High Farm Land Prices Will Not End Well: That’s What History Tells Us

     This morning I did an interview with CBC Windsor regarding the high price of farmland in southwestern Ontario.  It is a topic that I’ve spoken twice on this past winter.  I also teach Agriculture for Realtors course throughout Ontario.  Tomorrow, Wei Chen on CBC’s Ontario Morning is interviewing me.  The topic will be farmland prices.  Yes, it is a hot topic, or at least the urban media has finally caught up with it.

Land prices to me are not top drawer despite being asked about them almost constantly.  I’ve spent the last few weeks preparing to crop my land like I have over the last 35 to 40 years.  Preparing to plant is almost more stressful than planting.  I am hardwired to farm, to put seeds in the ground and not necessarily think about how much that ground is worth.  I know that that is not totally correct in terms of how agricultural economists should think, but the ground is part of me.  These land prices I’ve never dreamed of.

The question is how sustainable is it over time?  My feeling always is that we cannot judge the future of land prices based solely on what has happened in the past.  In other words, there will be many in farm country that might say they have seen it before.  For instance, when in 1981 interest rates went over 20% land values crashed.  For instance I was able to buy land cheaper in 1991 that I did in 1994.  I cannot say whether that will happen this time.

In southwestern Ontario recently we had 480 acres sell for $5.8 million.  In another transaction, we saw 133 acres sell for $1.4 million.  These prices are triple what they were 3 years ago.  It appears that some buyers are too afraid to offer less in fear that somebody else will pay the price.

In my mind the reason land prices have gone up so quickly are twofold, low interest rates and high agricultural commodity prices.  Yes, low interest rates make land easier to pay for but also are a double-edged sword.  For people with money lower interest rates are a bad thing because they cannot get any return on their investment.  High commodity prices, especially a price of corn over the last few years has led to scan some profits in farming.  These factors have led to a perfect storm for farmland prices across Ontario and the US Corn Belt.

Key in this debate is when it ends.  In other words, when do interest rates go way up and went to agricultural commodity prices go way down?  If you’ve been farming as long as I have you know the 2nd part will at least come true.

So when Mark Carney, the Bank of Canada governor mentioned the other day that we may be seeing higher interest rates in the near future based on the health of the Canadian economy, it was telling.  At the same time we have seen a general decline in corn soybeans and wheat over the last month.  New crop corn prices for example in Ontario are almost down to the pre-ethanol era.  In other words the perfect storm is ending and will land prices return to more traditional values?  Will the farm land market cool into summer?

As I like to say with the grains, I don’t know.  However, I think so, and maybe in the future big-time with land going down.  There is no question that classic economics tells us that as you print money like the US Federal Reserve has been doing, inflation will rear its ugly head one of these days.  The way central banks deal with inflation is by raising interest rates, cooling the economy, controlling the money supply to control prices.  Eventually Bank of Canada Governor Mark Carney and even US Federal Reserve chair Ben Bernanke will be forced to do that.  When that happens interest rates will go up and one part of this perfect storm will be over.

At the same time you would expect that investment opportunities in the non-farm economy would improve.  In other words, the perfect storm for investing in farmland will cool and prices will come down to better reflect the economic returns from farming.

This morning the CBC commentator asked me how this would affect food prices.  I responded very quickly by saying it had nothing to do with food prices, that consumers want cheap food and governments make sure they provided it.  That’s a standard response of mine and I was quite surprised I got to say it but the commentator really had no idea how this land price thing was playing out.  However, the issue itself has gained enough traction that you have CBC radio across Ontario bringing it right out into the open.

Of course, if history tells us anything, the big rise in farmland prices will not end well.  Of course the question is will history tell us anything this time?

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