by JIM ALGIE
The median price for farmland in 10 counties of southwestern Ontario during 2015 rose almost four per cent despite softening markets for most cash crop commodities, says a report by London, Ont. land appraiser Ryan Parker.
The 30-page report analyzes farmland sales completed during 2015. The report is slated to be published online by Valco Consultants Inc., where Parker is a partner.
It includes analysis of farmland sales in each of the 10 counties studied, including regional trends within each county. Demand by livestock farmers including those holding quota for Canada’s supply-managed commodities continues “to have a large impact in certain areas in Huron, Perth and Oxford counties,” the report says.
Parker identifies wide variability in land values locally. He also predicts continued upward pressure on prices for high quality farmland because of expected low interest rates. As well, he cites Canada’s relatively low currency value as a buffer for Canadian farmers from weakening international commodity markets.
“If our dollar was par right now (with the U.S. dollar), and we had to get $3.50 for corn like the U.S. guys are and our interest rates had risen a bit, we’d be in a totally different world, there’s no doubt about it,” Parker said in an interview, Thursday.
The 2015 report is Parker’s fifth in an annual series and documents a period of unusually strong growth in farmland values in southwestern Ontario. The 2012 report identified 29.3 per cent increases between 2011 and 2012 in the median price for all 10 counties with some regions at even higher levels. (The median is the mid-point of a data set; the mean is the average.)
In 2012, for example, the median price increase for Lambton County was 69.19 per cent while the price in Huron rose by 36.88 per cent and the price in Grey County rose by 29.30 per cent. Increases began to moderate during the 2013/14 crop year with a decrease identified in Huron, Lambton and Bruce counties, the report shows.
Parker’s data for 2015 shows the only drop in median value occurred in Kent County, down 5.7 per cent. While the 2015 regional median rose 3.83 per cent, southern Grey County led growth with a 12.5 per cent increase while all other areas showed more moderate increases of between 1.54 per cent in Huron and 6.12 per cent in Oxford counties.
Oxford County now has the region’s highest land prices, Parker’s data show. Among Ontario’s most intensive areas of livestock production, Oxford includes more than 11 per cent of the province’s supply-managed dairy industry with 2013 farm cash receipts estimated at $213.2 million.
Oxford hog farmers also manage a 13.38 per cent share of the province’s pork industry and just over eight per cent of Ontario’s corn business. Parker estimates the 2015 median value of land sales in Oxford at just over $18,000 per acre, more than double the number for 2010.
Although commodity price weakness led to more moderate land price increases in 2015, Parker also said he can see some psychological barriers among buyers faced with the huge increases in land costs in recent years. In some ways, the expansion of individual farms into ever-larger units, limits the number of interested buyers.
“For the first part of this the land values were jumping so fast that once you get up to a really high number and cash flows are slightly less, buyers tend to get a little more choosey,” Parker said.
“It has grown so fast and so far in a few years that, even if commodity prices had stayed the same . . . our rate of increase would have had to slow at some point,” he said. “Once you’re at $25,000 you have to be able to imagine” bidding even more, Parker said of potential buyers.
While Oxford led median land prices in 2015, Perth County came second at just under $18,000.
Remaining counties range from about $13,000 per acre in Huron County to the Bruce County low of $7,900.
Median prices in 2015 for other areas are calculated as follows:
- Middlesex, $12,500
- Kent, $11,500
- Elgin, $11,000
- Lambton, $10,500
- Grey, $9,000
- Essex, $8,000.
Parker’s analysis confirms a trend which has appeared lately in U.S. land price analysis. Iowa State University’s annual farmland value survey published late last year showed a 3.9 per cent decrease. It was the second year in a row for decreasing farmland value and the first time in 15 years for back-to-back declines. Iowa State analysts blame decreasing corn and soybean prices and dropping farm net income.
A September report of the Illinois Society of Professional Farm Managers and Rural Appraisers showed a drop in prices of between two and seven per cent based on land quality. The softening trend in farmland values is “following prices being paid for commodities,” the report said.
Farm Credit Canada’s national benchmark Farmland Values Report is expected to be published in mid-April. The most recent FCC report for 2014 showed a 12.4 per cent increase in Ontario farmland values that year, the 26th year of consecutive, annual increases in the province. BF
Comments
U.S. land prices down ...Canada Up? Go figure, or is it simply the need to expand because technology and human greed allows it? One thing for certain is that few farmers will be the result and the public perception of farmers as poor will end.
