Canadian farmland values jumped 22.1 per cent in 2013, the biggest annual rise in nearly 30 years, the Farm Credit Corporation says.
Saskatchewan and Manitoba led the way with increases of 28.6 and 25.6 per cent, FCC said.
“Most of the increase was driven by the strong commodity prices we saw in the first six months of last year. Then commodity prices started to decline in the next six months but interest rates remain low and that has kept farmland affordable,” FCC chief agricultural economist G.P. Gervais said in an FCC video.
Gervais expects the rise in farmland values to slow down as farming profit margins tighten because of higher costs for land rent and crop inputs.
Interest rates, which also affect land affordability, are expected to remain low for the next 12 to 14 months, he said.
But farmers need to be cautious when considering future land purchases, Gervais said. Both Agriculture and Agri-Food Canada and the United States Department of Agriculture are forecasting average grain prices over the next 10 years to be lower than between 2005 and 2013, but higher than between 1995 and 2005.
“Bottom line is lower prices than in the recent past but higher prices than what we’ve seen going back further in time,” Gervais said.
“I really caution producers when purchasing land about using recent prices. You need to be able to navigate different scenarios when it comes to commodity prices and interest rates and really look at your balance sheet and your cash flows… especially in an environment where prices are lower than what we’ve seen in the recent past.”
- From the Grainews website: Farmland prices and net farm income
While low interest rates increase the demand for land they can also reduce the supply as older farmers decide to keep their capital in land instead of selling, Gervais said.
FCC looks at land values by province, but local factors can have an impact on values. Farmers engaged in producing supply-managed commodities have been expanding their land base, he said. And higher cattle prices the last half of 2013 also contributed to higher land values.
Farmland values have risen every year since 1992, after an average decline of 2.1 per cent.
Farmers in Western Canada are struggling with a grain backlog, which could hurt their cash flow and also cool the demand for land.
Although Saskatchewan land saw the largest percentage increase in value, land in that province is still cheaper than in many others, FCC said.
Earlier in the month, the head of the Farm Credit Administration, the largest U.S. farm lender, told Reuters that U.S. farmland values, which have been under pressure over the last six months from falling grain prices, are likely to stabilize.
FCCs report is based on estimating the market value of 245 benchmark farm properties across the country using recent, comparable sales. It does not report on average prices in dollar terms.