by JIM ALGIE
Ontario followed Saskatchewan and Quebec in farmland value growth during 2014, Farm Credit Canada appraisers say as they continue to track a moderating trend in farm real estate markets.
FCC’s annual Farmland Values Report, published Monday, shows average values in Canada grew by 14.3 per cent in 2014, led by Saskatchewan at 18.4 per cent, Quebec at 15.7 per cent and Ontario at 12.4 per cent. It’s only the latest in a 25-year trend of rising farmland values but showed slower growth in 2014 than in 2013, the 12-page report says.
Ontario’s market reflects outsized demand for available land, together with relatively low interest rates, expanding livestock enterprises and, in parts of southwestern Ontario, the role of “non-agricultural buyers.”
J. P. Gervais, FCC’s chief agricultural economist, urged caution among farmers considering future land acquisitions. Lower crop prices together with expanding stocks of grain and oilseeds “could bring prices down further, creating tighter margins,” Gervais said in a statement accompanying the benchmark land values report.
Although higher borrowing costs appear unlikely in 2015, “interest rates will eventually increase,” Gervais said. He also said, however, that Canadian agriculture’s longer term outlook remains “positive” mainly because of the relatively weak Canadian dollar, expanding trade agreements and growing world food demand. Gervais is to discuss current land values during a webinar Apr. 20 beginning at 12 p.m. EST.
Corinna Mitchell-Beaudin, FCC’s chief risk officer, welcomed the move to “more moderate increases for farmland values.” In a statement, Mitchell-Beaudin said “gradual change in the value of this key asset” benefits both new and retiring farmers.
FCC is a federal crown corporation and Canada’s largest farm lender with a $27.3 billion portfolio and 21 consecutive years of growth. The trend identified in this year’s annual land values report follows similar observations in the United States and in southwestern Ontario.
In an annual report published in February for the 10 counties of southwestern Ontario, Ryan Parker, a real estate appraiser with London, Ont.-based Valco Consultants Inc., identified four per cent growth in land values during 2014 compared with 20 and 30 per cent growth rates since 2010. An August 2014 U.S. Department of Agriculture analysis of farm real estate values in that country indicates a similar slowing trend in farmland values.
In a current blog post discussing Ontario values, FCC’s Gervais identified a significant increase in the 2014 ratio of farmland prices to crop receipts. The 2014 ratio of 19.1 compares with a long term average at 12.4, he said.
“Results like these are cause for pause,” Gervais said in the post, although he also said “a higher price-to-receipts ratio can be justified on the basis of expected growth in agriculture.” However, the report also indicates recent growth may have peaked in some of Ontario’s most costly regions.
“We can’t rule out the possibility that farmland values have peaked and that the market could moderate/retreat at some future point,” Gervais said. BF
Comments
Gervais seems to have ratios for everything but what matters, and that's price/earnings ratios.
In 1973, and again in 1986, farmland was selling for about ten times cash rent which approximates a price/earnings ratio of 10:1, a ratio which measures earnings on what some call an EBITDA basis (Earnings before interest, taxes and depreciation allowance) which factors out the cost of money.
Now, in 2015, farmland is approaching a price/earnings multiple of between 50:1 and 60:1 and the best Gervais and FCC can muster is sugar-coated statements like "cause for pause", rather than the more-appropriate -"Holy crap, what are we doing?".
What's worse about today's price/earnings multiples of up to 60:1 is that cash rents have been hyper-inflated because of the ethanol bubble, so that instead of $285 per acre cash rents, we would, in the absence of ethanol, be likely seeing $200 which gives today's $15,000 per acre land a price earnings multiple of over 70:1.
Alas, I remember 1979 all too well, when "talking heads" everywhere were pontificating about increasing global demand and that when it came to land - "buy it, they're not making it any more" and other such nonsense which guaranteed the 1980s price crash was going to be far-worse than it ever needed to be.
Nothing smartens up people, particularly farmers, like a crash, and since things always look the rosiest just before the crash, we're long-overdue for a horrible one.
Stephen Thompson, Clinton ON
At 70:1 - all the greater minds will sell to the greater fools.
We will watch for the listings.
A better study would be to find out what percentage of farmers are knocking down the principle, and/or, what percent of principle on debt is being paid.
Inflation brought the boomer generation of farmers out of debt. Not looking like a repeat for millenials.
Raube Beuerman
Quote: "Ontario’s market reflects outsized demand for available land, together with relatively low interest rates, expanding livestock enterprises and, in parts of southwestern Ontario, the role of “non-agricultural buyers.”
Please note the "expanding livestock enterprises" and "low interest rates". So, it would appear this is saying almost the same as the recent Valco study. Boys will be boys.
"Outsized" is a word with no place in investment criteria, especially when it comes to the ego of the investor, but unfortunately, "outsized" is the only word to adequately describe the current bubble in farmland, or any investment bubble for that matter.
Whether it is:
(A) outsized expectations about food-price inflation and no inflation elsewhere.
(B) outsized expectations about abnormally cheap borrowing costs
(C) outsized expecations about the permanency of supply management and/or ethanol and the artificially-outsized cash flows emanating therefrom
(D) outsized egos of individual land buyers leading them to believe that:
(1) this time it will be different
(2) I'm capable of accomplishing anything
For some reason, I keep getting reminded of the long line-ups outside the Bank of Nova Scotia in the late 1970s as individual investors lined up to buy gold at $800/ounce - it promptly sank to about $300 and took the life savings of most of those individual investors with it, thereby once again amply demonstrating the wisdom of the adage - "Fools rush in where wise men refuse to tread".
Stephen Thompson, Clinton ON
In ontario farm land and houses in the larger centers are overpriced. With $50.00 per barrel oil corn needs to be less than $3.00 per bushel. This would bring cash rents back to $100 per acre then watch out.
Most commodities have been forced to compete in the last five or so years, but now are starting to back off. It will be interesting to see the other non free traded commodities, if they continue on there 120% over priced consumer backed buying spree. What a mess if the early 80s comes home for a visit
Sorry FCC, but I don t put much faith in any of your studies. You were out of touch 10 years ago from my experience. If I had never listened to my FCC agent back then I d be a lot happier today. I hope their employees today are a lot smarter than they used to be.
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