Canadian farmland values are still on the rise, according to Farm Credit Canada, but the rate at which they are rising is slowing.
In its 2019 Famland Values Report, FCC said the average value of farmland across Canada increased by 5.2 percent in 2019.
That’s the smallest annual increase in at least a decade.
The 2019 increase follows gains of 8.4 percent in 2017 and 6.6 per cent in 2018 and continues a five-year trend of softening appreciation in average farmland values across the country.
In the Prairie provinces, Alberta farmland values rose by 3.3 percent last year, down from 7.4 percent in 2018. Saskatchewan values rose 6.2 percent and Manitoba values rose four percent.
“The days of sharp increases in farmland values continue to be replaced by more modest growth,” said J.P. Gervais, FCC’s chief agricultural economist.
“Changes in commodity prices, uncertainty around global trade and some challenging weather conditions may be tapping the brakes on an otherwise healthy and robust Canadian agriculture industry.”
The highest provincial increases in 2019 were observed in the Atlantic provinces, the FCC report said.
Prince Edward Island saw an average increase of 22.6 percent in 2019 and farmland values in New Brunswick were up 17.2 per cent.
In an April 3 conference call with reporters, Gervais said a number of factors are influencing the demand for Canadian farmland and the price that buyers are willing to pay.
Low interest rates are supporting prices along with a limited supply of farmland on the market in some provinces.
On March 27, the Bank of Canada lowered its target overnight lending rate to 0.25 percent in an effort to spur the economy and make more credit available to people and companies affected by the COVID-19 pandemic.
Gervais said commercial lending rates are already near a historical low but are still about half a percent higher than they were in early- to mid-2017.
On the other hand, declining farm incomes and uncertainty surrounding the COVID-19 pandemic are dampening interest in farmland and prompting would-be buyers to more closely assess risk.
“There’s lot of uncertainty right now, so I expect more caution from sellers and I expect more caution from buyers,” he said.
“But having said that, again with low interest rates and (projected) farm income that might not be too different
than what we’ve seen in recent years, I would expect a similar pattern in land values in 2020….”
Gervais conceded that many farmers saw a change in their financial positions in 2019, which has affected capital spending plans.
“We had some significant production challenges coast to coast in 2019,” he said.
“Margins were tighter and we eroded working capital….”
The price of land relative to per acre farmgate revenues is also increasing, and is now at its highest level ever, he said.
“That ratio of land prices to (farm) income has been going up and 2015 is the period where it really started to shift….”
The impact of COVID-19 could also impact future land-buying decisions in 2020. It remains to be seen how markets for Canadian commodities will fare in the post-pandemic global economy.
When asked about the impact of COVID on the value of Canadian farmland, Gervais suggested that he expects farmland values to remain on a similar trajectory of modest annual growth.
But a decline in farmland values for 2020 is possible, he added.
“There’s no guarantee… that you wouldn’t see a decline (in farmland values) at some point, especially given that the valuations of land, relative to farm income, is at the highest point it’s ever been.”
“Do I anticipate (a decline)? The answer is no, I don’t. But I can’t rule out the possibility.”
“Given the uncertainty, I expect farmers, ranchers and food processors to continue being careful with their investments.”
Farmers and ranchers should pay close attention to their risk management plans and be prepared for a broad range of potential economic challenges, such as variable production, volatile commodity prices or disruptions to global trade, Gervais added.
“It (2020) is going to be an up and down year. There’s going to be quite a bit of volatility so make sure you’re fully engaging your risk management plans….”
“The outlook remains positive but I’d like to acknowledge that there’s quite a bit of uncertainty.”