These high land prices WILL NOT continue, their has always been adjustments over time that cause prices to drop like a falling Star. People think that it will go on forever, get even more greedy holding out for more money. Land has become like a commodity trading on the stock markets, all it takes is the wind to blow a different way and the spiral down starts! When interest rates jump back up and they will that will have the biggest impact on peoples ability to buy. With the average age of farmers over 60, it will become a wait and see game for buyers not sellers! Bill Denby
People that say land can't drop, didn't own beef cows before BSE hit and watch them drop to almost nothing and stay there for years. In most of Ontario paying more than $5000-7000 an acre will make land too expensive to pay for itself, unless growing specialty crops. At some point land has to pay for itself, may take a while to chew through built up equity, but at some time land will correct.
The following link is to Bonnefield investments the big land investment company. This fund which looks to have bough all it's land by 2012 only reported a 1.98% return on that 2010-2012 purchase price when you only count rental income, and that is on land that is half the price quoted today? Give us a dollar at par and a 6% prime rate, and the business to be in will be red ink distribution and the auction business.
http://www.bonnefield.com/uploads/pdfs/2015-06-30%20Performance%20Summar...
The majority of farmers that have recently retired were able to pay off most, if not all of their mortgage. The fact that they paid low principal and high interest, with interest as tax deductible was the saving grace.
After reading the very well written sarcastic piece by Mr. Pat Lynch in the paper version of BF (which I really enjoyed) in regards to the fact that most farmers dislike paying income tax, I will conclude that very little principal will be paid in the next 10-30 years given that it is paid out of after tax profits.
This will make farm transitions extremely difficult, if not impossible.
Raube Beuerman
As was indicated by Ryan at the TD. sponsored event in Seaforth this A.M., buyers with old pent up established "equity" have no problem using that equity plus current earnings to bid up the price of land to increase their holdings for their upcoming family members. They do this simply because they can and that is what they want to do. Get used to it folks, agriculture as we know it, is consolidating into larger and larger farms at a fast pace, case closed. Yes, consolidation also means fewer and fewer buyers, cherry picking the market, however the feeding frenzy won't slow down until interest rates rise or commodity prices plummet, but for the time being interest rate increases are not in the cards until about 2018 if then.
All of us in the farm management trade in the late 1970's saw farmers with what was then high equity and good cash flow prospects buy land "because they could and that is what they wanted to do" - it was a bad move if for no other reason than because farmers, and their bankers, didn't follow any sound investment principles, particularly the use of price/earnings multiples.
It is a mystery, therefore, why 60-year-old farmers are committing their 25-year-old progeny to investments that will take 50 years to produce a positive cash flow, and an even-greater mystery why the 25-year-old progeny seems to think it is a good idea.
Stephen Thompson, Clinton ON
The mystery answer is because dad does it , grandpa did it and they aren't making any more . That and after 2008 who could blame them .
The classic example of the "greater-fool" theory is a lender and a borrower - in present circumstances, it's a toss-up whether the greater fool is a 60-year-old farmer for buying a farm with a fifty year pay-back, or his offspring for agreeing to devote effectively all of his/her/their working life to making it happen.
In addition, one thing never considered by 60-year-old farmers buying land is that 40% (or even more) of all marriages now end in divorce and being the junior partner responsible for a capital purchase with a 50-year payback is a good reason for any farm marriage to fail and for the farm to fail along with it.
Stephen Thompson, Clinton ON
What about the 65 year old who just recently transitioned the farm to his 40 something year old son,(at a very high cost) who in turn has kids graduating from AG college fully expecting to be into farm ownership in a short matter of time.
Trouble is brewing, and inflation may not come to the rescue.
Raube Beuerman
Simple concept really. Take 15 or 20 farms that are already mostly paid and add one more. Perhaps don't even need a loan to assimilate it. Doesn't really matter at that point if interest rates skyrocket or commodities go sideways. Why do people go to Vegas and Hawaii and Texas?
And I have came to the conclusion that I don't know any farmer that has this many farms(10-15) that are "mostly paid."
The only two exemptions within a 15 mile radius of myself are not dedicated to farming only, as the far larger portion of their income comes from outside business that is not farming related.
I knew of one gentleman that had 10 farms paid for, but passed away recently.
I'm not sure what the point of wealth accumulation is, when you don't spend in
your later years and 'live it up'.
Thankfully, not all go down that road as I have 2 customers who have sold their farms recently and have significant interest income as they hold the mortgage.
One told me that he did the math and figured that the crop income could not match the interest income that he is now receiving. So he sold.
The other man's wife was quoted as saying "we make so much money we don't know what to do with it all". Big smiles.
