by BETTER FARMING STAFF
Buying farmland anywhere in Canada will cost you more this year but the pressure on price is greatest in the London area, mostly Middlesex County.
David Brown, executive vice-president brand marketing and promotion for Remax, says the London area stands out in the competitive market for farmland.
“We’ve seen as much as 40 per cent of our sales (in the London area) go in multiple offer,” Brown said. He was commenting on a Canada-wide Remax report on farmland. Values, according to the report, have reached record levels so far in 2013.
The report shows land in all of Middlesex County is trading at $12,000 an acre, up from $10,500 last year in Middlesex West and $7,500 in Middlesex East. The price leaders in Ontario continue to be Woodstock/Stratford and Kitchener-Waterloo, where land is trading from $15,000 to $18,000 an acre. South Simcoe’s Bradford area tops the field at $25,000 an acre with the Holland Marsh next at $20,000 an acre. The most expensive land in the country is in BC’s Fraser Valley, where prices range from $40,000 to $60,000 an acre.
“While demand is tight,” Brown said, “it’s hard to imagine that we are going to see much moderation, especially in the London area.”
Brown says the London area has buyers who are multi-generational farmers and quota farmers in the market. There is also an upsurge in hobby farmers.
However, there are a couple of factors chilling the market generally. Commodity prices are down and it is harder to get money.
“There’s a more conservative tone to the market,” Brown says. “People are being a little warier. They’re not just jumping in and paying huge prices.”
Well, not everyone.
Tom Eisenhauer, president of Bonnefield Financial, a Canada-wide farmland investment manager and property management firm, says a lot of farmland in Canada is trading at “ridiculous” prices, at least on the surface.
Sometimes land trades seem high at $15,000 to $20,000 an acre, especially in southwest Ontario. However, he adds: “When you peel back the onion, often times those tend to be pretty small lots where there’s a farmer next door who is price indifferent about buying that piece of property just because it allows him to make one less turn on his combine when he’s harvesting.”
Eisenhauer says price influencers can include quota “where we see the value of some of those quotas getting reflected in the crazy values of the land.” He says also there is development pressure in some areas of the country, especially the Greater Toronto area.
Where there are no other influences, Eisenhauer says land is good value.
“If you go to the middle of nowhere in Saskatchewan and look at farmland, or really where there is no development influence and not an influence of quota, by our estimation the earnings potential that land can generate over a three-year crop cycle is pretty well represented in the price.”
Dale Litt, senior appraiser at Farm Credit Canada, says their spring report was still showing an upward movement in the price of farmland. However, they will not be producing a new report until April of 2014.
“I don’t know if things really leveled off that much (since the spring report),” Litt said. “There have been gains in different areas of the province for sure. Other than that, I can’t really comment until we have another report.” BF
Comments
Everybody with even the most-modest background in the investment industry, rarely speaks a sentence without saying the term "price/earnings ratio" - yet when we get to farmers, and farm land, nobody seems to have ever heard of the concept.
That's why nobody seems to grasp the point that, for example, land which sells at $5,000 per acre based on a nominal rent of $100 per acre, or 50 times earnings, is more "expensive" than land selling at $8,000 per acre based on a nominal rent of $200 per acre, or 40 times earnings.
In any event, land selling for $15,000 per acre, based on rents of $300 per acre, or a 50 times earnings multiple, is still in dot.com territory where only the foolish, the brave, and/or those with a fatalistic need to ingore nearly a century of investment wisdom, venture.
I blame FCC's political masters for ending their lending policies based on income approach to value, as the start of this frenzy. It's hard to say who is the greater fool in this sorry saga - the people who abandoned this approach to lending, or farmers who ingore the price/earnings follies which resulted.
Stephen Thompson, Clinton ON
Many of today's farm purchases are speculating, and by speculating as opposed to investing, you are lowering your odds of building wealth and increasing someone else' like the banks or FCC. To quote Ben Graham, the author of arguably one of the best investing books of all time "An investment operation is one which upon thorough analysis, promises safety of principal and an adequate return". From an investment perspective, one would calculate what the farm is worth based on historic returns of good years and bad years. A moderate P/E earnings ratio for a stock would be about 15-1, therefore buying a stock with a ratio of 50-1 would be very risky, and if you were to buy at the 50-1 ratio with borrowed money it would be comparable to going to Vegas, or buying stocks on margin. A speculator will gamble that the price of the farm will go up because, for example, the speculator also believes the farms income will always go up, and someone someday will pay more for the farm upon sale. Raube Beuerman
l don't think development pressure is just limited to the GTA.London is getting bigger but so are some towns.There will never be a big land-turnover in Kitchener-Waterloo, the Amish just don't sell unless its to the city, so anything that does move is big bucks.
