Farmland continues to be a great investment

It’s not quite like the 2011-15 timespan when farmland prices increased by 10 to 20 percent annually, but land prices continued to rise in 2020. Considering the grain price outlook for 2021, values should continue to boom.

Farm Credit Canada is reporting average farmland prices last year increased six percent in Alberta, 5.4 percent in Saskatchewan and 3.6 percent in Manitoba. The FCC report provides the range of prices and the average price for different zones within each province.

In Alberta, many of the prices are around $4,000 an acre, while Manitoba has many values around $3,000, with Saskatchewan more typically around $2,000. These all seem on the low side relative to the numbers bandied about in farmer conversations, but local economics and soil quality vary dramatically.

It’s a common lament that once you pay all the variable and fixed costs involved in grain production, it’s hard to pay the interest on a land loan let alone make a dent in the principal. Land, many say, is priced well beyond its productive value. That’s true, but it has almost always been the case.

The increase in land values has for years been greater than the interest rates on borrowed money. It’s a strong incentive to continue investing in land. It’s also a strong incentive for non-farming owners to continue renting out their land rather than selling it.

Land rents probably vary even more widely than land prices, but on land worth $3,000 an acre, let’s assume cash rent of $75 an acre net of property taxes. That’s a return of only 2.5 percent, but it still eclipses what you can earn in a savings account or GIC (guaranteed investment certificate).

And on top of rent, the value of your asset keeps increasing. Unless you need the cash, why would you sell? Where could you make a better return with such low risk?

For years, we’ve been told to beware of rising interest rates. With rates at historical lows, it’s reasonable to expect that they’ll eventually have to rise, but that doesn’t seem any more imminent that it did several years ago.

Significantly higher interest rates would be a two-fold game changer: increasing the cost of servicing farmland debt while also making investments other than farmland look more attractive.

Of course, the other game changer would be a dramatic drop in farm profitability. That doesn’t look imminent either when you look at the grain price appreciation of recent months.

Many producers missed out on much of the recent price spike. A lot of 2020 production was sold ahead of the price surge. However, new crop prices have rarely if ever been this buoyant ahead of seeding. Profitable prices can be locked in for a wide range of commodities.

Whether the big payoff will come from pre-pricing or from holding out for even higher prices is an open question, but even with rapidly rising fertilizer costs, it’s an amazingly strong outlook for the year ahead.

Weather is always a threat. Over most of the prairie grain belt, the past six months have been much drier than normal. Big production shortfalls such as those in 1988 and 2002 can occur, but revenue loss would be buffered by farm support programs, particularly crop insurance.

While we live in uncertain times, it’s a pretty good bet that when FCC reports on 2021 farmland values a year from now, there will again be significant increases.

Kevin Hursh is an agricultural journalist, consultant and farmer. He can be reached by e-mail at kevin@hursh.ca.

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