The price of Alberta farmland took another big jump last year — but there are strong signs the red-hot bull market is finally cooling off.
Overall, Canadian acres saw their smallest price increase in nearly a decade, and the amount of land changing hands dropped as many would-be buyers either stayed on the sidelines or couldn’t find desirable land for sale.
That, and the outlook for farm incomes, is prompting the chief agricultural economist at Farm Credit Canada (FCC), which conducts the annual price survey, to warn farmers that times may be changing.
“Farm operators need to be cautious about the environment that we have in front of us in 2019,” said J.P. Gervais. “There are a lot of question marks around 2019.”
FCC’s latest Farmland Values Report said average Canadian farmland increased 6.6 per cent in 2018. That’s nearly two per cent less than in 2017 and the smallest jump since 2010 when the country was coming out of a recession.
Alberta land sales went up an average of 7.4 per cent (second only to Quebec’s 8.3 per cent jump), with transactions in southern Alberta recording a 12.7 per cent rise. FCC attributed that to large-scale farmers expanding their land base and potato producers wanting to boost production as more spud processing comes online in that region.
Central Alberta’s high-quality soil drove purchases among large producers growing their operations, leading to a 5.9 per cent increase in values in the region. Northern Alberta (around Edmonton) also saw strong demand for land, with prices up 6.1 per cent (0.4 per cent more than in 2017). But land values in the Peace Region struggled after a summer of wildfire smoke and a difficult harvest. After an 11.5 per cent increase in 2017, land values rose a modest 4.0 per cent there.
And while all provinces (save Nova Scotia, where prices fell five per cent) recorded an increase last year, the rate of increase was equal to or lower than what was seen in 2017 (except for B.C.).
That’s likely to drop further in 2019, said Gervais.
“We’re going to see the rate of increase we’ve had in the past slow down,” he said. “If supply of land remains tight — which I think it will — the rate of change in 2019 should be much lower than it is right now at 6.6 per cent. Perhaps half of that would be a fair estimate.”
Less land changed hands
The reason for that is simply supply and demand. In 2018, the quantity of farmland available in the marketplace was limited, and FCC recorded a smaller number of sales transactions in 2018 than in 2017 as a result.
“There are two reasons why you would see fewer transactions,” said Gervais. “One is weaker demand — not enough buyers in the marketplace. The second would be not enough sellers. And in 2018, I do think the reason we’re having fewer transactions than in 2017 is because of not enough sellers.”
And the land that is selling is typically lower in value, he added.
“Overall, the rate of increase has been higher for lower-value land than higher-value land.”
In most regions, interest at the top end of the market — “presumably the most productive land” — appears to be flat, while the rate of increase in the bottom half of the marketplace is stronger.
“I think that speaks to businesses that still have an incentive to expand but are being more strategic about where they’re making the investment when they’re deciding where to purchase,” said Gervais. “There have been more strategic purchases made with the idea that they expect to see land values increase.”
As well, interest rates climbed in 2018, raising borrowing costs by an average of 1.25 per cent.
“You would think that the higher interest rates would slow down the demand for farmland, and to some extent, it has,” said Gervais. “It wasn’t as much as we expected, given that from a historical standpoint, interest rates remain extremely low. But interest rates being what they are, the demand for land is likely to remain where it is.”
An expected drop in farm income is also a factor. FCC doesn’t have final farm income numbers from 2018, but based on “good intel” from the first nine months of the year, Gervais is forecasting a one per cent dip in farm cash receipts and as much as a three per cent drop in crop receipts.
“The fundamental issue here is we expect 2018 farm incomes to be lower than 2017, and that would weaken the demand for farmland,” said Gervais. “Both the interest rates and farm income aren’t necessarily working to result in a stronger demand for farmland.”
Also looming over the land market are trade issues, which Gervais expects will play a bigger role in the coming year, creating volatility in commodity prices.
“Market access issues loom large when it comes to farm income in 2019,” he said. “If you go back to the very beginning of the year, I think it’s fair to say that we expected farm cash receipts to go up in 2019.
“But now there’s a lot of uncertainty with where the market’s going, especially on the Prairies.”
China’s ban on Canadian canola seed imports is creating a “murky outlook for farm income,” and the value of April deliveries of canola compared to this time last year are “significantly lower,” with prices down more than 10 per cent.
“In the Prairies, canola can be as much as 45 per cent of crop receipts. This is obviously a big deal,” he said. “Some of these trade issues could last for a while. Some could be resolved quickly. That makes it really hard to plan.”
That’s why farmers need to have a strategy in place before they consider buying more land, Gervais added.
“Given the uncertainty right now, a risk management strategy is the right thing to do. Production risk, marketing risk, financial risk — all of these things need to be analyzed really closely to make sure that farm operations aren’t exposed to undue risk.”
The first step is knowing your cost of production and understanding your cash flow. Buying land can tie up a lot of working capital, which is “your first line of defence when things are becoming more volatile.”
“Your working capital is… what’s going to get you through a difficult time, and we do expect more volatile commodity prices in 2019,” he said.
“Are you still comfortable buying land knowing that things could get more volatile in 2019? If you’re thinking about buying land, it needs to fit in your long-term plan… (and) it needs to make sense from a cash flow perspective.”
But despite the headwinds, Gervais said the outlook isn’t entirely doom and gloom about the coming year, thanks to consistently strong demand for Canadian commodities.
“We have some serious short-term challenges ahead of us in 2019, but I do think the long-term outlook remains positive.”