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Top economic trends of 2018: Farmland values

Jan 9, 2018

As we head into the new year, the Ag Economics team wants to help you anticipate 2018 with a look at five economic trends likely to affect Canadian agri-food this year. 

The evolution of farmland values is the second of our five important trends to monitor. Values will likely continue to grow but, as in the last two years, their growth will moderate. That may sound worrying, but the forecasted slower rate of appreciation in values makes sense. It reflects a period when we expect crop receipts will be pressured by a growing supply of commodities, and interest rates will rise. 

2018 starts with a strong balance sheet

Farmland represented 68% of all farm assets in Canada in 2016 (the most recent data available). It has gained as a share of total assets in recent years, after recording significant price increases each year. The strong balance sheet in Canadian agriculture has been supported by revenues that, for instance, reached record levels for grains and oilseeds in 2016.

Balance between supply and demand determines prices of grains and oilseeds

We expect that same robust relationship between revenues and values to hold in 2018. Interest rates and farm cash receipts—but, primarily, crop receipts—drive movement in farmland values. Overall farm cash receipts, projected to grow 3.1% in 2018, will still support Canadian farmland values in the coming year.

But high ending stocks, fed by several commodities’ record production, have strongly subdued the marketplace since 2015. Without weather-related disruptions, key agricultural markets are likely to remain oversupplied in 2018. Global oilseed production will record a sixth straight year of significant growth in 2017-18. Even considering some weather challenges in Canada in 2017, production expanded: corn, soybeans and canola increased 7%, 18% and 9%, respectively, from 2016 levels.

In this context, price pressures for many commodities aren’t surprising. Slowing Canadian revenues and farmland values might have occurred earlier in fact were it not for the strength of demand in global markets and a low loonie shielding Canadian producers from commodity prices that remain under their robust 5-year average. A healthy world economy will continue to mediate prices in 2018, and we expect the loonie to average US$0.78 - supporting crop producers’ 2018 margins.

Navigating a higher interest rate environment

Movement in interest rates will also limit growth in 2018’s farmland values. Trending upward since late 2017, they should climb again in 2018, although we’re uncertain about the timing. Inflation remains low, but with unemployment currently declining, job gains will help lift wages, and ultimately, inflation.

We expect two 25-basis point increases in the overnight rate of the Bank of Canada in 2018, gradually rolled out. Rising borrowing costs will limit what potential buyers can afford in the farmland market. 

What's the bottom line?

Farmland is usually producers’ most important asset. It’s often bought using debt—which needs to be serviced by increasing farm revenues. Higher farmland values only strengthen the sector when they’re matched by proportional increases in revenues. This is the story behind Canada’s strong agriculture economy of the last decade, an economy projected to continue throughout 2018.

There are potential disablers on the horizon however. Large production volumes from major crop- producing regions could shift prices, and therefore Canadian revenues. A CAD that strengthens beyond what’s expected for 2018 could also dampen income. A higher interest rate environment means higher costs. Our advice? Monitor those pressures and plan ahead.   

Jean-Philippe (J.P.) Gervais

Executive Vice President, Strategy and Impact and Chief Economist

J.P. Gervais is Executive Vice President, Strategy and Impact and Chief Economist at FCC. His insights help guide FCC strategy, monitor risks and identify opportunities in the economic environment. In addition to acting as an FCC spokesperson on economic matters, J.P. provides commentary on the agriculture and food industry through videos and the FCC Economics blog.

Prior to joining FCC in 2010, J.P. was a professor of agricultural economics at North Carolina State University and Laval University. J.P. is a Fellow of the Canadian Agricultural Economics Society. He obtained his PhD in economics from Iowa State University in 1999.