From FCC Express by Owen Roberts
Farm Credit Canada released its Farmland Values Report earlier this week. It shows a continued rise in farmland values in 2014, but one that wasn’t as steep as the previous year both nationally and in many key agricultural regions. Average farmland values in Canada had a 14.3 per cent increase in 2014, compared to a 22.1 per cent increase in 2013.
“2013 was a really strong year,” says Ron Bonnet, president of the Canadian Federation of Agriculture. “I think what we’re seeing is a matching up of farmland values and commodity prices. You can usually draw a link between the two.”
The report reveals a strong demand for cropland and farmland, including an increase in value of the more marginal land to reflect cattle prices and a need for more pastureland.
FCC attributes drought in the United States as one reason for the 2013 spikes. Jeff Leal, Ontario’s minister of agriculture, food and rural affairs, adds many factors may influence the value of land and the price of food.
“These values and prices are usually determined by the market,” Leal says. And in key Canadian agricultural regions, such as Ontario, Quebec and the Prairies, that market has slowed down.
In particular, Manitoba and Saskatchewan showed the most significant change from 2013 to 2014, slowing from an increase of 25.6 to 12.2 per cent and from 28.5 to 18.7 per cent, respectively.
The figures also show a trend towards more steady values, FCC says.
“While the increases are still significant in many parts of the country, they do suggest we are moving toward more moderate increases for farmland values,” says Corinna Mitchell-Beaudin, FCC executive vice-president and chief risk officer.
“This is good news for producers since gradual change in the value of this key asset is always better for those entering or leaving the industry.”
Other provinces, including British Columbia, Nova Scotia, New Brunswick and Prince Edward Island, continued to see single-digit increases, while the value of farmland in Newfoundland and Labrador remained unchanged from 2013.
J.P. Gervais, FCC’s chief agricultural economist, predicts a “soft landing” for farmland values since crop prices began moving closer to the long-term average.
While lower interest rates make it tempting to buy land, Gervais says producers need to exercise caution.
“Interest rates will eventually increase, even if this is not on the 2015 horizon,” Gervais says. “Expanding world stocks of grains and oilseeds could bring prices down further, creating tighter margins.”
Bonnet agrees and says producers will carefully monitor their total debt load to keep that under control while keeping an eye on interest rates and commodity prices.
“Livestock is expected to remain strong this year,” Bonnet says. “There may be some back off on crops which may hold off purchasing in the next year.”
Tighter profit margins may also affect the land rental market. Rental rates usually take a little time to adjust downward following lower grain and oilseed prices. Multi-year leases are also gaining in popularity.
“Producers should be encouraged that a weak Canadian dollar, expanding trade agreements and growing world food demand are helping to enhance the demand side of the market for Canadian commodities, creating a positive long-term outlook for agriculture,” Gervais says.
“Land is a valuable asset and there really isn’t a one-size-fits-all formula for determining when to buy or sell,” Mitchell-Beaudin says. “Producers really need to take a close look at their operations and ensure they can manage through a number of scenarios when it comes to revenues and expenses.”