U.S. farmland market cooling off

The annual farmland value report of the USDA was released in August. U.S cropland values increased on average 7.6% between June of 2013 and 2014. Pasture land saw an average increase of 11.1% over the same period. The largest increase in farm real estate values was recorded in the Northern Plains (Nebraska, Kansas and the Dakotas) at 16.3%. The Corn Belt witnessed an increase of about average at 8.3%

A survey by the Federal Reserve of Chicago provides a slightly different picture. For the second quarter of 2014, “good” agricultural land values in Iowa, Illinois, Indiana, and Wisconsin were reported to be 3% higher than a year ago.

No real surprises: different methodologies, different results. The question for Canadian agricultural producers is whether we can draw insights from the numbers reported in the U.S.

The year-over-year increase in U.S. farmland values in the second quarter was partly driven by a rally in corn and soybean prices that quickly crashed as soon as planting finished and growing conditions in the U.S. Midwest turned favourable. Crop prices started falling in May. Canadian producers faced much of the same - wheat and canola prices also stumbled in May and June.

Given the similar pricing patterns in the U.S. and Canada, should we expect the same movement in farmland values? To some extent, the answer is probably yes. But there are also some notable differences between the two markets.

The most recent annual increase in U.S. farmland values is much lower than the double-digit annual gains recorded between 2010 and 2012. The U.S. farmland market started to climb before the Canadian market, and generally speaking, farmland values increased from higher base values.

It is not surprising to read about farmland values starting to fall slightly in regions where it climbed rapidly - the state of Iowa being a prime example. Unlike the U.S. Midwest, the Canadian farmland market was able to avoid a downturn in 2009 because price increases in 2007 and 2008 were softer than in the U.S.

In light of the U.S. market and informal evidence gathered in Canada in the first six months of this year, we believe Canadian farmland values will increase at a slower rate in 2014 than the last few years. The general downward trend in the price of grains and oilseeds combined with large increases in land values over the past few years suggest more conservative farmland valuations in the short-term.   

Jean-Philippe Gervais, FCC Chief Agricultural Economist