Farmland Arbitrage: What If It All Goes Awry?

corn Econ 510     Somebody told me this week I have an interesting career.  Two weeks ago I was in Bangladesh, all over the country.  The week of Feb 11th found me talking about farmland values in Creemore, Bradford and Blackstock Ontario.  On February 19th in Charlottetown PEI talking about the volatility in the grain market.  With my farm frozen in winter, I guess this is what I do.  I told the person who told me that, well, I’m a farmer first, and my farm is where my priorities are.

I was told that by a beef farmer who came to listen to me talk about farmland values in Creemore Ontario.  The auditorium was packed, testament to the hot topic of the day, “farm land values”.  I was suffering from a bad case of bronchitis, so I was hoping any semblance of a gravelly voice I had could keep up for a couple of hours.  Needless to say, wherever I went that week, farmers are buying farms.  It’s a white-hot market, but land is selling.  Southern Ontario is one of the hottest markets in North America.

It is also one full of surprises, at least to me.  Over the past two months I’ve crossed the province talking about farmland prices.  With a 30% rise in values in 2012, this topic is on everybody’s mind.  What’s interesting to me is how farmers are taking advantage of the arbitrage opportunities in farmland across Ontario.  I’ve met people from western Ontario who have bought farmland and moved to Eastern Ontario taking advantage of lower prices, selling out one place and moving to another.

It doesn’t stop with farmers selling farmland in western Ontario and moving to the east.  Just yesterday, I met a farmer who was buying farmland near Cochrane Ontario.  For those of you in the United State who don’t know where Cochrane is, its in northern Ontario, way up north, where you can catch the train to Moosonee on salt water James Bay.  So we are talking “up there”.  The farmer explained to me that he saw opportunity there.  With global warming and the rise in farmland values to the south, ultimately that land is going to be worth so much more.  Interesting, who am I to say he is wrong.

Frankly, this movement of “farmer capital” is widespread in Ontario, if not Canada.  If I’m finding out about it, there is so much more I don’t know.  However, don’t be surprised if your neighbor is buying farmland at the other end of the province.  Opportunity to arbitrage farmland opportunities in different geographic areas is becoming very real.

Last week I received a farm appraisal report from a firm in London Ontario.  I’ve read the 2010 and 2011 report, so the 2012 report was hot off the press.  It confirmed the 30% rise in farmland values from 2011.  Needless to say, to an old grizzled farmer like me, it’s striking.  The median farm value for land sold in 2012 in parts of Perth and Oxford counties was approximately $14,500/acre.  Keep in mind that is the “median”, which means half the farms were sold for less then that and half were sold for more than that.  Unbelievable!

How about if it all goes awry?  I don’t show up at these speaking events spewing sunshine blue-sky agricultural economics all the time.  I temper my remarks by the realities of the science called agricultural economics.  Simply put in the farming business, its up and down, you have good times and bad times and you always have to be ready in case things go off the tracks.  For younger people who have farmed over the last five years, the spectre of double digits interest rates and prices below the cost of production have been avoided.  However, at a certain point, one of two of those things will return and land values will drop.  The last person in will get hurt.

I say that because I believe it, but I also believe history doesn’t necessarily repeat, which means I may be captive from where I came from.  Just because I’ve paid 23.25% interest rates in my youth and sold corn for less than it cost me to produce it doesn’t mean it’ll happen again.  When I talk about farmland prices, I always mention that.  We really don’t know what the future will bring.  The road is littered with prophets who thought they knew.

So as long as US Federal Reserve chairman Ben Bernanke keeps interest rates low (he says 2015), we’re good.  Let’s keep our fingers crossed.  The road ahead in 2013 is checkered for a whole bunch of reasons. Farmland is a very “tangible” investment.  Hold onto it tight.  Take it from me, sometimes that means it’s a heck of a ride.