Farmland values still rising in Ontario but pace of increase slows

by SUSAN MANN

Demand for Ontario farmland outweighed supply in most areas and helped to contribute to the average 15.9 per cent increase in value last year, according to Farm Credit Canada’s 2013 Farmland Values report released recently.

Most of the increase occurred in the first half of the year, FCC says in its report, which covers Jan. 1 to Dec. 31, 2013. Trevor Sutter, FCC spokesman, says starting this year they’ve switched to doing one farmland values report annually from the two a year (once every six months) they were doing previously.

Ontario’s increase of 15.9 per cent for 2013 is about half as big as the highest increase ever recorded in the province of 30.1 per cent for 2012 but similar to 2011 when land increased by an average of 14.3 per cent. In its report, FCC described Ontario’s increase of 15.9 per cent as average compared to the rest of the country.

“Average farmland values in the province (Ontario) have continued to rise for 25 years,” the report says. The counties of Huron, Simcoe, Middlesex and Elgin were the hot spots in Ontario last year and “led the province with the most significant increases. In other regions, land values leveled off although demand remained relatively high.”

Stratford-area realtor and farmer Laura Leyser, immediate past president of the Canadian Real Estate Association and a past president of Ontario Real Estate Association, says part of the reason for the increase in land values last year is everything, such as good commodity prices and low interest rates, “was perfectly in line.”

In her area of Stratford, land is selling $27,000 to $30,000 per acre. “Is it ever going to be that you’re going to make money and it’s going to be able to pay for itself? No way.” But what happens is buyers with multiple farms use their other farm equity to “be able to come in and buy it.”

Good commodity prices and low interest rates are even impacting farmland rents. Leyser says she hears land rents in southwestern Ontario are $450 to $500 per acre.

The FCC report says livestock farmers needing a larger land base for manure management and to expand their cropland holdings fuelled demand from that sector, while favourable crop yields and receipts also stimulated demand from cash crop producers. Higher prices in southern Ontario led some buyers to acquire land in northern regions of the province where prices are lower, the report says.

Ontario Federation of Agriculture president Mark Wales says “land is always considered to be a good investment. The challenge, of course, if you’re buying land is at what price do you get in at.”

Wales says he’s not surprised by the 15.9 per cent increase for farmland in Ontario last year. The smaller increase in 2013 compared to some previous years is somewhat of a reflection that “corn wasn’t going to be $7 or $8 (per bushel) forever.” But “one of the things driving it here is there’s not a lot (of land) actually on the market.”

With the rapid appreciation in land values during the past four to five years, people are tending to rent their land rather than sell it outright, he says. “People are really realizing the fundamental value of farmland so they’re not in as big a rush to sell it as they were five, 10, 15, 20 years ago.”

One implication of the land price increases is it’s making it a lot tougher for young people to get into farming. Wales says new farmers are “going to have to take a hard look at creative rental arrangements, especially since we’re seeing that people are not in a big rush to sell their land anymore.”

University of Guelph Prof. Alfons Weersink says the main factor driving the price of farmland is “what can you earn from it” and that’s related primarily to crop prices but also livestock prices. Another factor is interest rates. “Both of them had been at extremely favourable conditions in terms of the interest in buying land by farmers,” he says.

Putting the combination of good crop prices and very low interest rates together means “you have high farmland prices,” he explains, noting now there’s some expectation that land prices will continue growing and land is considered to be a good investment by non-farmers. “That’s an additional demand as well.”

Al Mussell, George Morris Centre senior research associate, says during the past five years significant technological improvements to crop production “weigh in heavily in how people choose to bid for land.”

For growers equipped with technologies that favour large-scale farming, such as air seeders, earnings from the return against that machine “in turn can be leveraged against what they can pay for land,” he says.

Farms in Ontario are continuing to be in transition to larger-scale operations run by multi-generations from relatively small farms of 200 to 300 acres that may not be transferred to the next generation. Mussell says that asset transition, which has been occurring for the past 25 years, from one demographic group to another “is pretty significant in terms of holding up land values even in periods of lower price trends in grains and oilseeds.”

In addition to economic behavior, psychological factors drive land values. If the farm next door comes up for sale and it was once owned by a family relative, someone may want to buy it because they want it back in the family and the price “would almost be no object,” he says. But it’s hard to say how much of a factor that is in current farmland values picture, he notes.

Across Canada last year, farmland increased by an average of 22.1 per cent, the highest national increase since FCC began reporting on values in 1985. The highest increases were in Saskatchewan at 28.5 per cent, followed by Manitoba at 25.6 per cent and Quebec at 24.7 per cent. BF