The continuing rise in Ontario farmland values

Wednesday, August 1, 2012

Farmland in Ontario has been steadily increasing in value since 1993, driven by higher commodity prices and strong fundamentals in agriculture and urban growth. It's also increasingly being seen as an investment

by MIKE MULHERN

The ground your ancestors plowed is not the same ground that you plow. Your ground has gained investment status.

Everyone seems to agree that recent gains in the price of farmland are due to low interest rates and high commodity prices, but there are other factors at work in a complex marketplace where farmers are still the dominant players.

One element that is not a significant factor in Ontario is institutional investment, something that is more at play in the West, especially Saskatchewan. Tom Eisenhauer is president of Bonnefield Financial which, according to its website, is "the only Canada-wide farmland investment manager and property management firm." Bonnefield holds about 1,000 acres in Ontario, all of it leased back to farmers.

"Despite all the ink that's being spilled to the contrary, third-party investment in farmland in Canada is negligible," says Eisenhauer. He adds that over the last five years about $200 million of investor capital has gone into farmland all across the country. That compares with $280 billion of farmland in Canada.  He says about five per cent of the Canadian farmland – about $14 billion – changes hands annually. "The ones that are doing the buying here are farmers," Eisenhauer says. "Prices are being driven by farmers."

Eisenhauer says farmer-driven farm purchases are good news because "the farmers we know are rational. They pay for their land based on what they expect to earn from the land."

Bonnefield's holdings – about 15,000 acres in Alberta, Saskatchewan, Manitoba and Ontario – are all leased back to farmers. "We never buy farmland directly. We always work with a farmer to do leasebacks on land they already own," Eisenhauer says, "so, from a farmer's perspective, it's a way of reducing debt and improving cash flow."

He says 50 per cent of transactions are driven by farmers already working with Bonnefield who want the company to buy adjacent land and lease it back to them on a long-term basis. Bonnefield offers five-year leases and, if farmers comply with conditions regarding environmental management and crop rotation, and make their payments on time, the leases can be extended.

"We've got a huge lineup of farmers who are looking for that kind of capital because they want to farm at scale. They want to farm 3,000 to 4,000 acres but it's hard for an individual farmer to get that kind of capital together," Eisenhauer says. When Bonnefield does spend on land, Eisenhauer says, it avoids high-priced development land and prefers raw land with no buildings that will remain farmland.

Farm Credit Canada (FCC) senior appraiser Dale Litt sees the big picture for Ontario and he knows that demand outstrips supply and that cash crop and dairy farmers in southern Ontario are driving land purchases there. In Northern Ontario, Litt says, some of the pressure is coming from farmers moving north from their farms in southern Ontario.

"They are leaving land worth $9,000 and $10,000 an acre and going north and buying twice as much land (after improvement expenses) for $1,500 an acre or $1,000 an acre," Litt says. He adds that they have been very successful by clearing and tiling land and "doing what they have to do to make it productive."

In a report released on April 16, FCC said the value of farmland in Ontario increased by 7.2 per cent during the second half of 2011, adding to increases of 6.6 per cent and 2.1 per cent in the previous two six-month reporting periods. "Farmland values have been rising since 1993 in this province," the report notes, "and reached a peak increase of 8.2 per cent in the last half of 1996."

Litt says eastern Ontario has seen more modest gains with larger increases in areas closer to Ottawa. Some of the land pressure in eastern Ontario, he says, comes from Quebec farmers expanding into Ontario.

However, he notes that it's hard to predict the future of land prices in Ontario. "In the short term" he says, "I don't see any decrease. It's hard to tell, it can change, but the two main factors – interest rates and commodity prices – are big drivers. As long as they are going in the right direction, I continue to see some healthy increases."

Academics are also optimistic, although Brady Deaton, an associate professor in the Department of Food, Agricultural and Resource Economics at the University of Guelph, says land prices in some parts of Ontario are also tied to future development.

"In southern Ontario," he says, "it's important to keep in mind that, for many farms, the value of the land is a function of both its current (agricultural value) and future non-agricultural value if the land were to be transformed into, say, residential use."

Deaton sees strong fundamentals in both agriculture and urban growth as having an influence on prices near urban centres. "Put those two together – sunny outlook in agriculture and a sunny outlook in terms of urban growth – and those two factors are driving farmland values."

Another factor that is influencing supply, Deaton says, is that people who might have sold farmland in the past – widows, widowers, families who no longer live in rural areas – are holding onto land as an investment. Others are living in rural areas and renting land out, also viewing it as a long-term investment.

Agricultural economist Ken McEwan, currently the interim director of the Ridgetown Campus of the University of Guelph, believes increased farm profitability is driving land prices. "A lot of it has to do with higher commodity prices, which have increased profitability at the farm level," he says. McEwan notes that there has been little in the way of movement of farmers from Europe or other areas of the world driving the current increase in land prices.

Alfons Weersink, a professor in the Department of Food, Agricultural and  Resource Economics at the University of Guelph, agrees that it is not foreign investors who are buying up land but credits some of the activity to Canadian non-farmers.

"Local people looking at farmland as an investment," he says, "will find a place to live in the country and, at the same time, they will be able to rent the land out and get a return on that investment." He believes general interest in buying land as an investment is also motivating farmers to make some purchases.

"If you look at the supply side," Weersink says, "there's not a lot that comes on the market and, if it does come on the market, people are willing to pay a premium for a nearby location. That influences the bar at which other properties are compared." He also agrees that families that might have retired and sold in the past are holding on to land which they now see as a long-term investment.

"Before," he says, "it might have been sold when mom and dad decided to retire from farming." Now, he says, they hang on to the land even if there is no next generation farming it.

Land rents, Weersink says, have climbed along with land prices. In some areas of the province, he says, $250 an acre is being paid for "just" corn and soybean ground but "significantly less in other areas of the province." There are also premiums being paid for land. "Some big operators that are seeking out land will pay a premium to get that land," Weersink says.

Whatever the cost, land that is available to rent presents an opportunity. David Sparling, chairman of the Agri-Food Innovation and Regulation program at the University of Western Ontario, says some young farmers don't want to own everything and are content to rent. "Being able to rent allows them to be a good economic size without having to invest millions of dollars," Sparling says, "so it actually works out well for both sides."

According to Statistics Canada census data, in 2011 23.8 per cent of all agricultural land in Canada was rented by farm operators. In 2001, just 18.3 per cent of Canada's agricultural land was rented. BF