What are the economic drivers of farmland values?
In short, crop receipts and interest rates. It’s no surprise then, that with receipts being as high as they’ve been and interest rates as low as they’ve been recently, that farmland has seen large increases in its value.
But that could be about to change.
There are many things of course, that help to drive the value of a specific parcel of land. A few of the important considerations are:
- Land tile drainage
- Capacity to deal with spring moisture conditions
- Ease of access for large farm equipment
But the overall pattern in market values is explained mostly by crop receipts and interest rates.
Let’s start with interest rates. They’re not likely to change in the near future, which means they’ll have little impact on any change in values that occur.
We’ve recently seen an increase in inflation (because of higher energy prices), which nonetheless failed to trigger changes in the Bank of Canada overview of the macroeconomic environment. The consensus is for the Bank’s overnight rateto remain low for roughly the next12 months.
2014 crop receipts, on the other hand, could be substantially lower than they were in 2013. A couple of things will impact this: North American prices are cooling off in general, and the very large 2013 crop has put pressure on local prices in the Prairies.
A good indicator of farmland value is the ratio of the price of farmland (per acre) relative to crop receipts (per acre).
In 2013, Saskatchewan witnessed a 28 per cent average increase in farmland values. This appears to be an extremely large increase, yet the ratio is close to its average of the last 40 years – which suggests a fair market valuation given the current level of interest rates. In other parts of the country, the ratio is higher than its historical average.
A soft landing in farmland values may be on the horizon if 2014 crop receipts do indeed end up lower than last year. This would entail farmland values stabilizing at current levels, or increasing at or about the rate of inflation. Lower crop prices don’t entail an ideal scenario, but continuing low interest rates will give producers time to plan as the environment of the next marketing year develops.
J.P. Gervais, Chief Ag Economist