FCC released its annual Monday. The national average farmland value increased 14% in 2014. This is a lower increase than the 22% increase FCC reported last year; but this is nonetheless a very sizeable appreciation. The patterns in farmland values differ across the country: Saskatchewan recorded an average increase of 19%, Ontario was at 12% while BC farmland showed an average gain of 4%.
Given the large increases reported over the past three years, is farmland potentially over-valued? The concept of “fair” valuation is elusive. But economists have a few tools to guide reflection on the topic.
One tool is the ratio of farmland price to crop receipts. It measures the market value of farmland for each dollar of crop receipts. There is no magic number for this ratio. Optimism around the future growth of productivity in crops, urban pressures on land, etc will generate ratios that are different across provinces. While we do not know what an ideal ratio looks like, we can look backwards to see what this ratio has been in the past; potentially gaining insights into current farmland valuation.
Consider farmland in Saskatchewan. There has been rapid appreciation of farmland values over the last few years. In fact, FCC reported average increases of 20%, 29% and 19% from 2012 to 2014, respectively. Putting these price increases next to the strength of crop receipts, we find that they are not inconsistent with what has been observed over the last 45 years. The 2014 price-to-receipts ratio is 5.8 while the average of the ratio between 1971 and 2014 has been 5.4. In other words, despite the strong price increases observed recently, history suggests that Saskatchewan farmland is not over-valued, given the recent strength in crop receipts.
The situation in Ontario is different. The ratio of farmland price to crop receipts was 19.1 in 2014, higher than the long-term average of 12.4. Results like this are cause for pause. Current low interest rates can help explain the strong valuation relative to crop receipts. A higher price-to-receipts ratio can be justified on the basis of expected growth in agriculture.
Making sweeping generalizations based on one financial measure is certainly not a smart strategy. Perhaps market valuations have exceeded their true economic values in some very specific areas. In some of the most expensive land areas, we cannot rule out the possibility that farmland values have peaked and that the market could moderate/retreat at some future point similar to what has happened recently in the U.S.
Profit margins for grains and oilseeds operations could continue to be lower than the 5-year average. Yet interest rates are expected to remain low and the weakness of the Canadian dollar support strong receipts. Sound financial planning and efforts to increase efficiencies should allow crop producers to envision the future with optimism and invest with good business judgement.
J.P. Gervais, Chief Agricultural Economist