Farm Credit Canada’s most recent survey of farmland value in Canada landed this week, with a gentle thud.
Thud because it showed surprisingly durable gains in farmland values, despite the lower crop values of the past several years, which economic theory at least initially suggests should not be the case.
J.P. Gervais, FCC’s chief agricultural economist, was upbeat releasing the figures, but conceded they may come as a surprise to many.
“The fact that we recorded an average in 2017 (in Canada) that was greater than the year before may raise a few eyebrows,” Gervais told reporters.
Gentle because the trendline remains in the more positive direction and upward pressure appears to be easing off slowly.
Across the country farmland values accelerate by 8.4 per cent from a year earlier, and in Manitoba, which was around the middle of the pack, they picked up by about five per cent, with regional differences.
That’s in stark contrast to the situation to our south, where U.S. farmers have watched with alarm as the value of their largest asset has fallen precipitously in recent years.
Brent Gloy, an agricultural economist with Purdue University, wrote of this a year ago in a column in Corn and Soybean Digest, where he gathered a number of farmland value surveys and showed some with declines as high as 25 per cent from the peak of the market a few years back. Most of the surveys showed more modest declines in the order of five to 12 per cent.
No doubt that was a reflection of falling farm incomes, Gloy added, noting income had been dropping in advance of farmland values.
“Today, it appears that farmland values in the Great Plains and Corn Belt are rationally reacting to lower farm incomes,” Gloy wrote.
To put the drop in U.S. farm income into context, a Bloomberg News Service article from this past February reported 2018 farm income was forecast to fall 6.7 per cent from 2017, to a 12-year low of US$59.5 billion. If that forecast comes to pass, it would represent a 52 per cent drop from the 2013 peak, which saw American farmers earn a record US$123.8 billion that year.
North of the 49th parallel, the contrast could not be more stark.
FCC’s Gervais said Canadian farmers were looking at an eight per cent gross revenue increase in 2017 when compared to the average of the previous five years. A bumper crop in Manitoba was likely to give farmers here a 13 per cent increase, he added.
Why Canadian farm receipts are staying high in the face of falling grain prices is the tale of two currencies.
The U.S. greenback remains the global reserve currency, used internationally to settle accounts for everything from oil to grain. That means any losses in the value of farm produce are passed on, dollar for dollar, to U.S. farmers.
Here in Canada exported farm products are sold in U.S. dollars once they leave our shores, but farmers are still paid in Canadian currency, and they’ve benefited greatly from the loonie’s falling value.
Back in the heady days of 2013, it was still trading slightly above par with the U.S. dollar at times. The commodity price website indexmundi.com reports that in Oct. 2013 U.S. farmers were earning US$325.69 a tonne for hard red winter wheat, f.o.b. Gulf of Mexico, or $8.86 a bushel. Canadian farmers, with a par dollar, would have earned similar returns, plus likely a quality premium, for wheat at port.
Today those same U.S. farmers are getting just $201.26 for a tonne, or $5.48 a bushel. Canadian growers, however, have a loonie worth just 78 U.S.cents, at press time. That means Canadian farmers should get at least C$7.04 a bushel for wheat in a similar port position. The latest figures from Manitoba Agriculture peg the local elevator price at C$6.77 a bushel.
Gervais acknowledged the dollar effect during the release of the farmland value survey, noting it was the biggest difference between the two farm economies.
Another tailwind for farmland values have been low interest rates — record low, in fact, for the start of 2017 — which has enabled farmers to cash flow the purchase of land at higher values.
It may be time to consider the coming headwinds however. While FCC is predicting modest farmland value growth for 2018 as well, Gervais was careful to also counsel properly and regularly evaluating the financial risk for any farm operation, including the decision to purchase farmland.
The farm economy at present remains stable and many farms enjoy reliable cash flow and strong balance sheets. Less positively, interest rates look set to climb and the exchange rate remains a hard-to-predict source of risk.
Were the petro-loonie to ever regain some of its previously lofty heights, Canadian farm ledgers would quickly look a lot less positive.