COVID-19 has created shockwaves across the agricultural marketplace over the past six months — but has it affected farmland prices?
“So far, we’re pretty confident to say no,” said J.P. Gervais, chief agricultural economist for Farm Credit Canada. “Right now, given the data that we have, we see very little impact of the pandemic on farmland markets. That’s good.”
But the FCC data for Alberta is also a bit surprising.
In 2019, buyers of farmland in the province finally took a bit of breather — only bidding up land prices by 3.3 per cent following a torrid eight-year stretch where annual increases averaged close to 10 per cent.
In its annual mid-year review of farmland prices, FCC found the rise in land prices nationally was 3.7 per cent in the first half of this year. But Alberta again stood out with farmland prices going up 4.9 per cent. (The other exception was Saskatchewan, up 4.2 per cent.)
“Every other province has a slight slowdown in the pace of increase, whereas in Saskatchewan and Alberta, there’s actually the opposite — a little bit of an increase,” said Gervais. “That’s a pretty strong market.”
That difference is even more pronounced when you consider the rise over the last year in both provinces, he added.
“These are the two provinces for which the most recent 12-month increase in average land values is actually higher than the previous 12 months.”
In Alberta, the price of farmland rose 8.5 per cent from July 2019 to June of this year, a sharp increase from the 3.3 per cent rise in the previous 12-month period. (In Saskatchewan, that increase was smaller — 7.9 per cent versus 6.2 per cent in 2019 — but still higher than the average 7.1 per cent increase seen during that period.)
For farmers in both of those provinces, strong cash receipts coupled with low interest rates have driven up demand for land.
“In the first six months, grain, pulse, and oilseed receipts went up 6.3 per cent, so we have a bit of an acceleration in cash receipts that triggered a bit of an acceleration in the pace of increase in land values,” said Gervais, adding that demand is mostly coming from grain operations.
“I’m not sure that the outlook for the 2020 crop — which is, so far, positive — has anything to do with this. But the fact that receipts were high and prices have been moving upward shows that things have been moving in the right direction despite the pandemic.”
But as farmland prices move ever higher, are cash receipts keeping pace with these increasing land values?
“In recent years, the answer to that question is no — cash receipts have not been moving up at the same pace as land values,” said Gervais. “In 2015, land values were moving up roughly at the same pace — even a little higher — than cash receipts. Since 2016 onward, we’ve seen land values outpace cash receipts.
“But if we look at 2019, the average rate of increase in Alberta was 3.3 per cent for the entire calendar year, and 3.3 per cent is not too far off what we had for growth in cash receipts. When there’s an outlook for positive market conditions that suggest farm income is going to go up, that contributes to a stronger demand for land.”
And while there’s a chance that the cost of land will just continue to climb, Gervais doesn’t think that’s likely “and certainly not outpacing growth in farm income.”
“I think we’re at a point where we really need to match whatever happens in the land market with whatever happens to farm income,” he said.
“Yes, the increase is strong, but it matches up with a strong increase in cash receipts. Prior to that, the increase was more muted, and that matched up with a flat lining in income.
“Income is going to drive a lot of that in the next few years.”
But Gervais cautions farmers who are thinking of buying more land to run the numbers for their own operation (particularly in southern Alberta where the increase has been more pronounced).
“This land is quite expensive, so I think the best piece of advice is to run some scenarios — if you’re making this purchase decision, understand what position you’re putting your business in from a financial standpoint,” he said.
“There’s no doubt that, in recent years with the tightening of margins, operations have had to sharpen their pencils. If you have a really good understanding of your leverage, your strengths, and your risks in your balance sheet, I think you’re going to be in a good position to make that decision as to whether it’s a good time to buy.”