Fantasy Land Prices: Farmland Rental Auctions Coming to Canada?

Agr Realtors 20000It is the night before the release of the December USDA report.  As reports go, the December report is one of the least concerning to farmers.  The USDA will adjust ending stocks a bit but everybody seems to know that the January 9th, 2012 report will be the real big enchilada.  That’s when the final numbers from the 2011 crop will be recorded.  I’ve seen it many times when the grain market reacts violently.

Of course we do not know what will happen to prices. The last several months have not been kind to the grain markets as the slowest moving train wreck, sometimes called Europe has been a problem.  The European debt problems started many months ago.  Nothing has really changed except everything is gotten worse but it happens so slowly it is like a bleeding ulcer to the grain markets.  It’s getting to be quite a broken record.

I was reminded this week that despite the price drop in grains many producers are still planning on contributing to the 96 million acres of corn next year in United States.  I think that is quite a stretch, but yes, even at these price levels there are still profits to be made for 2012.  Interestingly enough many of these profits are being capitalize back into land.

I say that because this past week I learned that one particular parcel of land in Iowa sold for $20,000 per acre.  I can remember in Ontario when land got to $5000 an acre our eyes glazed over.  So when you hear that a farm goes for $20,000 per acre it makes you stand up attention.  This parcel of land was sold in Northwest Iowa in Sioux County.  I don’t know much about the land other than the fact it was bought by a neighbor.  Obviously, they had a lot of money.

At one time in my life I would only have a mild interest in the news.  However, about 3 or 4 years ago I was asked to develop an “Agriculture for Realtors” continuing education course and teach it to Ontario Realtors.  It was quite a challenge because no such course existed in Ontario.  The London and St. Thomas Real Estate Association was finding an increasing demand in farm sales and Realtors needed to know much more about agriculture.  There is a regulation in Ontario that realtors must submit to continuing education within a two-year period and my course was going to be part of it.  So over the past few years I have taught the course several times.  Needless to say, over that time land prices in Ontario have skyrocketed.

What do I mean? I’m talking about $10-$14,000 an acre in southwestern Ontario.  In fact a land appraiser told me he has never seen anything like it except in the late 1970s.  That’s when inflation was running at 12% and land was going up with it.

When I mention farmland values like that but my own eyes glaze over.  Keep in mind that southwestern Ontario is not in the footprint of the greater Toronto area.  These were farmers buying the land.  So where does that come from?

Well, the simple fact is it comes from profitability but it also comes from other sources.  Its no secret that money has been invested in farmland from folks who got burned in the equity markets over the last few years.  However, it is also farmers flush with cash, looking to put in a place other than “paper money.”

So it is tough to get your head around some of this.  For instance some academics say that land rent should be about 4.5% of the purchasing price of land.  So that means if land is valued at $10,000 per acre, we should be paying $450 an acre to rent the land.  In some jurisdictions renting is lagging behind land values, so “rent auctions” are taking place.  This is where an auction for renting land is held with bidders publicly competing on price.  I have never heard of this in Ontario, but there was one instance near Milverton where a standing cornfield was “sold” for $950/acre.  That’s not quite a rental auction but it’s close.  If profitability stays in Ontario agriculture, this may be our future.

When I teach “Agriculture for Realtors” I have a section on land values where I look at recorded land sales on the Farm credit Canada website.  The last time I did that was about 3 weeks ago in Mitchell Ontario.  I was showing actual land sales of $9000 per acre.  Many of the realtors that day were shaking their heads saying private sales were much higher.  I told them I did not doubt that.

It is likely to continue as experts say you should try to imagine what land will be worth in 30 years and price it accordingly.  I am one of the few who has actually seen land prices go down within a 10-year period over my career.  At one point in my career that represented a buying opportunity, but now I really don’t want to see that again.  That’s just another reason why tomorrow I’ll be interested in the USDA grain’s report.  On a monthly basis it usually relates directly to our profitability as farmers.  Of course that increasingly relates to the price of the land underneath us.  Of course the land is what many of us are all about.  It’s just all so complicated.