Seeds of crisis? Historic boom for farmland raises red flags

WATCH: Farm land prices have almost doubled in some places in recent years. Reid Fiest reports.

GUELPH, Ont. — To hear Ian McCormick tell it, prospective home buyers in big, pricey cities like Toronto or Vancouver have it easy compared to a farmer sizing up a piece farmland.

“Once you’re ready to buy, you have to move because it makes Toronto bidding wars look like a walk in the park,” McCormick, a cattle farmer in southwestern Ontario, said. “You have to be ready to go.”

Indeed, housing booms within many of Canada’s big cities in recent years appear to pale in comparison to what’s been happening in the countryside, where farmland values are climbing far faster and far higher than at any point in at least the past three decades.

According to Farm Credit Canada, a Crown corporation that helps farmers buy property, between 2010 and the end of last year, the average price of a farm climbed an eye-popping 76 per cent.

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“It’s just crazy how much land is appreciating,” said McCormick, a program manager at Farmstart, a non-profit that assists individuals in becoming local farmers. With land values soaring, most graduates of the program don’t have a hope of owning their own farm, including McCormick, who leases land for his beef cows.

Perfect storm

That wasn’t always so. Up until a few years ago, annual double-digit jumps in Canadian farmland values were rare, happening in back-to-back years only twice between 1985 and 2010. Now they’re the norm.

Arable land in Ontario has jumped more than 80 per cent in five years, a total that’s matched within a few ticks by gains in Quebec. In Saskatchewan, farmers have witnessed land virtually double in price. Farms in Manitoba meanwhile are up more than 72 per cent compared to five years ago, FCC numbers show.

Prices paid for land this year point to another big leap in many provinces, according to experts, though the rate of growth is declining.

“We can’t say we’ve plateaued but certainly the rate of increase is slowing down – it’s still going up but at a declining rate, which is something we want to see,” said JP Gervais, Farm Credit Canada’s chief agricultural economist. “This to me is a soft landing.”

The principal source of farmland inflation has been farmers themselves, experts suggest — not speculative foreign buyers or big investment funds. Investors are playing a role, but the data that’s available show it’s not a meaningful one.

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Recent research from the University of Guelph suggests that less than one per cent of landowners are foreigners, a number that corresponds to ownership levels in the United States.

Instead, many farmers have been emboldened to buy land as their bank accounts have filled amid banner crop prices in recent years (see chart below). “The period we went through has built expectations of high incomes. That’s a big thing from a psychological point of view,” Stephen Duff, a senior economist at Ontario’s ministry of agriculture, said.

Flush pockets have heightened competition for land between big Canadian farms to get even bigger, a prevailing trend among producers the world over who are betting on higher prices in the coming decades for commodities like grain (to produce feed for cattle and hogs).

Consumer parallels

And just like the housing sector, ultra-low borrowing rates are the fuel that’s kept the fire burning red-hot.

“I think the low-interest rate environment has just accelerated all of it,” McCormick said. “It’s been a perfect storm.”

Many farmers appear to have followed the same path Canadian households have travelled down in recent years, taking advantage of low rates to snap up real estate but assuming worrisome levels of debt in the process. Some housing critics are now warning homeowners carry outsized loans at a time when economic conditions appear to be turning against them — a spectre farmers face too.

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“You can take each of those points and make a parallel to farm debt,” the FCC’s Gervais readily admits, though he feels farms remain “well positioned” to handle their debt obligations going forward.

Uncertainty ahead

Still, a sense of reckoning is taking root. Commodities like wheat, soybeans and corn are turning down from recent highs and appear to be entering a sustained period of lower prices — trends that will pressure farm incomes, according to experts.

A recent survey published by the Western Producer, a trade publication, showed the vast majority of farmers feel land is overvalued, even as it continues to find buyers.

“The overwhelming numbers say, ‘I’m gonna pay too much. I’m going to buy but I’m going to pay too much,’” Al Mussell, a researcher at Agri-Food Economic Systems, said.

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“That sounds like a definition of insanity. But you also have to understand they’re adding to existing landholdings. There is some economic rationale to this. But it’s still odd that people are thinking: ‘I am going to buy land and I am going to pay too much.’”

The uncomfortable question that’s emerging is whether the bubble bursts – do farmers who’ve seen farm debt scale new heights now face a looming crunch? At a conference of Canadian agricultural experts and economists in Guelph, Ontario, last week, the jury was out.

“We can’t know for certain,” said Brady Deaton Jr., an agriculture economics professor at the University of Guelph. “We can’t rule out that possibility.”

1980s replay

Declines in grain prices have slowed, according to Statistics Canada’s index of farm product prices. But in its latest forecast, TD Economics suggests there’s more downward pressure to come, drops that will add to the 30 to 60 per cent dive in several commodities from their 2012 peaks.

Some farmers are concerned about a repeat of the 1980s crisis, when high agricultural prices triggered a land boom followed by a painful bust that took scores of Canadian farms with it.

“Some prognosticators look at what’s happened in the market and say, ‘The same thing happened in the 1980s, and look what happened,’” said Alfons Weersink, a Canadian agricultural academic and former president of the Canadian Agricultural Economics Society. “The cycle is ready to repeat itself.”

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Weersink nor other experts in the field feel a crisis is certain. But just in case, he suggests policy makers should begin thinking about possible responses.

The more likely scenario is that land values decline for a few years. Guelph’s Deaton pointed to land prices in Iowa, a state with more direct exposure to the commodity cycle compared to more diversified Canadian provinces, and is among the first regions to feel price changes.

Farmland values are off nine per cent this year, Deaton noted, but they’re is still up 18 per cent versus a few years ago.

As long as incomes hold up, what’s been an historic land boom in Canada’s countryside should glide into a soft landing, experts believe — a hope shared by housing market policy makers.

“You can expect changes in farmland going down,” Deaton said. “But that may not necessarily be a crisis.”

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