Farmland Prices Simmer: Where To Now?

It has been a couple years since I toured Ontario speaking about farmland prices and the great rise in values.  The value of our farms is typically the highest value asset on our balance sheet and therefore must be taken very seriously.  Of course, for some of us our land is a part of us almost bonded within our psyche and personality.  Its value can sometimes be the key to the rest of our farming operation.  Other times, it is the great constant, that great tangible asset on the farm that is taken for granted.

I read with interest this past week the Southwestern Ontario Land Values report from Valco, a London Ontario real estate appraisal firm.  In this study farmland in SW Ontario was pegged at $11,714/acre in 2015 up 3.83% from 2014.  That was a smaller gain than the year before which was 3.9% between 2013 and 2014.  However, it was a far cry from the gains of 22.8%, 29.3% and 21.4% seen in the three years before that.  In fact, in my home county of Chatham Kent Ontario, in 2015 land values actually decreased 5.7%.  It was an interesting throwback to me to read the statistics.  Land still is a hot commodity even during a time of lower grain markets.

It is what it is and for me looking back it was also hard for me to believe.  I was asked last week in an interview in Guelph Ontario about what I would do differently if I was going to do it all again.  I was being interviewed about my life for a future podcast being produced.  What I did say was my experience with 20% interest rates earlier in my career probably restricted me from some opportunity in the low interest rate era of the last five years.  Simply put, that cloud of 20% interest rates has never left me and borrowing a lot of money at this stage of my career wasn’t top of my mind.  However, in retrospect if I borrowed a ton of money in 2008 or 2009 and bought land, I would surf the wave up in land values.

In fact, I did buy my last farm in 2009 but I did not anticipate the rise in land values.  In Ontario farmland rose like a meteor partially because of much higher commodity prices and extremely low interest rates.  Capital had to find a home somewhere in the low interest rate era and much of it rushed into farmland in Ontario.  The same could be said in Québec and parts of Western Canada at different levels.  Two years later in 2016 as the Valco study has showed, we’re still there, but maybe a few cracks are showing regionally.  Land is still land and interest rates are still very low.

Of course the question is what happens now?  Should I still be buying land at these prices, especially at a time when the price of land is decreased where I do business?  It just so happens that I had breakfast with a farm banker the other day.  This question came up not only about farmland values but also about someone like me taking on a lot of debt possibly to purchase land at this stage in my career.  The interesting response I got at the end of the conversation was to keep buying land even if I had to go in debt to get it.  Of course, at one point our conversation was about 1978 or 1979 in Chatham Kent Ontario.

For those that you that don’t know, 1978 and 1979 were years of good commodity prices and farmland spiked in my area to about $5000 an acre.  Farmers that were expanding at the time bought land, which was financed with equity.  Then, commodity markets crashed and interest rates went to over 20%.  Land values plummeted, all the equity was gone and it was scorched earth across farm country.  So this is 2016 and we were wondering if it’s back to the future with land prices the way they are now.

There certainly are a myriad of opinions.  Simply put, the world has changed, the difference now is interest rates are still extremely low and cash commodity prices are really on par where they were last year.  There is also a multitude of capital around the world looking for a home.  Southwestern Ontario farmland might be a destination for that.  This still low interest rate world is creating those opportunities.  It’s not 1981; I don’t see those high interest rates coming back again.

Last August when I spoke in Ste. Hyacinthe Quebec on the grain markets, one farmer asked the question what I thought about land prices.  He said land was $20,000 an acre in Ste. Hyacinthe Quebec, would I buy more?  I choked a bit on the question, but I said that these high land values would be sustained as long as interest rates stayed low and the TPP did not take down Canada’s supply management system for dairy.  However, even though I think I was right, I still almost choked on saying stuff like that.  My roots are so deep in the bad times of the 1980s.

Of course the world is so different now and when it comes to farmland in 2016 and 2017, we/I cannot lose trace of that.  Farmland now is more of an investment vehicle for the world that it is for me to grow soybeans on.  Nobody knows the future and “they” are making lots more land in Brazil and Africa; so don’t let anybody tell you “they” aren’t making it anymore.  Simply put, low interest rates are the testosterone of the agricultural economy and land prices are a big beneficiary of that.  These land prices might be cooling off, but don’t be surprised if the conditions come together again they’ll head north once more.