What has been driving land price increases?

Tuesday, June 5, 2012

Land value increases over 10 years have been matched by productivity as measured in better corn yields

by RANDY DUFFY  

In 2010, Statistics Canada data showed the average value of farm land and buildings in Ontario was $5,062 per acre. The 10-year period from 2001 to 2010 has seen land values increase an average of 5.5 per cent annually in Ontario. Productivity over the same period has seen the average corn yield increase 5.9 bushels per acre or five per cent annually in Ontario. The 10-year average yield in bushels per acre is 136.7. Land values appear to have kept pace with productivity increases.

Corn prices have increased ten per cent per year. Combined with the productivity increases, revenue per acre has increased an average of 16 per cent annually. Crop input expenses show annual price changes in fuels, fertilizers and pesticides have averaged five per cent, nine per cent, and two per cent respectively. Has farm profitability kept pace however and the ability to pay for these higher land prices?

In some regions of Ontario $5,000 per acre is probably considered a bargain. Coffee shop talk has farms selling from $10,000-$15,000 per acre. Farm Credit Canada recently reported that the average increases for Ontario farm land values in the first and second halves of 2011 alone were 6.6 per cent and 7.2 per cent respectively.

There has been much debate about the reasons behind these increasing land prices. Some have pointed fingers at supply managed commodities (i.e. dairy and poultry and egg) or the grains and oilseeds sector. Is this necessarily the case? In certain regions of the province, anecdotal information might suggest that farmers from these sectors are driving these higher prices by buying farms. However, some swine producers and producers from other commodity sectors have also been purchasing land.

Using data from the Canadian Farm Financial Database (Statistics Canada), Figure 1 shows the average value of farm land and buildings owned per farm for Ontario dairy, poultry and egg, oilseed and grain, swine, and all Ontario farm types from 2001 to 2010. The trend over this period has shown that the average value per farm has doubled regardless of farm type. It is interesting to note that swine, dairy, and poultry & egg farms all had a similar value of $1.7 to $1.8 million in 2010.  The averages for oilseed and grain farms and all Ontario farm types were $1.3 million and $1.2 million respectively.

Because land values, as well as the cross section of farm types, can vary significantly between regions it is hard to determine if the increases are solely the result of land appreciation or due to the purchase of additional land and/or construction of new buildings.

Financial returns in recent years appear to have been much better in the supply managed and oilseed and grain sectors than in the swine sector. This becomes an issue if a farm needs extra land for nutrient management requirements or would like to grow additional crops for feed or sale. At the same time, the rising land values have provided additional security for lenders and allowed many swine farms to assume additional debt or restructure their debt. However, there has been research done showing that just about every farm sector type includes farms that do very well and farms that struggle financially regardless of the time period or farm size.

The reasons for increasing land values can vary from region to region along with the local competitive factors. The most likely reason is the higher corn and soybean prices which have improved producer margins. However, the decision to pay a certain price for land ultimately comes down to reasons important to an individual farm regardless of the commodity being produced. BP

Randy Duffy is Research Associate at the University of Guelph, Ridgetown Campus.