Ontario’s farmland value growth rate lags behind national rate

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No matter whether it's on a before-tax basis or an after-tax basis, farmland in Ontario is selling at an unsustainable price/earnings multiple that puts an entire generation of aspiring farmers at substantial risk of never even getting started.

Depending on the sector, and depending on whether it's trailing earnings or future earnings, price earnings multiples in the broader economy are currently at about 15 to 20 times earnings while Ontario farm land is priced at anywhere between 45 to 60 times earnings, and maybe even more than that if one uses projected 2016 corn crop prices.

Every year when preparing income tax returns for beginning and/or aspiring farmers, I hear the same seething discontent, all pointed squarely at supply management, and it won't end well, yet nobody, especially at Farm Credit where they'd curl up and die without making loans to the supply management juggernaut, is paying any attention to anyone who doesn't own quota.

What agriculture needs, if we're going to have a next generation of farmers rather than a next generation of land-based aristocrats, is a crash that completely bankrupts half of all the existing dairy and poultry operations and humbles the rest into a long-overdue understanding of what "being a good neighbour" and "being all in it together" is all about.

Lest dairy and poultry farmers think I'm being overly-cruel, I am reminded all the time by my younger, non-supply managed clients that supply managed farmers think nothing of being "cruel" to consumers and also think nothing about being "cruel" when they use their government-sanctioned incomes and assets to outbid other farmers for land, thereby keeping, possibly forever, an entire generation of aspiring non-supply managed farmers "sitting on the sidelines".

Stephen Thompson, Clinton ON

The perception is we need more young farmers when the existing farmers plus their sons who inherit the farm at reasonable prices can sustain it until their children can do the same. A few years ago a 12 row planter was considered big, yet today I passed by a farm in southern Huron where 2 48 row planters plus one 32 row planter were ready to start planting. Face it Stephen science and tech dictate we don't need more farmers. We can get by nicely with the existing farmers plus a few of their children.

Then why not close the border to cheap foreign workers with all this big equipment?

The above comment is jingoistic, simplistic nonsense and ignores the stark reality that supply management has created a rural aristocracy that shuts down and/or shuts out anyone and everyone who wasn't born with quota under their pillow.

While we may not need any more farmers, it is a national obscenity that the "right" to be one of the few who do exist, goes disproportionately to those who have a legislated advantage over the rest of us.

It also appears rather obvious that the above poster is NOT a non-supply managed farmer with a child or children wanting to farm, because they will have been hearing from their children since they were in grade school, that supply management is too big an obstacle for them to ever surmount, especially if/when they have to pay out non-farming siblings in order to get established.

More to the point, the idea that agriculture is somehow going to thrive on "existing farmers plus their sons who inherit the farm at reasonable prices" is nonsensical, as well as blatantly-sexist, and works only if/when farmers have only one child.

And as for the 48-row planters, my experience suggests this doesn't indicate long-term prosperity, but rather a short-term opportunity to rent land from farmers whose children have fled from the stratospheric price/earnings multiples caused by supply management, and those farms will, therefore, eventually get sold to supply managed farmers, leaving the owner of the 48 row corn planter to rent land from yet another middle-aged farmer whose children, in turn, have fled the supply management price/earnings multiple onslaught.

What part about the social obscenity of a legislatively-created, non-level playing field in Ontario agriculture do farmers not understand and/or not want to understand?

Stephen Thompson, Clinton ON

Many of our ancestors came to Canada to get away from feudalism and its highly-structured systems whereby the eldest son of the lord of the manor got the estate and nobody else, especially the serfs who toiled on the land and lived in the houses they could never buy, got anything - yet it would appear that the above poster is advocating a return to just exactly that principle and just exactly that sort of system.

The appropriate number of farmers is not the issue and never has been the issue. The only issue is that supply management has created economic and social schisms in agriculture because it has made a mockery of the democratic principle that "all men are created equal".

