Why We Are Paying So Much for Farm Land?

I have often said, that if there is one constant in agriculture, it’s change.  In fact that has turned into a bit of a buzz phrase for many of us.  I can attest that as I grow older, sometimes I don’t really want change.  Needless to say, whether I like it or not, change it is.  Whether it is market conditions or the land underneath you, it’s always different, everyday.

Tonight in Courtland, Ontario I’m going to be speaking about the changing economic times and why we are paying so much for land.  It is a different topic for me as most of the time I speak about the vagaries of the grain markets.  When I was asked to speak on this I was a little bit surprised, but the more I thought about it, the more it made a lot of sense.  Simply put, the increase in Ontario farmland prices has been nothing short of startling to me.  My small mind has had a terrible time adjusting to it.

I say that from a position of what should be authority.  For instance several years ago I was asked to develop a continuing education course called “Agriculture for Realtors”.  I was asked by the London and St. Thomas Real Estate Association to develop this course to help realtors sell farm properties.  It was not easy for me to do that as the parameters were such that it had to be 3 hours long.  If you have ever spoken for 3 hours straight with a break in the middle, you’ll know how challenging it is.

Over the 4 years I’ve taught that course farmland prices have exploded into territory, which I never expected.  For instance in the Chatham Kent area of Ontario where I farm, good farmland has sold for up to $13,000 per acre.  Heavier land, typically clay-based, for corn and soybeans sells for half that.  At the same time and in some areas of Ontario where dairy production is heavily concentrated land prices have been rising as producers have been putting profits into land versus their inability to buy more dairy quota.  The underlying causes of the high land prices are low interest rates, high commodity prices and specific other stimulus such as the dairy example.  Simply put, farmland is hot in Ontario, hotter than ever before.

In fact you could argue that farmland has become a playground for the world’s capital.  A good example of that is www.bonnefield.com.  Call it what you will, but essentially “bonnefield” is a company, which pools investment capital to invest in farmland.  The reason that investment capital is being put into farmland from Niagara to Windsor Ontario is that over time it gives a very solid return on investment.  Companies like Bonnefield are only one example of many more that are taking advantage of the farmland boom.

There are many other factors that need to be considered when discussing these higher farmland prices.  Yes, as mentioned, low interest rates are almost like crack cocaine for borrowers.  It creates an environment, which makes it so much easier for farmers to buy large assets, whether that is farm machinery or land.  Much of the land that is been bought over the last few years has been bought on variable interest rates, ensuring, albeit in retrospect, the lowest carrying costs possible.  It has only added to the increased value of land.

High yields of corn with even higher prices have been a prescription for higher land prices.  For instance on some soils in southern Ontario where continuous corn can be cultivated, land prices have risen.  Corn offers a much higher gross margin than growing soybeans in southern Ontario.  Over the last 10 years, corn yields have been increasing at 5 bushels per acre per year versus soybeans, which is increasing at .32 bushels per acre per year.  So corn wins every time and the demand for land to grow it has increased.

None of this is really a secret.  However, the degree of increase in farmland prices over the last 18 months has been breathtaking, for old guys like me.  I suppose I always thought buying farms was a good investment idea, but to me it was more about farming. In fact, in this mild winter, I can almost taste a bit of spring, which automatically sets my hardwired brain to get ready to plant.  However, tonight I’m taking time to tell everybody why land prices have shot into the stratosphere.

Yes, change is our only constant.  The hard part though might be me.  This change has been so swift; maybe I am captive to my old ways and cannot change with it.  Does this mean that maybe I’m looking at a farmland bubble?  Oh, if I only knew.  It’s just another thing that makes this farming business such a challenge.