The rate of increase in farmland values declined last year, and that will likely be the trend, says Farm Credit Canada.
The average nationwide increase was 14.3 percent, down from 22.1 percent in 2013 and 19.5 percent in 2012.
“While the increases are still significant in many parts of the country, they do suggest we are moving toward more moderate increases for farmland values,” Corinna Mitchell-Beaudin, FCC’s executive vice-president, said in a news release.
“This is good news for producers since gradual change in the value of this key asset is always better for those entering or leaving the industry.”
J.P. Gervais, FCC’s chief agricultural economist, is forecasting even more moderate growth rates this year.
Quality problems with last year’s crop could weigh down crop receipts this year, but the price outlook for new crop is positive with some futures prices already higher than average prices for 2014.
The lower Canadian dollar will also have a positive influence on crop receipts, which is one of two major drivers for farmland values. The other is interest rates.
“We expect interest rates to remain low for 2015,” Gervais said in a video accompanying the news release.
“Considering where oil prices are and how important oil is to the health of the Canadian economy it is really hard right now to envision the scenario in which interest rates would climb.”
He believes farmland values will go up four percent, or about twice the rate of inflation in 2015.
Forecasting what happens beyond that is difficult. Gervais relies on the long-term agriculture projections produced by the U.S. Department of Agriculture and Agriculture Canada.
Both reports suggest grain and oilseed prices will be lower than they were last year but higher than the 1990-2005 period. Profit margins are expected to shrink because input prices likely will not follow crop prices down.
He believes the two reports are generally supportive of farmland values, although there is a distinct possibility they could decline in the high-price regions of North America.
“This is a little bit of what we’re seeing in some regions of the United States,” said Gervais.
“The Canadian market often lags the United States.”
The upshot is that producers who are considering buying land need to look closely at their balance sheet and cash flows to see if they can withstand a variety of crop price and interest rate scenarios.
Interest rates will rise at some point, maybe starting to climb in 2016.
“Using caution is a really smart strategy in the current environment,” he said.
Saskatchewan led the country last year with an average increase of 18.7 percent.
Farmland values have been rising by 19 to 29 percent each of the last four years, but they are not out of whack with crop receipts, which is a good sign.
“I’m fairly confident that the farmland values we have in Saskatchewan rest on sound fundamentals,” Gervais said in an interview.
Continued interest from out-of-province buyers looking for productive land will likely keep Saskatchewan’s increases well above the national average for years to come.
However, there were scattered pockets in the province where land values appear to have stabilized, which was also the case in other provinces.
Farmland values in Manitoba increased by 12.2 percent despite excess moisture, average to below average crop yields and quality and a decline in crop prices.
The increase was 25.6 percent in 2013.
Gervais said Manitoba has benefited from being sandwiched between Saskatchewan and Ontario, two provinces that have experienced strong increases the past few years.
Crop receipts tend to be more variable in Manitoba than neighbouring provinces, which prospective investors should keep an eye on.
Alberta’s farmland values were up 8.8 percent, which is lower than the 12.9 percent increase in 2013.
Strong beef prices have increased demand for pasture in central and northeastern Alberta.
The rapid growth of values in the province’s Peace region stabilized because of dry conditions that re-duced the 2014 harvest.
Gervais said Alberta is the only province where slumping oil prices could have significantly affect future farmland values.
“It is not impossible to see farmland value increases in Alberta be a lot lower than what we would expect otherwise,” he said.
Gervais said there may be zero increase in Alberta’s farmland values this year if oil prices stay depressed, which is what economists are forecasting.