Farmland values across Western Canada continued their upward trend in 2020, despite a global pandemic that turned the rest of the Canadian economy on its ear.
Average farmland values rose by six percent in Alberta last year, 5.4 percent in Saskatchewan and 3.6 percent in Manitoba, Farm Credit Canada said in its 2020 Farmland Values Report, released March 15.
Average values across Canada rose by 5.4 percent, modestly more than the 5.2 percent national increase recorded in 2019.
JP Gervais, FCC’s chief economist, said strong demand for Canadian farmland was driven by different factors in different regions of the country.
In general, however, strong farm incomes in 2020 and historically low borrowing rates drove demand from coast to coast.
Across the country, producers of grains, oilseeds and pulse crops saw gross farm incomes increase, on average, by an estimated 18.2 percent in 2020, according to data from Statistics Canada.
We saw “very, very strong income as a result of strong prices, especially in the second half of the year,” Gervais said.
“That’s one driver that applies coast to coast. The second one is low interest rates,” he added.
“If you look at the average borrowing cost in Canada in 2020, it came all the way down to 2.25 percent, so that’s an historical low when it comes to average borrowing costs that businesses faced.”
Gervais said strong crop receipts were a key factor driving farmland prices higher in the Prairies.
Based on FCC data, the number of farmland transactions were relatively stable across the West and supplies of available farmland remained tight.
“We noticed quite a bit of activity in the second half of the year in Saskatchewan, and that is related to the run up in commodity prices… and the positive impact that had on overall receipts,” Gervais said.
Demand for farmland was more muted in areas where more farmland is used for livestock production. That was especially evident in early 2020 when the effects of the pandemic were having a profound impact on livestock sales and slaughter capacity.
“If you look at the livestock sector, this is where you had quite a bit of stress, especially in the cattle sector but as well in the hog sector,” Gervais said.
“Disruptions in packing plants, backlogs of animals, (and) lower prices on both sides of the border really did put a lot of financial stress on livestock operations in 2020 and hence, when it comes demand (for land) from livestock operations, it’s been muted in 2020.”
Gervais said he expects farmland prices on the Prairies to continue rising in the first half of 2020 but he urged buyers and borrowers to consider the potential impact of future rate hikes that could occur in 2021 and beyond.
The Bank of Canada said last week (March 10) that it has no intention of increasing its benchmark overnight rate for at least two years. However, some commercial lenders think inflationary pressures might warrant a rate hike earlier than that, perhaps in 2022.
Commercial lending rates for five-year fixed mortgages are already as much as half a percent higher than they were a month ago based on yields from long-term fixed-rate bonds, and a full percent higher than they were six months ago.
Short-term commercial lending rates have remained constant based on the Bank of Canada benchmark, which has remained unchanged at 0.25 percent since early 2020.
The central bank lowered the benchmark rate by 1.5 percent last year, shortly after the COVID-19 pandemic began to wreak havoc on the Canadian economy.
“That (a change in interest rates) is one of the things that I think is absolutely critical to monitor moving forward for operations that are think about buying…,” Gervais said.
“It’s not that we have strong inflationary pressure now but the markets are concerned about future inflation and that, I think, is pushing up rates.”
Visit www.fcc-fac.ca/fcc/resources/2020-farmland-values-report-e.pdf to view FCC’s full report, including provincial and regional valuations.