September 5, 2013
By BARRIE McKENNA
Farm prices nationally have risen an average of 12 per cent a year since 2008
In a lifetime of farming, Dwight Foster has never seen anything grow like the value of his land over the past five years. The price of a plot in and around North Gower, Ont., south of Ottawa, where he has 6,000 acres, has more than tripled since the height of the Great Recession.
"For years and years, the price of land never really changed. In the past five years, it's done huge things," said Mr. Foster, 47, who cultivates corn, wheat and soybeans on his land.
While irrepressible strength in housing prices has drawn attention in recent years, home values look tame next to the dramatic run-up in farm-country real estate in North Gower – and right across the country – where a confluence of economic factors is pitting farmers against their neighbours and sometimes hedge fund managers in a race to gather arable land.
Driving the rise are record-low interest rates, improved crop yields and high global commodity prices, inflated by rapidly expanding demand for food in the developing world. New crops and better farming techniques are allowing farmers to do much more than ever, so they're buying up their neighbours to create larger, more efficient and ultimately more profitable farms.
Taking advantage of plentiful credit and the swelling value of his land, Mr. Foster has nearly doubled the size of his own farm in the past two to three years, betting that the prospects for farming are too good to abandon the livelihood that has sustained his family for generations. Improved crop genetics and vastly better equipment mean he can farm more land, and produce more corn, wheat and soybeans, with less manpower.
"You can sell your land. You can get out right now, but you can never get back in again. You're done," said Mr. Foster, who hopes to eventually leave his farm to his now-teenaged children.
Farm prices nationally have risen an average of 12 per cent a year since 2008, according to Farm Credit Canada (FCC), a federal Crown Corporation and the largest lender to Canadian farmers. That's more than twice the average of the five years from 2003 through 2007, and several times faster than the corresponding rise in home prices over the same period.
Other factors driving farmland prices are purely Canadian. The virtual absence of new quota to produce milk is prompting many dairy farmers to plow their profits back into land – an unintended market distortion caused by the country's tightly regulated supply management system.
"Farmers who have money can't buy quota. So they buy land," explained David Sparling, a business professor and agri-food policy expert at the University of Western Ontario's Ivey Business School.
Committed farmers know land better than most other types of investments. They live it, breathe it and accumulate it. Larger equipment and better crops make those larger farms viable.
"My father, he farmed 150 acres and made a living," Mr. Foster said. "We farm 6,000 acres, and that's what we depend on to make a living."
And the pace is picking up. In the six months to Dec. 31 of last year, farmland prices rose 10 per cent – the fastest six-month clip since the FCC began tracking prices in 1985.
"The market is really being driven by producers interested in expanding their current land base," said Corinna Mitchell-Beaudin, FCC's vice-president of credit risk. "When a nearby land parcel becomes available, farmers can get quite assertive in wanting to buy it."
Prices are shooting up even faster in the most productive farming areas in the country. In Southwestern Ontario, prices have jumped 30 to 50 per cent a year in some counties, according to a recent report by real estate appraiser Valco of London, Ont. The average annual increase since 2010 is 25 per cent across a region where the long-term average is just 3 to 5 per cent.
Average land values in 2012 ranged from $6,000 per acre to more than $14,000 across the 10 counties of Southwestern Ontario, Valco said. A few farms near Woodstock and Stratford, Ont., are now fetching $20,000 or more per acre – three or four times the going rate just five years ago. By comparison, single-family home prices are up a combined 20.5 per cent in the five years since 2008 (and 32 per cent in Toronto), according to the Canadian Real Estate Association's home price index.
To be sure, bullish sentiment towards farmland won't halt urban sprawl because returns available on homes and condos still outpace produce, Western's Prof. Sparling said, adding that zoning laws are the main deterrent to property development. But the recent spikes in farmland prices could slow the push for land conversion.
The root cause of the brisk run-up in farmland prices is low interest rates, according to Valco analyst Ryan Parker. "Interest rates are the vehicle which is allowing land values to climb so rapidly," he concluded.
The boom has caught the attention of lenders and investors. Pension funds, hedge funds and farmland trusts are piling in, scooping up land and renting it back to farmers. There's even growing interest from foreign investors, who realize that arable farmland is scarce in populous markets such as Europe, Brazil and China.
"It's not just farmers buying land. It's investors as well," Prof. Sparling said.
The Caisse de dépôt et placement du Québec and British Columbia Investment Management Corp. joined U.S. pension fund giant TIAA-CREF this year in creating a $2-billion global farmland investing company.
So does all this suggest a price bubble is forming down on the farm?
Worried about its exposure to FCC, Ottawa recently directed the Office of the Superintendent of Financial Institutions to review whether the federal lender and insurer might be exposed to too much risk. Since 1997, FCC's loan portfolio has more than quadrupled to $25-billion, sparking complaints from banks and credit unions that the Crown lender is tapping the government's credit rating to unfairly target their business.
Experts say a farmland price crash, like the one that occured in the 1980s, is unlikely. Nor will prices continue to climb at 20 per cent a year, particularly if interest rates move back up and commodity prices level off.
As an indication of the direction for interest rates, the yield on Canada's 10-year government bond soared more than a full percentage point from its low for 2013, set on May 13, to mid-August. That was the biggest 15-week move in Canadian bonds in nearly two decades, BMO Nesbitt Burns chief economist Doug Porter said in a research note.
And yet the future still looks bright for farmers and farmland prices mainly because prices of key commodities corn, canola and soybean are expected to remain high for years.
"Canada is positioned to do very well in agriculture and people have noticed," explained Sylvain Charlebois, associate dean and professor at the University of Guelph's college of management and economics. "It's a phenomenon that's linked to the whole global food security agenda. Prices will only continue to go up."
The most recent crash in farmland prices was in the mid-1980s, when interest rates shot up to near 20 per cent. That sent shock waves through the banking industry as thousands of heavily indebted farmers defaulted.
Lenders are more cautious than they were in the 1980s and farmers generally have less leverage, said Alfons Weersink, a University of Guelph professor and expert in farm economics.
"Financial institutions learned their lessons," said Prof. Weersink, who was raised on a dairy farm. "They're less willing to lend on equity. They want to see cash flow."