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This article was previously published in Western Producer and has been reproduced with permission.
There is no doubt we have seen a significant surge in the value of prairie farm land over the past 10 years. In fact, from 2005 – 2015 over a 10 year time frame, we’ve seen values triple in many areas. There are some key factors that have played a role in this so far and will no doubt impact any future movements in the price.
Low Interest Rates
Low interest rates have made it easier for more producers and investors to cash flow the larger price tags. Rates have been low for so long there is a whole generation out there that is not old enough to remember when interest rates were much higher. This generation would be one of the more aggressive buyers and they carry a much higher risk tolerance. At this time, there doesn’t appear to be a clear indication interest rates are going to rise significantly any time soon and so if rates continue to stay low, that will further fuel the rise in land prices.
Some commodity prices have settled (wheat, canola, oats, peas) while others remain very strong (lentils, chickpeas). Depending where the land is located, we may see some land price stabilizing occur. I wouldn’t expect a decrease in land prices just yet, like what has happened in the U.S. in some areas but some stabilizing may occur. However, for the areas strong in the pulses, we should expect land prices to remain strong and possibly increase.
Economics is driving a lot of expansion as farms look to increase in size to become more profitable. Given the recent increase in profitability, the industry has seen a resurgence of young people returning to the farm to take over. As such, the farm needs to be larger to generate enough return to provide both a living for the new generation and a retirement for the older generation. However, farming is an expensive business. Large expansions take a lot of cash and there are limits on what can be borrowed to achieve this. The recent surge in expansions has pushed many farms to their borrowing limits and from that we may start to see a cooling of the expansion plans for a while, which could stabilize land prices in some areas.
It’s interesting to see that more and more investors are interested in farm land. With interest rates being low and financial markets being less and less predictable, farm land seems to offer a nice stable return and it’s tangible. Speculation is no doubt one factor for this interest, so what do they know that we don’t?
Urban Sprawl continues to occur on the prairies as people look to move out of the cities and into the country. There is significant demand for both acreages and whole quarter sections for people to build their estates and with the rising cost of property inside the city, farmland is a relatively cheap option.
The weather is virtually impossible to forecast with any accuracy. However, with the advances in technology both in genetics and in machinery, there is an ever increasing resiliency in the overall prairie crop each year. If producers continue to experience plentiful harvests (in general), it will likely push the price of land higher.
It’s also worth pointing out that farm land in the prairies is undervalued due to the political restraints being placed on ownership. There are pros and cons to this, but the fact is if you compare the value of farm land in the Canadian prairies to that of B.C., central Canada, the U.S. or even Europe where ownership is less restrictive, we may be only scratching the surface.
It’s hard to know where values go from here, but the current fundamentals would signal that upward pressure will remain. One thing is for sure, while past and future increases in the value of land may frustrate many young or aggressively expanding farmers, it has created an enormous amount of wealth for those who were owners at the time and made retirement a lot more comfortable for the outgoing generation.
Stuart Person, CPA, CA, is the National Director of Primary Producers with MNP’s Agricultural Services. He has more than 25 years of experience in agriculture, specializing in the grain industry. Passionate about the industry, he grew up on a grain farm and continues to participate as a producer himself, which allows him to relate first-hand to his clients’ challenges and goals. Stuart can be reached at 306.764.6873 or [email protected]
Related Topics:Primary Producers; Economy
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