Watching the market | Economist says strong crop receipts will dip over the long term
BRANDON — Today’s sky-high land prices can seem dangerous to a farmer who lived through the 1970s boom and the 1980s bust and debt crisis.
However, land prices probably seem OK if you didn’t live through those times, one farmer noted at Manitoba Ag Days.
“If I was 21, I’d buy right into it,” said the farmer after a presentation by Farm Credit Canada economist Jean-Philippe Gervais, which showed today’s farmland prices matching the peak inflation-adjusted values reached in 1980.
High crop prices and low interest rates have helped farmland purchases pencil in a profit. Land costs more than $2,000 per acre in some pockets of the Prairies and more than $3,000 in parts of the Red River Valley.
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Prairie farmland prices rose dramatically as crop production became more profitable.
Farmers find themselves in a hotly competitive farmland market, often unwillingly pushing prices higher as they attempt to secure land that neighbouring farmers also desire.
However, Dan Caron of Manitoba Agriculture warned farmers to be careful with the assumptions that appear to make land purchases long-term profitable. He said high crop prices and low interest rates cannot be counted upon to be permanent.
That is particularly true for today’s historically high crop prices.
“It’s tough to make projections,” Caron said at St. Jean Farm Days in St. Jean Baptiste, Man.
“Two years ago, nobody would have (forecasted) crop prices like we saw this year.”
Gervais said farmers must be careful with predictions of a “new normal” of long-term high crop values. Eras of high prices tend to produce bigger supplies to remove the shortages that produce the high prices, regardless of climate change and growing food demand from the developing world.
“It’s been pretty unique for six, seven years, eight years now, but what about the possibility that we go back towards a different type of environment where prices are (lower)?” said Gervais.
“You don’t want to underestimate the possibility to be in a lower equilibrium where you have lower prices and lower crop receipts.”
The economic viability of farmland investment depends on the interplay of purchase price, financing costs, input and operating costs, crop yield and crop price.
Since 2007, high crop prices have allowed farmland to be priced far above levels that prevailed from the mid-1980s, while providing greater profits than were the norm during that same two-decade period.
The 1983-2007 period was marked by repeated bouts of losses, farm failures and a lack of financial progress for thousands of farmers. It also marked a bear market in farmland prices that slashed the value of prairie land.
Gervais showed a graphic showing Canadian land prices since 1971 and those same prices adjusted for inflation to show the cost in 2011 dollars.
Gervais said that in inflation adjusted dollars Canadian farmland peaked at $1,491 per acre in 1980 but fell back to about $800 by the late 1980s.
By 2000, inflation adjusted farmland values had risen to only $1,000 per acre, but then began surging, reaching $1,610 per acre by 2011. In 2012, Canadian farmland values surged again with a more than eight percent average increase.
Virginia Tech agricultural economist David Kohl has often noted that a period of booming land prices often sets up conditions for a farm crisis when crop prices fall or interest rates rise, leaving debt loads hard to cover.
Gervais said it’s hard to assess whether today’s farmland is reasonably priced.
“Is farmland overvalued or undervalued,” he pondered.
Present farmland prices are only slightly overvalued when using a simple measure of the number of years of gross crop receipts required to pay off the purchase price of the land. Contemporary prices are in the average range when low interest rates are included.
However, that raises questions about the direction of long-term crop price averages and long-term interest rates.
“You really need to have strong crop receipts to sustain the farmland values we see,” said Gervais.
In an interview, he said he expects crop prices to eventually enter a lower-priced era.
“I do believe that at one point we’re going to come down from this,” he said.
“The market will respond to this. We’re going to figure out how to increase supply, bring up yields again.”
Caron said farmland has been a great investment for the past 25 years and has often held its value even when farm profitability collapses.
However, he said calculating a reasonable price for farmland depends mostly on the estimate of future crop prices, which is impossible to know.
“Can we afford it?” he asked farmers in St. Jean Baptiste.
“Yeah. Possibly. It depends.”
