Prairie Farmland: What the Market is Telling Us

Friday, February 10, 2023

Whether you are buying or selling, it pays to be aware.

By Colleen Halpenny

Farmland across the Prairies continues to be in high demand.

As producers evaluate their current holdings and opportunities for growth, cost per acre is a number that most keep their eyes on.

As a finite resource, producers have long been aware that while land may become available, there is no new land to find. To better understand current markets, and explore new ways to grow, we talked with those in the know – to find Prairie producers the best solutions and strategies.

Increasing land values

The national land review published by Farm Credit Canada (FCC) in October observed an overall 8.1 per cent increase in farmland values over the six-month period from January to June 2022. Bolstered by strong commodity prices and strengthening farm receipts, the increased interest rates and higher input prices had minimal impact on the demand for offered parcels of land.

This trend is in line with historical demands for land on offer for rent or purchase. The Government of Alberta reported the provincial average acreage values from 2002 until 2021. When looking at all classes of land, the average sale price in 2002 was $928.56 per acre, while in 2021 the price had risen to an average $3,225.85.

Ted Cawkwell, a fourth-generation farmer and agriculture specialist with RE/MAX Saskatoon, has experienced the change over the last decade.

"Prior to 2010, profitability of farms was much lower than what we see today. Most farmers were just trying to get through one more year.

"While producers are still dealing with ever- changing commodity prices, input costs, and weather risks, farming has become much more profitable than it once was. Producers are then looking to turn these positive cashflows into investments," he says.

Cawkwell explains that higher net returns at the farmgate ultimately drive rising land values.

"For producers today, their overall net worth is ballooning along with profitability. This gives them a large amount of lending power.

"When my father passed, new machinery had debt, old machinery and infrastructure are worth little, all the net worth is in the land.

"So retirement is a whole different game now. Retirees can now go on holidays and improve their quality of life and enjoy that stage of life."

As an example, Cawkwell shares that for a 2,000-acre farm in Saskatchewan, which is on the smaller side, owners may have $6 to $7 million in land equity and sellers will have the ability to enjoy a significant change to retirement.

All about location

For many, the family farm location has been generationally specific. This situation, however, is changing.

When exploring the initial cost per acre, availability, and overall opportunities of an area, some farmers have found that the most logical location is not where it has always been.

Roelof Delang, a welder by trade and farmer by passion, is already contemplating the idea of relocating.

"My family was previously based in Ontario with dairy and cash crop, but I wanted to make a go of it myself and there wasn't the opportunity in the local community," he shares.

Instead, Delang packed up and moved just east of Red Deer, Alta., and used his welding business to generate enough additional capital to rent and purchase available acreage.

"I'm always trying to get land at a best-managed cost per acre; unfortunately, right now, if you haven't been well established for a decade, it's a tough go," he says.

Acknowledging the borrowing capacity against a welding truck, Delang knows it's several years' worth of saving to finance that first million-dollar quarter section. And that the next quarter is not a near-future reality.

"I originally picked this location due to the advantages for my welding business along with great land quality, but pressure from larger generational farms, Hutterite colonies, and developing land prices has surpassed my top end of capital. So now I'm looking at other areas of the province with less competition," Delang says.

Cawkwell suggests the assumptions about big corporations buying up land isn't necessarily accurate.

"For those who aren't actively farming the land they buy – call them investors or whatever you want – in my experience, 90 per cent of those are mom and pop types who have regular jobs and want to diversify their portfolio," he explains.

Of note, a portion of farmland being purchased in Saskatchewan is by farmers from other provinces such as Alberta and Ontario. Cawkwell says this is the result of being land-locked where the buyers previously were, and instead they look to other areas offering more competitive pricing and availability.

When comparing land investments to those of perhaps a rental home, Cawkwell says "it's an easy asset to manage. You need a good tenant, and it will look after itself for eternity."

Buying vs. renting

Farm Credit Canada reminds producers that renting land can be a way to reach a desired scale of operation and mitigate financial risk. FCC suggests using a rent-to-price (RP) ratio, which is the reported cash rental rate per acre, relative to the value of the farmland per acre.

This calculation reported average RP ratios of 2.20 per cent in Alberta, 3.00 per cent in Saskatchewan, and 2.50 percent in Manitoba, which is also the national average.

In the 2021 Census of Agriculture from Statistics Canada, 153,687,771 acres of total farmland were reported nationally, with 63,541,372 of those acres being reported as rented or leased from others.

Cawkwell says that finding good tenants for those who will not be actively farming their investment is very important.

"We always offer to connect buyers with good stewards and assist any way we can in getting those lease agreements in place so all parties involved can hit the ground running," he says.

Brenna Mahoney, general manager of Keystone Agricultural Producers in Winnipeg, Man., has seen the positive strides young producers are making in the industry.

The 2016 Census of Agriculture reported 2,175 farm operators under 35 in Manitoba. That is about 15 per cent of all Manitoba farm operators, making it the province with the largest proportion of under-35 farmers in the census year.

Mahoney stresses that for new entrants to be successful, beyond knowledge, they need access to land and capital.

In Delang's experience, land is either sold privately and doesn't hit the open market, or it goes through an auction and those with the large borrowing power sweep it up.

"I'm always networking, trying to keep my ear to the ground and get any advantage I can when the possibility of land becomes available. Unfortunately, it's a hard sell convincing those in a selling position to take the gamble on us small operators, to take less money up-front or do a rent-to-own scenario," he says.

The bottom line

For Cawkwell, only time will tell what the markets will do.

"In those weather-pressured areas, with high inputs and potential poor yields, we might be entering a time of a plateau on farm pricing. This would be a great time for those who are considering exiting the industry to really evaluate their long-term goals. And for those looking to expand to align themselves with those opportunities," he advises.

Delang, rational yet optimistic explains that "location isn't important to me. At the end of the day, I'd likely be better off taking my wage and investing into stocks.

"But when I ask myself do I want to farm or not? That's an easy answer for me." BF