Strong farmland market despite production challenges
/by Lyne Michaud
Last year brought its fair share of challenges with extreme weather conditions and supply-chain upheavals. Yet the farmland market showed strength, as Farm Credit Canada (FCC) reports an 8.3 percent increase in 2021 average farmland values in Canada from 2020 values.
PROVINCIAL TRENDS
The FCC Farmland Values Report highlights some significant increases in average land values in several areas, with the highest recorded in Ontario (22.2 percent) and British Columbia (18.1 percent). Two of the Atlantic provinces follow with increases of 15.2 percent in Prince Edward Island and 12.3 percent in Nova Scotia.
Quebec and Manitoba showed similar average increases of 10 percent and 9.9 percent, respectively, with growth in each region of those provinces widely dispersed. Saskatchewan followed with an average increase of 7.4 percent. New Brunswick and Alberta brought up the rear with 5.2 percent and 3.6 percent increases, respectively.
MARKET DRIVERS
Sustained demand for farmland buoyed by elevated commodity prices and historically low interest rates combined with tight supply of farmland available for sale have led to growth in farmland values:
1. Commodity prices have been rising since the second half of 2020, driving farm receipts of grains, oilseeds, and pulses in 2021 to all-time highs despite drought conditions in the Canadian Prairies. The outlook for 2022 is favourable, given tight global supplies of crops and strength in demand for grains and vegetable oil.
2. Interest rates have declined following the Bank of Canada’s aggressive monetary policy actions at the outset of the pandemic, resulting in average business borrowing costs reaching an all-time low in early 2021. FCC projects that the Bank of Canada will lift its key policy rate by 125 basis points in 2022, but this would keep borrowing costs at a low level from a historical perspective.
WEATHER’S IMPACTS
Unfavourable weather conditions are one of the risks that Canadian farm operations account for in their planning. But unique and extreme weather conditions like those in the Canadian Prairies and British Columbia in 2021 are infrequent. Could these adverse conditions affect land prices over time? We look at historical data to learn of markets’ reactions to extreme weather conditions.
MANITOBA
In 1997, the southern part of Manitoba experienced one of its worst floods, the Red River flood. The same area was also affected by flooding along with the Assiniboine River area in 2009 and 2011. Average farmland values in these affected areas increased in the following years.
FCC reported increases in values in Manitoba for 1997 and 1998 (11.7 percent and 3.4 percent, respectively). For 2009 and the next few years, FCC reported increases of 11.7 percent, 4.7 percent, 4.4 percent, and 25.6 percent, respectively, in the average farmland values in Manitoba.
SASKATCHEWAN
Certain areas of Saskatchewan experienced significant dry weather from 2001 to 2003, and then again in 2009. FCC reported a small decrease in the average farmland values for the province in 2001 of -1.5 percent followed by years of growth of 3.9 percent in 2002, 3.1 percent in 2003, and 1.9 percent in 2004. In 2009, FCC estimated a gain of 6.9 percent, followed by a 5.7 percent increase in 2010, and a 22.9 percent increase in 2011.
ALBERTA
Dry weather conditions experienced in areas of Saskatchewan in 2001-2003 and 2009 were also present in areas of Alberta. Despite these adverse weather conditions, values continued to rise in the affected areas (mostly in the central region). FCC published 4.8 percent, 4.4 percent, and 8.7 percent average increases in 2009 to 2011, respectively, for Alberta.
CONCLUSIONS
While it’s difficult to isolate the impacts of a natural disaster on land values from all the other farmland supply and demand drivers, it seems that large floods and extremely dry conditions have had no large detectable impacts on land values. Farm operators consider the stream revenues attached to land over a long period of time.
Higher prices can also sometimes offset yield declines and mitigate the revenue impact from challenging weather. However, this doesn’t imply that revenue expectations aren’t or won’t be affected by changing weather patterns. More research is needed to understand the influence of climate change on farmland values.
BOTTOM LINE
Farmland values continued to climb in 2021 amid adverse weather conditions and economic uncertainties. The outlook remains positive for the farmland market as the supply of available land remains very limited and the outlook for 2022 farm income is robust.
One headwind is the likely increases in interest rates. Producers should have a risk management plan that considers possible economic changes to ensure budget flexibility if commodity prices, yields, or interest rates shift. Market conditions can change rapidly, which can impact land values.
(Lyne Michaud is a senior analyst with Farm Credit Canada. This article is reprinted by permission of the author and Farm Credit Canada.)
