It’s good to own land

BUT RENTING ISN’T SO BAD

its a catch-22 situation for many farmers. Rising farmland values have given them more purchasing power this year, but finding land they can afford to purchase has become tougher with every increase.

In their semi-annual report released this fall, Farm Credit Canada (FCC) indicated that farmland values in Ontario increased 16.3% in the first six months of 2012 and was the largest increase in Canada. That’s not a surprise to farmers who have tried to buy land lately. What everyone really wants to know is when, or if, the increases will stop. Dale Litt has 10 years of experience with Farm Credit Canada and has been helping to create the farmland value report for several years. He says they’ve been monitoring the same benchmark properties for 25 years, examining the historical trends, and assessing all the market factors that impact those trends; but it’s still difficult to anticipate what might come next.

“If all the factors continue in the same direction they are right now, with high commodity prices and favourable interest rates, I don’t see why the increases won’t continue,” says Litt. “I’m not sure they’ll continue at the same rate, but in the foreseeable  future I see no reason why they wouldn’t continue to increase or at least remain stable.”

understanding the market
If any of those factors change, however, Litt figures the whole landscape of farmland values would change accordingly. Anyone who knows real estate knows that it tends to be cyclical, and spikes such as the ones being seen lately have occurred before (particularly in the ‘80s). Claude Robin of Zhand Real Estate in Listowel has years of experience in agriculture and as a real estate agent. He says he’s only just starting to see signs that prices may finally start to plateau, at least in his area.

“People wanting more than what the neighbour paid seem to be having a hard time selling,” says Robin. “That to me is an indication that buyers’ appetites are slowing down and people are reassessing before becoming more aggressive in buying land.”

Robin laments that good times always come with the greatest opportunities to make bad decisions, so reassessing becomes even more important. But both Robin and Litt agree that anytime their assets increase in value it’s a good thing for farmers. But for young people trying to get into farming, current land prices are a challenge. Litt says renting land is a very good option any farmer should pursue if the land they need isn’t available. FCC conducted a survey in 2010 which showed about six in 10 producers own and rent land in the area they farm. So it’s not just new farmers that are renting Litt says.

“Farmers that choose to rent or lease their land believe it mitigates a lot of risk and provides them with flexibility in the management of their operation, as well as helps them with cash flow,” says Litt. “If you don’t want to compete with the other purchasers in the market, [renting] is probably your best bet.”

However, Litt says generally if land value is going up, rent goes up too. Kevin Williams is a REMAX broker in Stratford where some of the greatest increases have occurred this year according to the company’s annual Market Trends Report Farm Edition. He says he is definitely seeing more potential sellers become hesitant about putting their properties on the market.

“We have people paying huge amounts of money for rent now, so the option of selling becomes less and less attractive,’ observes Williams. “Where people used to sell their farm and get a six to seven percent return on a GIC or investment, now their options are limited so they’d rather get paid a $300/acre rent check.”

rising costs
But Williams doesn’t think rising land values in Ontario really have much to do with outside investors. In his area, he sees the rising cost of farms as a direct result of tighter land inventories and growing competition between major cash croppers, dairy and poultry farmers who have done well this year. It’s times like these when more brush land is cleared than before and there’s more tiling happening to bring marginal land into production. Williams says farmers are getting smart with their money and, if they want to stay in the game the way things are today, they have to.

“Guys that are paying this kind of money for land are taking advantage of every bit of technology to make the most of it,” notes Williams. “They’re smart with fertilizer, they’re smart with pesticides, and they don’t wait ‘til harvest to see what they’ll get for it.”

Keeping a keen eye on the farm is critical, but don’t forget about the rest of the world warns Robin. He points out that, in relation to the rest of the world, we are getting more expensive; but there are still a lot of other places where land values are higher than ours. He’s not sure if that’s an indication that Canadian farmers will see outrageous prices here someday too or not, but he does believe everyone should be thinking as long term as they can. While there’s nothing wrong with having variable financing, Robin strongly recommends everyone protects themselves from the impacts of the world markets in more ways than one.

“If you’re borrowing at three to four percent now, you should be in a position to afford an eight percent debt load. So before you buy, make sure you’re comfortable if there’s going to be a change in rates and book [at least] a portion of them,” cautions Robin. “Just be prudent if you’re buying land.” •