The fact and fiction behind farmland prices

Who or what’s to blame for high farmland prices? It’s interesting how that question is being asked, implying that there must be blame involved and that we all agree that high land prices are bad.

A Canadian Senate committee recently came out with an underwhelming report saying that farmland prices are threatening the viability of the family farm and even the mainstream media is doing stories on farmland values.

On the contrary, don’t high farmland values show the viability of farming? And since most farms continue to be family farms, the viability of family farms has never been better.

Analysts like to trot out statistics about how much farmland will change hands in the next decade and how most farms do not have a younger generation interested in taking over. That’s why farms continue to get larger and the number of producers continues to shrink. If there wasn’t a strong market for land, that would be worrisome.

To be sure, the magnitude of farmland price escalation is startling, but it isn’t as evil or undesirable as many are claiming. Let’s examine some of the statements being bandied about.

Young people interested in farming can’t afford to get in. This has been true throughout the generations. Farmland has always been worth more than its productive value.

Ten or 15 years ago, returns from grain farming were dismal and even though land was cheap by today’s standards, you still couldn’t pay it off with what it produced.

Even young people taking ownership of the family farm from their parents are saddled with huge debts. Every family situation is different, but most people only get their start in farming because the previous generation gives them a break.

The outgoing generation needs money to retire. The incoming generation shouldn’t assume more debt than the operation can afford. And non-farming siblings need to be considered in the succession equation. All of this isn’t easy, but strong asset values provide a lot of options.

Outside investment has caused the big spike in land values. Investment money has certainly been a factor in some regions, but often this is tied to commercial land development. Out in the country, where the land is going to remain in farming for the foreseeable future, outside investment seems to have slowed.

Most of the price increase is coming from farmers bidding against other farmers. It’s the marketplace at work.

All those buyers of high-priced land will be sorry someday when prices crash. Be careful what you wish for. Dropping land prices will only occur if farm profitability goes in the dumpster for an extended period. Land might be cheaper, but even more difficult to afford.

In the U.S., farmland values have dropped the past few years in many areas due to poor corn and soybean prices. In Canada, we’ve been shielded from much of that pain due to the low value of our dollar.

One legitimate worry may be the growing attitude that farmland values will never drop. Given that perspective, farmland is always a good investment. It’s never too expensive. It’s only going to increase in value. It’s a sure thing.

What goes up can come down. Most markets don’t go up indefinitely. However, if too many farmers aren’t taking that into account, a future correction could be sharp and painful.

Farmland prices in themselves may not be as worrisome as the psychology fueling the escalation.

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