It is not like the 2011-15 period, when farmland prices increased by 10-20 percent per year, but land prices continued to rise in 2020. Considering the outlook for grain prices By 2021, the values should continue to rise.
Farm Credit Canada reports that median farmland prices increased six percent in Alberta last year, 5.4 percent in Saskatchewan and 3.6 percent in Manitoba.. The FCC report provides the price range and the average price for different zones within each province.
In Alberta, many of the prices are around $ 4,000 an acre, while Manitoba has many values around $ 3,000, while Saskatchewan is usually around $ 2,000. All of these appear to be low relative to the numbers being talked about in farmer conversations, but the local economy and soil quality vary drastically.
It is a common regret that once you pay all the variable and fixed costs involved in producing grain, it is difficult to pay the interest on a land loan, let alone make a dent in capital. Land, many say, is priced well above its productive value. That is true, but it has almost always been that way.
The increase in land value has for years been greater than the interest rates on borrowed money. It is a strong incentive to continue investing in land. It is also a strong incentive for non-farm owners to continue renting their land rather than selling it.
Land rents probably vary even more widely than land prices, but on land worth $ 3,000 an acre, let’s say the cash rent is $ 75 an acre net of property taxes. That’s a return of just 2.5 percent, but it still dwarfs what you can earn in a savings account or GIC (guaranteed investment certificate).
And in addition to the rent, the value of your asset continues to increase. Unless you need the cash, why would you sell? Where could you get a better return with such low risk?
For years, we’ve been told to watch out for rising interest rates. With rates at record lows, it’s reasonable to expect that they will eventually have to go up, but that doesn’t seem any more imminent than it did several years ago.
Significantly higher interest rates would change the rules of the game twice: increasing the cost of servicing farmland debt while at the same time making investments other than farmland appear more attractive.
Of course, the other game changer would be a dramatic drop in farm profitability. That does not seem imminent either if you look at the appreciation of the price of cereals in recent months.
Many growers missed much of the recent price increase. Much of the 2020 production was sold before the price increase. However, prices for new crops have rarely or never been so buoyant before planting. Profitable prices can be set for a wide range of commodities.
Whether the big payoff will come from prior pricing or expecting even higher prices is an open question, but even with fertilizer costs rising rapidly, it’s an incredibly strong outlook for next year.
The weather is always a threat. Across most of the prairie grain belt, the past six months have been much drier than normal. Large production shortfalls may occur, such as those of 1988 and 2002, but the loss of income would be offset by programs to support agriculture, particularly crop insurance.
While we live in uncertain times, it’s a good bet that when the FCC reports 2021 farmland values a year from now, there will again be significant increases.
Kevin Hursh is an agricultural journalist, consultant, and farmer. He can be reached by email at [email protected]