And as for 48 row corn planters, that's all well-and-good, but does spending a lifetime "playing in somebody else's sandbox" make you anything more than a elderly tenant farmer with a lot of green iron and an IOU to John Deere?

Stephen Thompson, Clinton ON

That would have to rank among one of the saddest comments I've ever read on this site...and there have been some self serving dandies. I would find it really interesting to see you make that comment face to face with my son...but then you don't even have the decency/balls to sign your comment.
D. Linton

D. and Stephen, I get your point, however with the utmost of respect, the same consolidation thing is happening at breakneck speed in the U.S. and they don't have S.M.
Granted, I get your point that S.M. perks may make it harder to compete here in Canada, the overall result still means as in the U.S. we need less farmers because of science and tech plus engineering progress. Some of those children of current non supply managed farmers will make it farming in spite of S.M. competition. Science and tech is stopping for no one period.

Consolidation is happening in the US, but, if my understanding is correct, the price/earnings multiples on US farm land is, thanks largely to supply management, as duly and regularly noted by Ryan Parker of Valco Consultants, about half of ours, especially in Perth, Huron and Oxford counties, the "ground zero" of supply management in Ontario.

Furthermore, claiming that "science and tech is (sic) stopping no one" misses the point that science and tech simply don't matter to someone who is already stopped because of the juggernaut of supply management.

In addition, claiming that SM perks "may" make it harder to compete in Canada is the ultimate in chutzpah (as well as fairly positive proof that the above poster isn't a non-supply managed farmer under 40 in Perth, Huron and/or Oxford counties) because it tries to downplay the stark and awful truth that supply management absolutely does make it harder to compete in Canada.

Finally, it's exactly the sort of dismissive and/or "tut-tut" postings like the one above that are increasingly angering young farmers (see the related posting by Mr. Linton) who quite-rightly view the baby-boomer generation, and their/our inability to see the economic and social evils of a two-class system in agriculture, as major obstacles.

Stephen Thompson, Clinton ON

So, according to your theory that S.M. enhanced farmland prices actually promote fewer farmers. Furthermore, for discussion purposes could we conclude it's to the government's advantage to promote policy that deals with fewer farmers?

Any discussions, like the one above, about how many or how few farmers is irrelevant and avoids the issue which is that government policies, including supply management and ethanol mandates, give financial advantages to one group of farmers at the expense of other groups of farmers.

It doesn't matter whether Ontario has ten farmers or 100,000 farmers - legislation that favours one sector over another will ALWAYS be wrong.

Stephen Thompson, Clinton ON

So you think we should have more farmers ? All with 100 acre farms with 80 hp tractors and 2 row corn planters...that is not a reality !

D. and Stephen, claim that S.M. is soley responsible for the need for less farmers in Canada however the same consolidation thing is happening at breakneck speed in the U.S. and they don't have S.M.
Granted, I get their point that S.M. perks may make it harder to compete here in Canada, the overall result still means as in the U.S. we need less farmers because of science and tech plus engineering progress. Some of those children of current non supply managed farmers will make it farming in spite of S.M. competition. Science and tech is stopping for no one period.

That is Stephen's apparent wish.

2 row planter and 100 ac. farm being Stephen's point.

You made my day with that statement but you forgot the business component, using a "fax" machine!

Social license would tell me that if SM is not aware of the power of the people then those in SM are fools for sure . People will demand a competitive price to the US price in stores there .

The good people in Venezuela had 'voluntary' controls on milk production at one time. Ask them today where they can buy milk and even if they could find the milk, at what cost? Who would have thought?

Your so-called 'social licenses' are worthless in the face of challenging times while trying to survive adversity.

There is no such thing as a 'social license'.

