Tight supply supports price

Low interest rates are contributing to low inventories of farmland available for sale, a farm realtor contends.

Ben Van Dyk of Real Estate Centre in Alberta said older farmers are choosing to rent land upon retirement because that pays more than selling it and earning interest on the banked proceeds.

“They just hang on to what they know best,” Van Dyk said at an April 28 lunch meeting organized by the Canadian Association of Farm Advisors.

“That land is not coming to the market right now and that causes the price to substantially go up.”

Farm Credit Canada’s 2015 farmland values report, released in mid-April, showed a 10.1 percent increase across Canada, lower than the 14.3 percent increase seen in 2014 and much lower than the 22.1 percent increase in 2013.

Nevertheless, Van Dyk said farmland continues to be an excellent investment and he predicts continued double-digit value increases over the next five years.

Canadian farmland values since 1951 have averaged a seven percent increase annually, he said. Over the next 50 years, he thinks that approximate average will hold true.

Agricultural commodity prices contributed to land value increases over the past three years. Now that those prices are dropping, unirrigated land suitable only for small grains or pasture could see lower rates in coming years, Van Dyk said.

The global money supply is the other major factor keeping land off the market. With interest rates low and likely to remain so, investors seek more lucrative profit vehicles for their money.

“The money supply has dramatically changed since 1974 when everything was based upon gold,” Van Dyk said.

“Nowadays … the money supply has increased to reflect the growth in the economy. If the economy grows three percent, in principle the money supply is increased three percent and that money is always looking for the highest and best yield and the most steady supply.”

Investors seeking higher returns are not likely to consider farmland, and owners will not offer land for sale if they don’t believe they can obtain a good price.

“Land availability in Canada is at an all-time low as investors from across Canada have substantial access to capital.”

Farmland bordering cities, where urban sprawl is a factor, has always been in demand, said Van Dyk. However, the economic downturn in Alberta and Saskatchewan, primarily related to the energy industry, has cooled those prices as well.

Industrial land is also less attractive, he said, in part because of the slower economy and in part because of other options.

As an example, Van Dyk said industrial property in Lethbridge city sells for $250,000 to $300,000 an acre. If a new business needs five acres, it would be better off to spend $1.2 million to buy 80 acres in Lethbridge County.

Then it could use part of the land for the business and farm the rest, gaining benefit from commodity sales and from a lower tax rate.

In its recent report, FCC said the 11.6 percent increase in Alberta farmland values in 2015 was the result of many producers “purchasing land for expansion or to support succession planning.”

The report specifically mentioned strong pulse crop prices as one reason for land value increases.

In Saskatchewan, where farmland values overall rose 9.4 percent in 2015, FCC said prices in almost half the province were stable or lower than in 2014.

It noted limited land available for purchase in Saskatchewan and high demand for property on urban fringes.

Manitoba had the biggest farmland value increase in Canada for 2015 at 12.4 percent. FCC attributed that to farm expansion plans driven by a good crop year.

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