Understand farmland economics, not just the farmland market

Farmers are sometimes accused of knowing lots about how to produce crops, livestock and other agricultural commodities, but little about agricultural markets and marketing.

(If you’re reading this column, you’re probably not one of those.)

However, when it comes to the most important market farmers operate within — their local farmland market — the average farmer’s knowledge and wisdom is deep. Many farmers can tell you how much every piece of farmland has sold for in the local area — for years and sometimes decades.

That makes sense. In the end of an average farmer’s career, what they have achieved over decades of operating a farm is a parcel of land that represents success, a family legacy, or a cashable retirement fund.

But do farmers understand the economics of owning land? I’m wondering this after igniting an extended discussion on Twitter between farmers discussing a story I wrote about a farmland investment expert urging farmers to support outside investors being allowed to own Canadian farmland.

It became clear in the discussion that farmers are well-informed and passionate about the value to them of owning farmland. This is something many have clearly spent much time thinking about.

But it also became clear to me that some of the thinking around farmland investments by farmers follows dodgy reasoning that wouldn’t withstand much scrutiny in other realms of investing.

Some argue that farmland always goes up in value and is probably the safest investment there is. That’s part of the “they ain’t making any more of it” line of thinking.

But does that always have to be so? Much of the logic behind the belief that farmland values will always increase comes from the connected belief that the world’s population is inexorably increasing and getting richer, spurring a never-ending increase in food demand.

Maybe that won’t happen. Certainly, some believe the world’s population is near the peak and could begin declining in a few years. It is already radically greying as birth rates plunge. If demand falls while productivity keeps increasing, well you do the math.

The long, long trend of world food demand growing and growing might not be permanent. As traders say, the trend is your friend – until the end, when it bends.

It’s pretty risky to put everything you have into one type of investment, as any investment advisor will tell you. Yet that’s what many farmers do with farmland.

Some argue that plowing all of a farm’s profits into buying more farmland makes sense because it’s a form of forced savings. That makes sense for farmers who would otherwise fritter away their earnings, but it’s pretty sad to accept that farmers can’t learn to invest in things other than farmland and would waste their money if they weren’t up-to-their-necks in mortgage debt.

Perhaps if some farmers weren’t solely focused on piling up more acres they would find other places to invest their money that wouldn’t see them triple-down on agriculture.

There’s a question I think some farmers don’t examine often: Are they buying farmland in order to farm, or farming in order to buy farmland?

It’s a crucial question that I know some wise farmers have thought through, but in my experience, many have never stopped to think about it.

The answer to that question makes all the difference in terms of the reasonableness of land purchases. If farmland purchases are needed to produce the most efficient, best-managed farming operation, they seem like a reasonable focus. You need land to farm, and you need enough to farm with scales of efficiency. If the price offers a reasonable shot at adequate profitability and return on investment, then it’s easy to justify.

But if a farmer is farming simply with the goal of being able to buy more farmland, at whatever the going price is and without matching that to efficiency of production, equipment, financing, labour, etc., then it’s a form of farming as land speculation. That’s when you really need to know what your future profitability and farmland prices will be.

How distorted are farmland values by people buying land that is priced far above reasonable expectations of profitability? Some of it, I know, comes from farmers dealing with the same market dynamics that often dominate stock and futures markets: FOMO and the “greater fool” theory.

FOMO: Fear of Missing Out. If I don’t buy that land I might be missing my chance at getting in on an ever-rising market.

Greater Fool theory: I might be a fool for paying so much for this farmland, but an even greater fool is bound to come along who will pay me even more for it when I want to sell.

There is a pile of research on farmland values and investing on both sides of the Canada-United States border, and indeed for markets around the world.

In the next few weeks, I think I’ll wade through that research and try to uncover the best-proven principles for assessing farmland purchases and investing. I’m not sure what I’ll find, but I’m sure that’s true for some of you, too.

Farmland is a gigantic market in which farmers have most of their lives’ profitability invested. Maybe it’s so big it’s impossible to see without standing far, far back to get some perspective.

That’s what I’ll hope to bring you in coming weeks.

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