The fact that these people hold the mortgage also tells me that the purchaser was not likely able to get a loan from a bank or FCC.
Raube Beuerman
When you look to a land adjustment , They aren't making any more !
Have read reports saying we are losing land at an astounding rate per day around the GTA but then have also read that we are not . What is being lost are wetlands and swamps . Further we have GFO's who are on side to bring land in the north into production ag so how much is being lost and at a time when we are over producing now . This land that is to be brought into production is currently sequestering carbon . So it seems the solution is to release more carbon while pushing for a cap & trade program ! A little backwards really .
Worked some numbers for a client today - he has a bare land farm which netted him about $30,500 in rental income after paying property taxes and insurance on the farm and currently has an offer from someone who wants to buy that farm, right now, for $1.5 million.
He would realize, after paying capital gains tax and experiencing a claw-back of his OAS for one year, some $1.384 million (about an 8% marginal tax rate on the $1.5 million). He'd have Alternative Minimum Tax of about $43,000 too, but I didn't subtract it from the $1.384 million because it is, in effect, a prepayment of future income taxes and, therefore, not money gone forever - well, it might be gone forever if he expires before it is used up, but I digress.
Therefore, he is going to put $1.384 million in the bank, after tax, on a property which is now earning him about $30,500 annually before tax.
This is a price/earnings multiple of 45.377 to 1 and shockingly-obvious proof that, with deflation rather than inflation on any horizon, Ontario agriculture has already gone to Hell-in-a-hand-basket.
(1) Welcome to legitimized child abuse of the next generation of farmers
(2) Have fun at the next farm-crisis rally in Ottawa and/or Toronto
(2) I won't be there
Stephen Thompson, Clinton ON
I will assume this client of yours has no other sheltered or non-sheltered savings.
Your client could open a brokerage account(like I did a couple years ago), and max out his TFSA with equities. In the non-sheltered account he could put the remaining into dividend paying equities, there are plenty yielding from 3-5% which would give him an annual income of about $40'000
The best part is that after using the dividend gross up factor, you can receive up to $49000/year tax free.
Bell, Rogers, Telus, the 5 banks, utilities and pipelines.
I get that some people don't like daily fluctuations of stocks, but focus on the staedy income. All those I mentioned increase their dividends yearly, keeping ahead of what little inflation there is.
Raube Beuerman
As far as I'm concerned, we need to bring back capital punishment for people who, in 2016, forecast a rosy future for agriculture.
For example, in the last week, as I do every week, I dealt with:
(A) a reasonably-intelligent 30-year-old unmarried man who is effectively doomed to spend his life as a power-wash drone in a hog barn or milking parlour.
(B) a reasonably-intelligent 75-year-old unmarried man who, even without quota, and thanks to the capital budgeting "wisdom" of the farm community, is going to be rich beyond his wildest dreams because the money he's going to put aside to pay for income tax on the sale of his farm is equal to what the farm was worth two decades ago.
Capital punishment needs to be meted out to those great-many who don't seem to understand that we, in agriculture, are caught in the throes of a "you can't get there from here" dilemma that can be aptly described by the opening lines of "A Tale of Two Cities" by Charles Dickens:
"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity........."
More to the point, even though (A) and (B) share the same postal code, when "you can't get there from here" gets as well-established in agriculture as it clearly is now, agriculture has become unsustainable, untenable and, for the next generation, ultimately undesirable.
Stephen Thompson, Clinton ON
Cherry picking at its best! Someone should tell that 75 year old that accountants make very poor financial advisers.Which also relates to why there are so many scam artists these days taking advantage of the elderly.
What would be the % of retiring farmers that have a financial expert? I would hesitate to guess less than 10% and yet we are dealing with perhaps millions of dollars.If you are not a big corporation any Tom,dick or Harry can do your tax return but when it comes to seeking sound professional investment advice some of our senior citizens seem lost and not talking about a bank !
Maybe that 30 year old can get a good safe job out in the oil fields... but wait!
Accountants make very-good financial advisors, especially the ones who have taken and passed the Canadian Securities Course.
A big problem is that the ability of so-called financial advisors ranges all-over-the map, especially when they get paid commission on what they sell.
The far-bigger problem is that the farmers buying land for this sort of price-earnings multiples are in desperate need of "sound professional investment advice" and if/when they get it, are obviously ignoring it because there isn't an investment advisor anywhere, even one getting paid commission, who is going to advise the purchase of anything valued at over 40 times earnings.
Stephen Thompson, Clinton ON
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