Walking Gingerly: The Softening In Ontario Farm Land Prices

Farm-Land4
Next week I will be flying to the Ottawa area to speak on agricultural market trends and farmland values.  I am part of a FCC learning tour and will be appearing with the distinguished John DePutter, one of the best agricultural market analysts in Canada.  I talk about the nuances of the agricultural markets and how that has affected farmland prices over time.  It’s a bit of a dance with John, as I talk about the grain market too.  Next week in North Gower Ontario, hopefully that dance is a good one.

In many ways farmland prices have been seen as the sexy topic over the last two years in Ontario.   I got to speak about farmland prices through default.  As many of you know I speak about the grain markets across Canada.  However, a few years ago I began teaching in agriculture for realtor course across Ontario.  I had been asked to develop that course by the London and St. Thomas Real Estate Association.  My experience and background doing that was a natural jumping off point to speak about farmland prices over the last couple of years.  It was simply a coincidence that I was asked to do this at a time when farmland prices exploded across North America.

In 2012 the price of Ontario farmland went up approximately 27.5% on average.  That was simply unprecedented in such a short time before.  In fact farmland prices have been increasing at those rates for 2 or 3 years now.  If you have farmland, it gives you that warm feeling.  If you don’t own farmland it seems so far away and if you are buying that farmland it takes a boatload of money.  At the end of the day there are not a lot of people buying the farmland, a small aggressive minority, including some institutional investors.   So it might be a sexy topic to go speak about, but frankly I’ve found that many farmers are not interested in it.  I once gave a presentation on farmland values and the 1st question was about what I thought the price of corn might do?  I found that very telling.

So when I was asked to go on another tour for the Farm Credit Corporation I had a short discussion around the topic of Market Trends and Farm Land Values.  In many ways, I felt that with commodity prices backing off over 2013 the compelling story about farmland prices was over.  Needless to say, the story is changing and FCC was very interested in me documenting how I feel that is about to change.

Simply put, the market for farmland in Ontario is softening.  Prices, while still very high have softened and in fact in some cases have actually dropped.  There is still a slew of pent-up demand within the agricultural economy for farmland, but it is not as strong as a year ago and it varies among regions and even within regions.  There has been some land change hands over $20,000 an acre, only to be sold a few months later for much less.  At the same time there is still some of the best land in some areas being sold for over $20,000 acre.  It is all over the map and in some areas demand has dropped and prices have softened.

The price of corn has been cut in half from last year that certainly has been a bit of a drag on some of these farmland prices.  However, the cap on acquiring more quota in our supply-managed industries is still creating large cash positions that are re-capitalizing in farmland.   Now, with corn cheap and hog prices more appealing, even hog operations are in the game.  When you drive down highways in central Ontario and you see all kinds of white roofs on barns, these are progressive farms getting in each other’s way.  There is big competition for expansion and some of these dollars up in expensive farmland.

However, the softening of farmland demand is very real in some areas.  How many people can write seven-figure cheques for farms and do that every year?  Simply put, that is pretty hard to do and the very large aggressive farmers have their limits too.  There are also very large farmers who are buying farms simply because their equity position puts them in a place where they can.  Big families are part of that equation.  With the softening of demand, it might even make “farmland arbitrage”, where people go far afield to buy land even more of a reality.

This past week the Bank of Canada Governor Stephen Poloz mused that Canadian economic growth was not as strong as expected and disinflation was becoming a real concern.  Translation, higher interest rates are so far back in the rear view mirror, they can’t even see them.  A rate cut is more likely.

What’s that mean?  For Canadian farm land it means buoyancy will remain, as the interest rate pillar lives another few years.  Sure, the market is softening in spots, but its variable and uneven.  Walk gingerly guys.  Knowing that ground has never been more important.

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