A strong agricultural economy fuelled by low interest rates, growing world food demand and resulting higher commodity prices continue to underpin a national increase in average farmland values, according to Farm Credit Canada’s Farmland Values Report, released earlier this week.
The average value of Canadian farmland increased by 10.0 per cent during the second half of 2012, according to the FCC report.
The report provides information about changes in farmland values across Canada. In the two previous six-month reporting periods, farmland values increased by 8.6 per cent and 6.9 per cent. Average farmland values remained virtually the same in British Columbia, New Brunswick and Newfoundland and Labrador. Average farmland values increased in the other provinces. Quebec experienced the highest average increase at 19.4 per cent.
Canadian farmland values have continued to rise over the past decade. The current average national increase of 10.0 per cent is the highest since FCC began reporting. The second highest increase of 8.6 per cent occurred in the first half of 2012. The last time the average value decreased was by 0.6 per cent in 2000.
“The market is currently being driven by existing producers interested in expanding their current land base,” says Michael Hoffort, FCC senior vice-president of portfolio and credit risk. “With most transactions involving an incremental addition to the holdings of established operations, it is common to see aggressive bidding to secure land available for sale. Producers want to achieve economies of scale and use newer technology to farm larger areas. They also recognize limited opportunity to purchase land near their current operations.”
The national value of farmland has increased at an annual rate of 12 per cent on average since 2008, about twice the level it did from 2002 to 2007.
“Strong crop receipts create a favourable environment for higher farmland values,” said Jean-Philippe Gervais, FCC chief agricultural economist. “Low interest rates make it easier for producers to consider expanding their farm operation.” He cautioned buyers to do their homework and ensure their budgets have room to flex should commodity prices fall back from current highs or interest rates rise to more traditional levels.
Gervais notes that current farmland values also reflect expectations of future crop receipts. Recent agricultural outlook reports in Canada and the United States suggest that while crop prices are expected to come down from recent highs, prices are projected to remain above historical averages over the next ten years. “The outlook for Canadian agriculture is really positive,” Gervais says.
“While there is some concern that farm debt in Canada is increasing, net farm income — especially in the grain and oilseed sector — has roughly increased at the same pace,” Hoffort adds.
Increasing farmland values might make it more difficult for young producers to expand or get into the business. Alternatives are to lease some land — not giving up the possibility to build equity by purchasing land, but complementing the business model by looking at the leasing market. Crop share rental agreements and joint ventures can sometimes meet the needs of landlords and farmers, but the decision to buy or lease really depends on the financial situation of individual producers.
According to the 2011 Ag Census, the majority of the total land in agriculture (including areas that were used by others) in Canada was owned by those who operate it, at 61.5 per cent. This is followed by rented land at 21.9 per cent and land leased from government at 13.1 per cent.
The FCC Farmland Values Report has been published since 1985. FCC established a system with 245 benchmark farm properties to monitor variations in bareland values across Canada. FCC appraisers estimate market value using recent comparable sales. These sales must be arm’s-length transactions. Once sales are selected, they are reviewed, analyzed and adjusted to the benchmark properties.