The 2021 average increase in farmland values isn’t entirely surprising, says J.P. Gervais, chief economist for Farm Credit Canada (FCC), but the magnitude of the increase certainly is.
With a weighted average of 8.3 per cent on the year, the significant weather events of the year — the extreme drought for the Prairies and parts of B.C., extreme flooding in the lower mainland of B.C. — nor the global uncertainty or trade issues, i.e. potatoes to the U.S., seem to have dampened the demand for farmland.
“The drought in 2021 seemed to have limited to no distinguishable impact on farmland values,” Gervais says. At least, not yet.
Gervais explains how several factors converge to shape farmland demand and prices. 2021 was a full year under pandemic conditions, but also a time of low interest rates, and increasing farm gate receipts. And farm gate receipts drive farmland values, he says.
“We’re at the highest point we’ve been [in the crop price cycle] so land is the most expensive it’s ever been in Saskatchewan and in many other provinces. Now, there are different levels of affordability or prices, but the story is the same pretty much across the country,” Gervais says. “We are where we are today with a very, very strong market for farmland given the tight supply available.
The correlation to farm receipts doesn’t fully explain the 22 per cent jump in Ontario farmland values, however. There it’s more about tight supply and urban money moving out to the outskirts of town — a “diversity” of buyers, he says. (Story continues below interview)
And while farm gate receipts may continue an upward trend in 2022, interest rates are climbing, too. The agriculture industry was already experiencing volatility and tight commodity supplies even before the Russian invasion of Ukraine. The volatility story will only continue for 2022.
Interest rates have already edged up in early 2022, and how high they climb could hold some demand back for farmland purchases.
“We were projecting at the beginning of the year, an increase of 4.4 per cent in cash receipts. Now, fast forward, to early March, a couple of weeks ago, when we ran, again, our set of forecasts, we end up with a forecast for cash receipts a lot higher, you know, you can make a case that might be you know, between 15 and 20 per cent, higher than 2021,” Gervais says. “It’s an easy case to build that cash receipts could actually look a lot higher in 2022 to 2021. If we do you get inflation on top of economic slowdown, I do think that could get it could get in the way of the farmland market. But things are pointing to two more (interest rate) increases in 2022.”
But what about that widespread drought in 2021? Gervais says they’ve looked at the impact of farmland values following extreme weather years, and it does find its way into land values, but more slowly and perhaps with less of an impact than expected. The overall borrowing and agriculture environment has a greater impact.
Subscribe: Apple Podcasts | Google Podcasts | Spotify | RSS | All Podcasts
Please register to read and comment.