For years land prices and rents have only been doing one thing — climbing.
But with the drop in commodity prices and changing markets, it seems that prices may have peaked.
“I think we’re at the top of the cycle,” said Merle Good, a former tax specialist from Alberta Agriculture, and a speaker at Ag Days in Brandon last week.
“The increase in farming profitability, that’s been the big driver,” he said. “We’ve also had a successful run of good prices… it’s very rare in agriculture that you get six years in a row of substantial revenue increases, that in my view has been capitalized into the land value and I believe we are at the top.”
What happens next remains up for debate, but farmers who bought land over the last few years shouldn’t waste time wringing their hands if prices fall.
“The real question is, based on what you just paid, can you afford to maintain your payments?” said Good.
Producers with heavy debt loads could be seriously impacted when interest rates rise, but that’s not likely to happen in the near future. Just last week the Bank of Canada once again lowered its overnight lending rate to .75 per cent from an already low rate of one per cent.
“Yes, always a word of caution on interest rates,” said Roy Arnott, a business management specialist with Manitoba Agriculture, Food and Rural Development. “But I think you’ve got time before some level of increase, interest rates have been fairly stable, I don’t think they’re going to go up.”
But he said now is the time to plan for when interest rates do eventually increase.
Variable or locked in?
Good advised those with variable-rate loans to begin thinking about when might be the best time to lock in a rate, and ensure they are going to be paying what their business can afford in the long run.
“Because right now a lot of young guys are saying, oh, wow, I’m going to stay on the variable rate ’cause it’s four per cent and I can’t afford to pay more than that,” Good explained. “Which is fine, but you should, in my view, perhaps look at the flexibility with some lenders where you do have it, to actually say, I want to lock in 30 per cent of that mortgage, and let 70 per cent float.”
Those who rent land are also facing tough decisions and changing prospects.
“So have prices peaked? Are they on the decline? Are they going to go down? I don’t know, but I think they almost have to. We’re in a situation where land rental rates are quite significantly high, and when you look at the commodities that we can grow… we’re not going to make as much as we did over the last two years,” said Lance Stockbrugger, a farmer and chartered accountant from Saskatchewan.
“From September 2012 to September 2014, corn has gone down 51 per cent gross value, canola has gone down 41 per cent, wheat 31 per cent, and soybeans to a lesser extent have gone down by 22 per cent,” he said. “That’s straight out of the profit, that’s the money that you get to take home, that’s the money you get to use to pay your bills and your principal/interest payments, that’s gone.”
That means producers with rental agreements are going to have to look at renegotiating those agreements. Something that underlines the importance of having a good working relationship with the landowner you’re renting from, Stockbrugger said.
That sentiment was shared by Good, who said, “you have to get creative, if you’re going to rent the majority of your land, you’ve got to really make sure you’ve got a good relationship with the landowner.”
In the past, renters had to choose between a share crop model or paying straight cash rent, he noted. But today it’s better to have something in between, such as “flexible cash rent with a guaranteed floor,” said Good.
Buy or rent?
All this still leaves producers who want to expand with their biggest decision — whether to buy or rent.
“Land purchase is a long-term investment decision specific to you farm’s current cash and equity position, long-term enterprise cash flow, profitability and your view of land values in the future,” said Arnott. “Land value planning is not easy, simple or straightforward, this is challenging stuff, definitely makes my head hurt for sure, but I definitely think it’s worth the work if you’re going to move your farm forward in a positive direction.”
The first step is knowing exactly what your farm is making and what it’s costing, making sure margins are known and gross revenue is understood.
Good suggested producers look at their operations as two separate businesses.
“The real reason I like the idea of two separate businesses is primarily for succession, because the transferring of the farm is not transferring one bundle of assets, the farm to me is the operating business, the cattle, machinery, inventory and that structure, the land is a separate issue, because I can be a successful farmer with not inheriting every acre,” Good said. “So when we have that separation of land versus the operations, we can then understand what our business is making, versus what our real estate investment is making or costing us.”
But perhaps before producers even think about acquiring more land they need to be asking if they can increase their profit margins using the land base they already have at their disposal.
Before buying more land, Good suggested farmers look at ways of increasing their returns from existing land through improvements such as tile drainage, or increasing productivity through strategies such as variable-rate seeding, or improving their bottom line through better marketing.
He also noted that new challenges are on the way that will impact what farmland becomes available. As existing landholders, many of them retired farmers, pass on, more farmland is being inherited by children who don’t farm.
“When they get that land, what are they going to do with it? And I think our role as educators of agriculture is trying to convince a girl in Calgary or in Brandon that if she inherits farmland from her parents, maybe she should hang on to it, and not flip it the next day,” Good said, noting that over the long haul, land still proves to be profitable regardless of ups and downs along the way.
“Over the 30-year cycle, land from 1983 has increased approximately twice as much as the TSX,” Good said. “In addition the bull run has continued from 1992 which is the last year in Canada that farmland year over year had a negative change in value.”