Farm Land Values Wobble Amid the Commodity Meltdown

Sprayer 375
This past week I’ve been involved in improving the drainage on my farm. Drainage in my part of Ontario is essential for successful crop growth. Without it, you are starting behind the eight ball for any crop you grow. You could have the greatest fertility in the world and the greatest machinery management but if your crop is underwater most of the time nothing is going to grow. So the tiling machines are running.

About three years ago I noticed on one particular farm some drainage issues. It was wet where it wasn’t supposed to be and I made the decision to rotate the crops into wheat to give me the opportunity to improve the drainage during summer. This past week I uncovered many drainage tile there were crushed and quartered. Essentially, with old clay tile you are at the mercy of every joint. 42 years after I helped put clay tile into the ground as a kid, this week I am replacing them with plastic tile laid with GPS and laser beams. I hope to return those farms to top production next year.

It is an expensive exercise, but one which is a lot less expensive than buying an additional farm. So I improve my land making it more valuable for that day down the road when I have to make decisions. A good drainage system in southwestern Ontario is not only essential for crop production but also to sustain the value of the land.

Of course the question is what will the price of farmland be in 2014 and 2015 based on the commodity meltdown that we have seen in the agricultural sector. Over the last few years I have been asked to speak across Canada on both grain prices and farmland values. Of course when you are speaking in an environment when land prices are rising, many people in the audience feel very good. The two key factors to higher land prices were always low interest rates and high commodity prices. In 2014 and 2015, only one of those holds true anymore.

So are land prices headed down or just headed sideways while we wait for the higher price escalator to get in gear. Almost every analyst I read is talking about lower commodity prices especially with United States having such a big crop over the next few years. In normal times, that means farmland values will be headed down but with interest rates still very low, the jury is out.

I recently read a report from Ryan Parker of Valco Associates in London Ontario. Valco publishes their impressions each year on farmland values as well as actual values. I have used their work before when I speak about farmland values across Canada. I was interested in what they were predicting for the future. Basically, they said that interest rates are set to remain low, they are not expecting short-term rates to rise very soon. However, they did pen a very cautionary note about agricultural commodity prices. They said that the expectations of high commodity prices like we had in 2011 and 2012 are not likely to return anytime soon.

According to the report variability will be the one constant result in the short term. In some areas of southwestern Ontario we might expect to see new highs made in 2014 but surely in some areas the old highs will be a thing of the past. Mr. Parker closed out part of the report by saying it is very likely that there will be fewer sales and more listings as vendor expectations outpace purchaser’s willingness to pay. Interesting stuff for a land market, which has been white hot over the last 5 years.

I thought that to be a pretty good answer. Farm real estate is quite a mixed bag with soil type being a big part of it. In tougher times, more marginal land is likely to see its value being eroded. At the same time in good times that same marginal land probably increases in value beyond what it is capable of. Generally speaking, with commodity prices down land prices won’t be at the high extremes, which they will have been leaning toward over the last 5 years.

Of course in Ontario there are lots of anomalies regarding farmland prices. The closer you get to the greater Toronto area, the generally the higher farm land prices are. Also too, wherever there is a preponderance of supply management agriculture, farmland tends to have higher prices caused by competition among farmers. So this variability that the Valco report talks about is so very true.

As I’ve said many times in presentations, land values are generally the highest value item on a farm balance sheet. In many ways, they set the direction for the farm future. From 1982-89, farmland values decreased in Ontario 25%. I was part of that, so frustrating at the time. Will that happen again this time? It surely will depend on how deep this commodity valley turns out to be.