Does It Make Sense For Farmland to be Worth This Much

Tomorrow, I will be starting my corn harvest. Statistics Canada says that Ontario corn crop will come in at 169.5 bushels per acre. Of course, I am hoping for a lot more as the key to corn profitability the last few years have been productivity. Everybody is pushing to get toward the 300 bushels per acre mark. It is forbidden fruit now, just like 200 bushels per acre once was. Tomorrow, for me that race continues.

Last week I talked about the vicious cycle of agricultural productivity and 300 bushels per acre is certainly part of that equation. However, there is also the bigger costs involved, which is the ground underneath me. Typically, the value of our farms represents the largest asset value on our balance sheet. In Ontario, farms are worth a lot of money. It is crazy the amount of capitalization on the farm that it takes to employ one person. However, that’s what I’ve been working toward all my life.

It is so different now. Land values range for heavy clay land north of Dresden from approximately $7000 to $9000/acre. The best land in Chatham Kent south of Dresden would range from $13,000- $15,000 per acre. In other areas of Ontario where there is competition for land from the supply-managed sector, inferior land to here, has been sold for $20,000 plus per acre. It is what it is. Agriculture is a high capital business.

Of course, many of us would like to know what is the future for farmland prices. Of course, it’s hard to tell and I always like to remember what my late father told me before he passed away in 2010. We were having a conversation a few years before that about rising land values. He said to me,” how do you know that land won’t be $10,000 an acre in the future”? I remember at the time thinking how bizarre that sounded, but I guess I should’ve listened a little bit more intently. I guess the question I should muse about now is whether land will be $30,000 an acre someday?

The reasons for that in Ontario are what they are. I really don’t want to get too much into that. However, much of it has to do with capital chasing tangible assets with positive rates of return in the super low interest rate era. The same could be said for the Canadian housing market, except for the fact that it affects a lot more people and it is something that our beleaguered finance minister keeps his eye on. The similarities between the Canadian housing market and some parts of the Canadian farmland market are striking.

Last week the Canadian Mortgage and Housing Corporation (CMHC) said that the Canadian housing market was highly vulnerable and at risk of overvaluation and too quick price appreciation. My antenna went up when I read that because in an earlier time I had studied the CMHC’s mortgage insurance and how that might be applied to farm mortgages. The CMHC is a good barometer of the housing market and the greater Canadian economy because they measure the health of the sector. Four times a year they look at the housing market to see if it is overheating, there is accelerated housing prices related to speculative activity, overvaluation and overbuilding. In cities like Toronto, Hamilton, Vancouver, Victoria and Saskatoon the CMHC is calling the housing market highly vulnerable. In other words, if some of those factors are getting to be too much, it increases the risk of a crash in those cities housing market.

The CMHC offers mortgage insurance for these homes with a typical down payment being 5%. Clearly, with the federal government backing up CMHC, there is a lot of risk here and a boost in interest rates would be a bit of a calamity. That’s one reason that you see the Bank of Canada keeping interest rates at 1% this week. Generally speaking, thoughts of any double-digit interest rate levels in the future are almost anathema to think about. Needless to say, the CMHC is waving a warning flag.

Fast-forward to your loyal scribe harvesting corn tomorrow on land that might be worth $15,000 per acre. Corn is about $4.20 a bushel. Does this make sense? The answer of course is a mix bag. I will leave that up to you to decide. Clearly though, the amount of money being capitalized into land in Ontario is very high compared to many other farming regions of Canada and United States. There are some unique factors that contribute to that in Ontario, one being that hot housing market in Toronto and the greater Toronto area. However, I will ask again, does it really make sense for farmland to be worth that much?

I don’t see any federal agricultural agency waving the warning flag about farmland like the CMHC does about the Canadian housing market. I also hear the echo of my late father asking me why land shouldn’t be over $10,000 an acre someday? Simply put, agriculture is a complex business and it is highly capitalized. Increased productivity like I talked about last week will probably fuel that even further. Will there be a correction? I lived through the last one in the 1980s and it was crushing. However, these times are different, I’m just throwing it out there. Can’t wait to get my combine roaring through that corn tomorrow.

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