How can anyone put any credibility to anything FCC says anymore. It is nothing more than a fake investment bank, with interest only loans to certain clients, an ever changing business plan, re quota values as collateral .If the politicians ever decide to rein it in who will own the farms???
You are obviously assuming "certain clients" are Supply Management farmers,which l also assume you are not! FCC is simply going where the best chance on a return is and it doesn't hurt that your biggest cleinte also has the backing of the Politicians.As for "reining it in",no banking system wants to go back to the farm debt review days.
A dairy farmer came through my shop at the end of winter, mentioning that he had recently purchased another piece of dirt. He said he was with FCC. I asked him why he wanted to buy it, and he said "I hate paying income tax". It is my understanding that every year FCC, since it is basically a government entity, contributes a large chunk of cash to the tax cofers. So, effectively, he is indirectly paying tax anyway. Why not just pay the income tax? Raube Beuerman
If FCC implodes, and it will because taking quota as security is, even according to my own banker, bad banking, any losses will be absorbed by the taxpayer, and the farms will be bought by the next generation which has been chomping at the bit waiting for just this chance. Refusing to allow FCC to take quota as security would be the second-best thing we could do for the next generation - getting rid of supply management itself, would be the best.
Stephen Thompson, Clinton ON
Why would a jockey rein in his horse when he is ahead in the race! FCC has become the Nation's biggest farm lender, the only ones wanting to rein it in are the other banking establishments.
The challenge for any farmer in any Agr-sector when applying for a loan is present to their bank/CU a business plan featuring a positive sustainable cash flow.FCC is willing to take on young farmers if they can show that cash flow, the banks always want a longer business history and more collateral
A young friend of mine, not in supply management, went to see FCC - when FCC found out he didn't have quota, the interview was effectively over.
Secondly, you've got the horse-racing metaphor backwards - it's all about FCC entering their "horse" in too many races.
Thirdly, you're in dreamland about cash flow - when land is selling at up to 50 times earnings, thanks to the artificial stimulants propping up ethanol and supply management, too many young farmers need over $100,000 in off-farm income annually to compete with young farmers their age who were born with quota under their pillow.
Stephen Thompson, Clinton ON
Odds are your young friend went to a bank before FCC and he probably got the same answer!
FCC should be right out of the land game then, because with 8-15 000 land and $4 (or less) corn it doesn't cash flow. The average Ont corn crop is forecast at 160 bpa or there abouts. At $4 that is $640 an acre gross. On $8 000 per acre land at 3% it takes $240 to carry that, throw in some property tax and say land costs $260 an acre. That leaves $380 to grow and dry corn. $100 for seed $150 for fertilizer, $80 for drying and trucking ($20 a tonne for 4 tonne). We have $50 left to plant, spray, combine, do tillage, pay interest etc. If interest went up to 5% it now takes $400 plus property tax to carry that same acre and well $640-$400 is $240 and we have $250 in seed and fertilizer and we are already in the hole before we plant or harvest. These numbers assume everything goes perfect because we didn't add $10-$15 for crop insurance because we never get drought, hail, wind, disease, frost, flooding, bugs, or anything else that would cause us to have less than 160 yield every year for the next 25 till the land earns enough to pay for itself. Wait, at these prices you will never earn enough to pay for the land, you can't hardly pay the interest, and you wonder why Steve is predicting bad things ahead?
John Gillespie
Ripley
Another thing about this expensive land is that guys can't finance expensive land and then finance 200k tractors or 350k combines,,well for very long anyways.....now if you have the cash or most of it then it really doesn't matter ,a good place too park money.......if you had $1 million cash on your kitchen table would you trade it for 100 acres bare ground ? and depends on if your 25 or 55 , sometimes over paying for just 1 more farm and prices drop,interest rates increase and you struggle makes farming no fun - who knows what economy land will be in 2-5-10 yrs. and everyone has a different level of comfort . kg kimball
Alas John, it was always thus.
I would suggest that land prices have never ever "cash flowed" for the first few mortgage payment years, based on COP. However, the dollar cost average method of return ratios and COP after about 10 years of payments for those with an accumulated war-chest is somewhat different.
Furthermore, even Steve claims COP is meaningless, therefore 50 times ratios is also meaningless.
Other factors not considered are 1. off farm income $$$$$ 2. inheritance $$$$$ 3. Savings and war-chest $$$$$. 4. urban development plus urban retirement pressures.
Finally, if land prices were to somehow match COP or earnings ratios what would happen to price vs demand at that point?
