Deciding whether to cash in on high land prices

Farmland price increases have been nothing short of startling in recent years. You know land has become a speculative commodity when non-farmers who don’t know an air drill from a combine are making purchases.

Here’s a recent unsolicited email:

“Dear Mr. Kevin Hursh:

“I read your essay about farmland price trend. Not long ago, I visited a farm in SK. It is located at XXX.

“The farm covers 160 acres, of which, 110 acres are arable land. The farm has a house with a garage and an old tractor, but the building was built in 1920s. The soil is black colour, no irrigation.

“The owner offers a price of $249,000. How do you evaluate this price?”

For landowners, these would seem to be the best of times. There are lots of eager buyers, locally and across the country.

However, there’s also an uneasy recognition that prices are unlikely to rise forever, or at least, the rate of increase is likely to moderate. If you’re going to ultimately sell out, is now the time?

Should you sell the farm, rent the farm or help the next generation that wants to take over the farm? It’s a decision with which many are grappling.

Even modest farmland holdings can now be worth millions of dollars. This has long been the case in Ontario, British Columbia and Quebec, but it’s a more recent occurrence on the Prairies and particularly in Saskatchewan.

Suddenly, even some small farmers are millionaires, at least on paper, and it can be a great temptation to cash in as reports circulate about the latest high-priced land deal.

Farmland has typically been worth more than its productive value. In addition to being a revenue generating asset, it’s also an investment.

There have been some amazing returns for grain producers in the last few years, but costs and risks keep increasing.

Unless you were updating varieties, seed used to come from the previous year’s production. However, canola seed now costs $50 to $60 an acre, which would have been unconscionable not that long ago.

As well, most crops didn’t receive fungicide applications in the past, and fertilizer use was at much lower levels. The price tag for both wasn’t as exorbitant.

Every spring, we bury a bunch of money in the ground and hope for the best. The annual input investment is huge, compared to what a typical wage earner makes in the city. It’s not a game for the faint of heart.

Equipment costs have also escalated, and if you think you’ll get by with older equipment, beware of the cost of parts and labour. An older tractor or combine might look like a bargain, but the repair bill could rival the purchase price.

There’s never a time when some piece of equipment shouldn’t be replaced. If you aren’t making continual upgrades, at some point the entire equipment fleet is inadequate and a huge outlay will be needed to stay in business. This is an exit point for many producers.

Meanwhile, the weather and market risk seems higher than ever. Seeding delays are the current worry, winter has been excruciatingly slow to leave and the value of any commodity you’re growing could be dramatically lower or higher in a matter of weeks or even days.

A look through the auction sale listings will find some estate sales and retirements due to advancing age, but there are also cases where it’s a strategic decision to get out while the getting is good.

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