That phrase is nothing more than technocratic mumbo-jumbo. In other words: Stuff and nonsense.
Get over it really.

let's not forget about the daughters who inherit the family farm

Mr Thompson as usual wants to pin all of the perceived problems of agriculture at the feet of the supply managed sector….however to be fair he does occasionally give that a rest to flog the ethanol sector for any that got missed.
Are land process high….yes possibly based on what metric one uses…..but to claim that is exclusively or largely the result of a a relatively small (less than 10%) group of supply managed farmers is not likely that accurate. It would seem reasonable to hypothesis that if supply management was at the root of the rise that two things would also be true : that the rise would have occurred previously as supply management is by design a stable form of price control and secondly that in neighbouring jurisdictions that don't have supply management that the rise in land prices would have been less. On both of those measures we don't see what the "its all supply managements fault" hypothesis would have suggested. The neighbouring US states have all seen land values rise at similar or higher rates -Iowa is up 108% in the preceding 10 years while Ontario was up 106%. The rate of rise and fall in land prices is also much more varied than one might expect if SM was the primary driver, the correlation is much stronger to grain prices, low interest rates and the overall strength of the economy. One change that likely has had an impact was the establishment of a nutrient management policy that required larger land bases to handle livestock manure but that is not limited to either poultry or dairy.
The second point Mr Thompson likes to make is that the price to earnings multiple is unsustainable. However in making his calculation he assumes that land values will show zero future appreciation in value. If one is making the investment requiring cash income that is a fair assumption as any appreciation will be non cash until a disposition of the land asset. However for a long term investor looking at the issue the assumption that land value rise will keep pace with or exceed overall rates of inflation has proven correct for a long long time. Yes Stephan I know the "tree can't grow forever" but it sure seems to have grown for quite a while.
I am not, nor have I ever been, a SM farmer and am quite willing to accept that there are many issues with those systems…just not sure that the rise in land value is all SM's fault argument holds up to scrutiny.

Tom Cox

Pretty much every year, Ryan Parker, with Valco Consultants in London, squarely lays the blame for high land prices in Huron Perth and Oxford Counties, at the well-shod feet of supply management.

In addition, Mr. Cox can dance around and be as dismissive about the Price/Earnings multiples all he wants, but EVERY common stock also has a capital appreciation component - therefore, why should the long-term average P/E multiple in the stock market for stocks with capital appreciation be about 15 to 1 and farmland be at 50-1.

I can't understand why Mr. Cox wants to pick issues that aren't issues to anyone with any sort of background in finance - his arguments don't stand up to any scrutiny at all.

Stephen Thompson, Clinton ON

Mr. Cox makes the often-repeated, yet always-fallacious argument that a small segment of the farm population, the 10% of farmers who own quota, cannot wield as much influence over the price of land as I, and others, including Valco's Ryan Parker, attribute to them.

Firstly, Mr. Cox doesn't seem to understand that it doesn't matter whether supply management has 10% of the farm population or even 1%, as long as they have more purchasing power than everyone else, they have control, and that's all that matters.

More to the point, Mr. Cox is still avoiding the root of the problem, the two-class system in agriculture - it doesn't matter whether it's supply managed farmers versus everyone else, or grain farmers who benefit from ethanol mandates versus livestock farmers who suffer because of these mandates, legislated inequalities in purchasing power are always WRONG.

Secondly, in the business world, many public companies are effectively controlled by a small group of shareholders who may not have more than 10-20% of the shares, but have control of the company because the rest of the shares are too-widely dispersed to allow any individual or group to exert even that much control.

In the final analysis, however, Mr. Cox is still defending the biggest fallacy of them all - agricultural exceptionalism, or the belief that agriculture is and/or should be exempt from the principles that guide every other segment of our economy and our society.

There is simply no way Mr. Cox, or anyone else, can justify, in an economy driven by almost zero inflation and on the verge of negative interest rates, paying 50 times trailing earnings for any asset, WITHOUT laying the blame for this aberration where it belongs - on those sectors of agriculture behaving as if their particular flavour of agricultural exceptionalism will, and must, last forever.