Numbers
In my calculations I didn't even start with the mortgage payment. If you had a million dollars free cash sitting around I am going to bet you could easy get 3% or maybe more in a GIC type investment, and I can't even get to that level of return on the million dollars at $4 corn and I would have to think the risk that one of the 6 big banks is not going to make a GIC interest payment is a lot lower than making 160 bushel corn every year. If you want a young farmer to actually pay for the land in 25 years it won't happen at these prices.
John Gillespie
John, the crazy thing is that if you buy any of the big six banks stocks, you will recieve more in dividends, than their GIC,s!! Another reason I would love for interest to normalize. Raube Beuerman
why are the land values higher in Huron, Perth and Oxford then they are in Chatham, Kent and Essex ? it seems the answer has to do with where the supply managed farmers are concentrated. its pretty simple to tell who is set the land prices its not beef farmers.
Sean McGivern
PFO
I,m not from there but is the land much better in the first 3 counties than the last? If so maybe that,s half the problem , people not buying rocks to farm on at least for the high prices.
Did you ever stop and think that maybe higher quality land deserves a premium?
the land in Chatham, Kent and Essex is far more productive then the land in Huron Perth and Oxford because of the longer growing season and the higher heat units, that why it doesn't make sense that is less expensive. The reason there is distorted price is because one are has a lot of SM farmers and the other area has hardly any Sm farmers to force the prices up.
Sean McGivern
PFO
There are buyers in Perth Huron and Oxford because there are sellers! l don't think l have to tell you the Agr-sectors that haven't been doing to good in those counties the last few years.You get a little farther north and they wish they had some SM farmers around.
I have 70 year-old farmers, who want to eventually sell their land, tell me all the time that they love supply management - but I have even more 35-year-old non-supply managed farmers tell me they hate supply management for the same reason the 70 year-old farmers love it.
Sorry, but it's exactly because supply management pits farmers against one another, especially along age lines, that it is not well-liked, and will not be missed, especially by younger farmers.
Stephen Thompson, Clinton ON
More times than not its all about timing,even without the lower interest rates those 35 year olds were probably wishing they had of did their building/buying 5 years ago and the 65 year olds were glad they held out for another 5 years.
You are giving Supply Management way to much credit, farmers have been bidding against other farmers for way before SM came around...it comes back to what has changed in the last 5 or 6 years,in my Perth county it is not hard to see.
Are there only in this day that we have older farmer? If you want to farm till they throw a shovel of dirt in your face so be it , why is it some people think that if you hit a certain age you should go lie down and let a young person in to take over. Is that the way some people like to treat older people , well I,m glad I,m not your parent. Is it that when you worked hard all your life that its nice to be able to do what you want and if,s it to farm till your not able any more without debt what,s the problem.
Guess a farmer has a big combine just sitting there he likely figures what,s a few thousand more acres to own and keep it busy than keep it lock up and rusting. I for one would like a few millions in the bank and banking it for retirement than buying land at 20,000 $ plus unless I had some houses going up in the near future.
There are those that wish they were SM farmers and those that wish they lived beside one...which one are you ?
If you have never farmed there you don't know what you are missing .
Sorry you can't comment on some thing oyu have not experienced .
If,if,if, you're starting to sound like a former banker of mine rejecting my loan application.
Let me rephrase,FCC may be the biggest farm lender but they certainly are not the only one, so what you are telling me is that all banks and credit Unions should be out of the land game ?
You're trying to splice together history with current info,while mixing in a healthy dose of pessimistic future to come up with a formula of why present day cash-cropping doesn't cash flow but l can tell you it does in many many cases and those are the ones that FCC looks after.
When was the last time Corn was under $4.00/bu? Only a short time ago some farmers would kill for $4 corn! Who says interest rates will soon be at 5%,my former banker gave me that story almost 9 years ago!! You go on about corn but what good cash-cropper does not rotate!
My former Pork producer neighbour saw the light about 4 years ago and entered into a share/cropping agreement with a bigger cash cropper, maybe you should ask him if cropping has no cash flow... he will tell you pretty quick!
You might discover that your old banker soon becomes more popular again. I have sold a lot more corn at $4 or less than $4 or more. Another big crop down south and we will again be happy for $4 corn, the other crops will follow. History has shown that good prices are followed by bad, and the average is what you have to project with. A $4 average price is likely pretty realistic. I never said there was no money in cropping, just no money with $8 000 plus dollar land. If your neighbour has some $2 000 -$5 000 land he bought years ago he will be making money on his investment, although if he could sell it for todays prices he also has an opportunity cost he is giving up on the unrealized current value of the land.
John Gillespie
The cash crop is where the hog industry was 15 years ago.
