In 2015, Canadian farmland values increased, nationally on average, by 10.1%.
Although this is the second consecutive year that Canadian farmland values have slowed down, 10.1% is still a sizable appreciation.
Here are three interesting takeaways from FCC’s recently released FCC Farmland Values Report PDF (312 KB).
1. Crop receipts impact farmland values
The U.S. average cropland value increase in 2015 was 0.7 %. How can the pattern in farmland values between Canada and the U.S. be so noticeably different? After all, the two agriculture economies are closely linked. Moreover, interest rates remained stubbornly low in both Canada and the U.S.
The answer to this question is crop receipts. Prices of major crops in the U.S. and Canada diverged in 2015, which is reflected in each country’s overall receipts.
U.S. crop receipts were down 8.6% year-over-year in 2015. When this decline is compared to Agriculture and Agri-Food Canada’s (AAFC) projected 2% increase in overall Canadian crop receipts for the same year, the difference between the increase in U.S. and Canadian farmland values is more easily explained. Variations in yields and seeded acres account for some of this difference. But the decline in the value of the Canadian dollar with respect to the USD explains most of the difference in crop revenues.
2. Farmland values aren’t increasing everywhere
Provincial average increases differ – they range from a low of 4.6% in New Brunswick to a high of 12.4% in Manitoba. But variations within provinces also exist. Nearly half of Saskatchewan recorded either little or no increases in farmland values in 2015. Similar observations can be made in many provinces.
So what’s driving these differences within provinces?
The structure of farm cash receipts can account for some of these variations. For example, 2015 receipts for pulses and special crops are estimated to be up 22%. It turns out some of the most important variations in average farmland values in the Prairies were recorded in areas where pulse production is concentrated. Higher receipts push farmland values higher.
3. Farmland valuation ratio ranges across Canada
One of many tools used to discuss the “fairness” of farmland valuations is the ratio of farmland values to crop receipts. There’s not really any way to estimate the “ideal” ratio. But looking backwards can tell us a lot about whether farmland in any one area is “fairly” assessed according to conditions specific to that area - because the ratio shouldn’t diverge too much from its historical mean.
There are again some significant differences across provinces. While Saskatchewan has recorded significant increases in farmland values over the last four years, the average valuation of farmland appears “fair”, at least based on the current strength of crop receipts.
The situation in Ontario is different. Farmland has appreciated rapidly in recent years, to the point where the ratio of farmland values to crop receipts exceeds the historical average. No matter what economic valuation measures may suggest, good business judgement must be exercised when purchasing farmland.
A positive and cautious outlook
Profit margins for grains and oilseeds operations could trend lower over the next few years due to increasing supplies. Yet demand for Canadian agriculture commodities is solid, interest rates are expected to remain low and the weakness of the Canadian dollar supports strong receipts. One long-term indicator for the health of the farmland market is our ability to raise our productivity faster than our competitors.
Looking for more on 2015 farmland values? Download the full report, watch my latest video and view my informative webinar.
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