Despite decreasing farm income, farm land prices likely to continue upward trend

Opinion

Early March has brought a very bearish tone to the commodity and equity markets due to concerns regarding the coronavirus. As a result, both the Bank of Canada and the U.S. Federal Reserve aggressively cut their key rates 50 basis-points.  The possibility of both countries making even stronger cuts in the coming months is likely to keep economic growth alive.

Just 18 months ago, Canadian economists saw a climate of higher rates ahead, but the black swan event of coronavirus on top of a weakening economy has thrown a wrench in any possibility of rate increases.

With banks following the Bank of Canada lower with their own prime rates, farmers with floating mortgages are going to see lower debt service ahead in 2020. Although farm profitability is still a concern with the current bearish price tones, land prices may prove a winner.

But wait, you say, farmers can’t make money on ever-increasing land prices! In my opinion, the attraction of generationally cheap money will override the concern of profitability in the short term. We have seen land prices detached from the reality of cash flow for many years and at this point I do not see that changing in 2020.

The aggressive dropping of rates in early March has housing-market watchers equally concerned about the market in major cities of Vancouver, Montreal, and Toronto. From a recent Globe and Mail article, “The dramatic rate cuts and the related bond rally to record low yields will put housing on steroids,” said Douglas Porter, chief economist with Bank of Montreal.

Many farmers refer to a return to the 1980 crisis routinely, but that concern has not been prevalent as land prices have steadily increased for two decades. According to the Farm Credit Canada Land Values Report the average value of Canadian farmland increased 6.6% in 2018, following a gain of 8.4% in 2017. The 2019 report will be released in early May.

Even though farms are more heavily leveraged than in the 1980s, being concerned about a 5 or 6 per cent Bank of Canada rate feels like a future generations issue.

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