No bites here
If a 25 year old chose to not become a bankslave for the rest of their life, and has a decent paying job, here is an investing plan. Open a TFSA, direct it yourself, buy ETF's with low MER's. Over the last century the stock market has averaged 9%, but we will use 6% to adjust for inflation and .05 MER fees. If you started with 10 grand, and add the maximum $5500 per year, compounded over 40 years at 6% for maturity at 65 you would have over 1 million. This is tax free money. TFSA's are like an off shore bank account, the only fear I would have would be if the NDP ever got into power and changed the rules.
Let's look at a 55 year old that has a million cash also. If he/she built a portfolio of ETF's and invested it for 10 years at 6% compounded at age 65 would have 1,790847.00 1 million sitting in dividend paying stocks today will get you 4%, so you can earn $40000.00 a year doing nothing. The same as a hundred acre farm, if someone will pay you $400 acre rent. Is land going to increase 6% per year for the next 10 years? Raube Beuerman
Why are you feeding pigs then ?
I built in 1997, borrowed over $700,000 at about 8 or 9% interest, with zero down. Looking back it was not such a smart move, and trust me, I almost threw in the towel at one point. In contrast, my business I started with almost nothing invested, has a better cashflow and it never put me in a financial risk situation. In the last half year, I have taken an interest in learning about investing, and have been reading everything I can get my hands on. This is what we should be taught in the last year of high school instead of some of the completely useless garbage they throw at us now. Since I borrowed at 8-9% interest I would like to see interest normalize to about 6-7%, but alas, the government and BofC seems to want to favor irresponsible spenders over responsible savers. It will be a financial death sentence to many buying at these prices. When interest goes up, RE value goes down, and the banks just increased their rates. When mortgages come up for renewal in 5 years, it will be a sick feeling to see that ones debt level has not changed in relation to equity. Raube Beuerman, Dublin, ON
Lucky didn,t start back in the late 70,s or early 80 interest was 20 % and more just like buying the farm with your credit card. Look back and said same thing was young and wanted to farm and stop at nothing, body worn out now but it was a better life than seating at a office chair . People may be paying lots for land but there is next to nothing interest which accounts to a lot. When loans are new and high keep it open and pay it down faster than a locked in one , where the interest is way lower.
No, the Government in these times wants to stimulate spending for better a looking economy,much the same as the US is trying desperately to do! People stuffing money under their mattress don't stimulate anything but lumpy mattresses and a bad back! That is why interest rates will not be hitting near 6-7% any year soon.
Every Ari-sector has a different outlook and l can certainly see why some sectors have a more dismal view of things to come but you can't blame some farmers who want to move ahead in these low interest times...back in 97 with these present interest rates you might not only have built but bought another piece of land as well !
If, "back in 97", interest was 4%, the principal would have been far higher, so your point is invalid. Low interest=high RE values and vice-versa. There are plenty of examples of government stimulation, lets look at this one. A bunch of years ago Flaherty introduced new residential mortgage rules, 0 down 40 year mortgages. They soon realized that was going to lead to a RE bubble (a trained monkey could have also), so they changed them again, and then yet again, and then took credit for solving a problem that he created in the first place. Then they have CMHC, (insurance for risky loans), so the banks get all the profits, while assuming no risk. It may be the governments idea of stimulus, but it just creates bubbles and creates bigger problems down the road. The MARKET is perfectly capable of taking care of these things. Let the banks assume the risk without CMHC, and let interest normalize wothout central bank and government interference. As far as "people stuffing money under their mattress", that is not exactly what I was refering to by responsible savers. I just think that too many farmers don't see past the end of their driveway when they have money to spend or invest. There are places to safely park money and get a return besides buying the next farm that comes for sale. Raube Beuerman
The mid-nineties and the early 70s, were the only two times I can remember when the price/earnings multiple of land was comparable to that of other investment opportunities. In 1973, for example, land renting for $20 per acre could be bought for $200 per acre, or ten times earnings, and in the mid-nineties, farmers thought land was too dear at $1,500 - $2,000 per acre and selling for between 12 - 15 times earnings, whereas now it's trading at anywhere up to 50 times earnings, and farmers think it's a good buy.
Farmers really are their own worst enemy, and their willingness to completely ignore any sort of price/earnings consideration when buying land, demonstrates that adage completely.
Stephen Thompson, Clinton ON
Good to see an article re-inforcing the market distorting influence of SM on RE values, although, any sane person already knew. Reading the posts below it becomes obvious that some chose to skip the story, or ignore it, and head straight for the commenting section. Then we have the deluded RE pumpers praising FCC and their lending practices. The anonymous posters are so predictable. Raube Beuerman
So many comments here and on other sites are by people who do not sign there name or are a registered user >that killed the Agris co-op site,maybe the moderators should either have users register or name with a valid e-mail on file. Lots can be said or agendas promoted by same person-kg kimball
There has always seems to have a certain negative ooze coming from the signature crowd and not only on this site.
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