on a rent rate of $60 per acre and land prices of $3,000 per acre.
Good said that’s not likely to last.
“You guys are at the peak of valuation,” said Good.
“We’ve got to look at the cycles.”
He said Alberta land that he bought for $1,200 per acre in 1981 dropped to $800 after grain prices fell. It proves that farmland values can drop, even though it has been 21 years since the last time farmland prices fell and a long time since the post-1981 slump.
He urged farmers to calculate carefully whether to buy or rent land. High “land access” costs rob farmers of the ability to adequately finance the rest of their operations, such as equipment replacement.
“Can the business afford it,” he asked.
Arnott said farmers need to figure out their own numbers and decide what they can reasonably afford, regardless of what others are willing to pay.
He recommended checking out his rent and purchase calculators on the Manitoba Agriculture website.
“It’s a tool that you can use to put some numbers to your gut feelings.”