While U.S. farmland values are beginning to slump because of a drop in crop prices, Farm Credit Canada thinks western Canadian farmland might escape a similar fate.
Prairie land prices didn’t shoot up as much as in parts of the U.S. Midwest, so they might not need to fall at all.
“I think we’re in a fairly stable, balanced position,” said Craig Klemmer, FCC’s senior agricultural economist.
“A lot of it has been playing catch-up at most.”
Klemmer said FCC expects Canadian farmland prices to slow the rate of increases seen in recent years, but values should still rise in the rest of 2016 and in 2017.
Rabobank Food and Agribusiness Research recently released a report called The Land Value Wave Dips, in which it predicts U.S. farmland rental rates will slip in the next year or face bigger declines in coming years.
“The cost of renting land remains sticky and unsustainably high,” says the report.
“If rental costs remain sticky at unsustainable levels through the 2017-18 growing period, individual land assets face the threat of much deeper devaluation as nutrient and crop protection programs are cut and abandonment increases.”
The term “sticky” refers to the tendency of land rents to rise in good times but resist decline when financial conditions get worse.
While the Rabobank report focuses on land rent in the U.S., it indirectly but closely reflects the underlying price of farmland. A rental rate reveals the price somebody is willing to pay for a piece of land and still receive a return.
Farmers in the U.S. rent a far higher proportion of their land than is common in Canada, where most farmers own most of the land they farm. In the U.S. it is not unusual for farmers to rent half or most of their land.
Farmland prices are hard to evaluate in Canada because so little changes hands. Klemmer said that in Canada only about two percent of land changes hands in any year.
U.S. farmers have been hammered by commodity prices far below those common in the 2007-12 bull market.
Land prices shot higher in those years, and rents followed them upward. Now that crop prices have slumped, many farmers find themselves dropping to break-even levels or even into losses, so high land rents aren’t sustainable.
If rents aren’t reduced, farmers might back away from future rental agreements, Rabobank says.
In Canada the situation might be different not just because of the slower rate of land increases, Klemmer said, but also because some of Canada’s crops have remained profitable.
“We’ve been insulated by the Canadian dollar,” said Klemmer.
“A 77 cent Canadian dollar definitely helps.”
Also, crops like some pulses and canola have been generally profitable. And rental rates aren’t such a drag on Canadian farmer profitability due to the lower proportion of rented land by Canadian farmers compared to their U.S. counterparts.
Canadian farmers face their tough land value challenges with buying and financing farmland.
But most farmers only occasionally pick up a quarter section, so even high-priced land can be “cross-subsidized” by the rest of the farm if values dip.
“We still have a very healthy land market,” said Klemmer.
“We’ll likely continue to see land prices going up.”