Stephen Thompson, Clinton ON

The U.S. Farm Bill which mostly supports corn-soy and wheat farmers! Cais closed.

Well said. These values make it impossible for oridinary people to farm.

In other news today, the bank of Canada left the rate unchanged at 1/2 a percent.
However, in the grand scheme of things, central banks don't necessarily hold the cards. What I mean by this is that even if the overnite lending rate remains unchanged at 1/2 percent for any prolonged period of time, I believe that the banks will begin raising rates, albeit slowly, but nonetheless, they will.
The question will then become, will FCC follow their lead, acting in its fiduciary duty to the tax coffers?

Raube Beuerman

You seem to be saying that young aspiring farmers are entitled to buy farms at cheaper than face value.We all thought your entitlement theory was reserved for supply management farmers?Would young beginning farmers also be entitled to cheaper equipment, how about feed and fuel as well ?

Some of our fathers and grandfathers borrowed money from uncles and father-in-laws to get their first farms and then shared balers and seed drills with neighbors to work the land. Your version of entitlement for today's young farmers would shock them.

There is reason why the young minimum wage construction worker and his young family is not buying the big house between the Doctor and the Lawyer.
There are many farms out there for sale, young farmers don't need to be going after the 15-20,000/acre ones, even if some people might think they should be entitled to.

Analysts at FCC have a vested interest (including their cushy jobs) in the preservation of status-quo land values and, as such, their prognoses are tainted by more than just a slight tint of rose-colouring.

In the real world, things are different:

(1) Some of the best and brightest investment people are at the Ontario Teachers Pension Fund which, even with interest rates and inflation at almost zero, is still reporting double-digit returns for its members. Double-digit returns at zero inflation and zero interest come, by process of elimination, from earnings and capital gains on the sale of equities trading at price/earnings multiples that dictate a sale. Would organizations like the Teachers Pension Fund be buying farm land, or rather selling farm land, with price/earnings multiples at 50 to one, especially given that earnings are artificially inflated by 200% tariff barriers for dairy and poultry farming and by ethanol mandates for corn farmers? Does water flow uphill?

(2) A client has a multi-million dollar investment portfolio managed by the private client services branch of a the investment side of a major chartered bank, and it's managed and run as if it was a pension fund which, for my client, it is. These people are good and tend to be somewhat on the conservative side because this fund didn't decline in value after 9/11 and pretty-much held its own in late 2008. If I was ever to win Lotto 649, I'd get these people to look after my money, in an instant. When interest rates were higher and declining, a lot of the fund was in bonds and interest bearing instruments, but not so much now. When the fund buys a stock, it typically holds it for up to 5 years and makes only about half a dozen trades a year which means they, unlike most investment advisors, aren't "churning" the client by over-trading so they could make more commissions. Some of the equities owned by my client double in value during the term of ownership and large losses are rare, until now, and one particular loss has a lesson for agriculture.

Canadian Oil Sands Limited (COS.TO) is like Canadian agriculture - what is more iconic and more basic to Canada than agriculture and oil, especially oil sands oil? COS.TO traded at $34.66 in July of 2008, declined to $12.94 by January 2009 and had climbed back to $25.03 when it was bought for my client in late 2010. It was sold in early 2015 for $8.30 which didn't look all that bad considering that in August of 2015, it was trading at $6.27 or almost 82% less than at $34.66. As of March 2016 it had rebounded to $9.93 (possibly a so-called "dead-cat" bounce) and even that is still over 71% less than it was at $34.66.

It's like this:

(A) if a major player in something as uniquely-Canadian and as basic to the Canadian economy as oil (they aren't making it any more) can tumble up to 80% in value because of a change in economic fundamentals, agriculture can too, and will.

(B) No COS.TO investor, including my client, is howling for government compensation and/or planning a demonstration on Parliament Hill the way agriculture would if/when facing a similar and long-overdue collapse in the value of farm land.

Stephen Thompson, Clinton ON

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