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Editorial: Farmland — always a good buy?

Keep renting, or buy that land now before it gets even more expensive?

Alberta farm management adviser Merle Good provided some perspective on that for an attentive crowd at Ag Days last week.

So far, it’s been a truism that farmland is a good investment. That’s not to say it is always the right investment or that land values never go down. They do. But the last time that happened was more than 20 years ago.

Now there is speculation that the meteoric rise in values in recent years has peaked. One indicator is how farmland prices compare if you use the same price-to-earnings ratio used to assess stock market values. Good says that over time, they should correlate. Right now, land prices are at a premium.

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Another measure is the cost of land relative to cash rents. Based on this calculation, the best time to buy land on the Canadian Prairies was in 1993 when land was 18 times the cash rent value. “Any time you can buy land at 20 times cash rent, back up the bus and buy it,” Good told the audience at Ag Days. Today, that ratio is 40 times the value of cash rent.

All these indicators suggest some sort of adjustment is in order. But that still doesn’t make land a bad buy. Land value appreciation over the past three decades has consistently outperformed other investments, especially the stock market, by a factor of 1.5 to two times. Good noted this is a point worth highlighting with a significant proportion of farmland about to pass on to a non-farming generation over the next few years.

Taxation rules around capital gains tax add to its status as a favourable investment. “If I transfer land to a child, that person qualifies for the capital gains deduction whether they farm or not,” he said.

Another truism has emerged within the past generation, and significantly changed the dynamics of operating a farm business. Historically, farmers owned their land. Today, farming is based on “access” to land through a combination of ownership and rental that could well be different for every farm operator. Some may own all of the land they farm; some may own none of it.

Good and other farm advisers speaking at last week’s Ag Days stressed neither those extremes or the various combinations in between are a recipe for success or failure. What matters is whether farmers are paying a fair and reasonable cost for accessing land, and whether the farm business is capable of supporting that cost.

This is a complex issue, and one that farmers have traditionally done a poor job of analyzing. It’s largely because they have treated their status as a farm business operator as one and the same as their status as a real estate investor. This muddies two very different questions: whether a farmer can afford to buy more land, and whether his or her farm business can afford it.

Buying land is an investment decision. It isn’t the same as determining whether buying, or renting, or expanding acres at all is the best strategy forward for the farm business. For example, has the farmer done everything possible to maximize returns from the existing land base?

Yet all too often farm management decisions over land access are driven by the emotionally charged mantra — “buy now — they aren’t making more of it,” or by its geographical proximity. “It’s the next quarter. How can I not buy it?”

“The difference between whether I can afford to buy land versus whether the business can afford to buy it is really, really, really important,” Good said.

He said farmers can get an idea of whether land investment is a strategy worth considering by calculating their business’s “land access cost,” which is the sum of current land payments, future land payments, and land rental costs divided by the number of acres. Is it higher or lower than cash rents in the area? If it is higher than area cash rents, then the farmer needs to be able to demonstrate the business can support the land purchase through better-than-average productivity or marketing. If it is lower, the farm business can probably afford to buy.

The other consideration that has become more complex in recent times is determining fair and reasonable values for cash rent. In the old days, there were two models available: crop share and cash rent. More recently, some new models for calculating fair rent values, sharing risk and determining what the farm business can afford to pay have emerged. Farm business adviser Roy Arnott has posted some examples on the “Business and Economics” section of MAFRD’s website.

Farmers would do well to review them before signing on the dotted line. If land values have peaked, rent values may be in for an adjustment as well.

About the author

Vice-President of Content

Laura Rance

Laura Rance is vice-president of content for Glacier FarmMedia. She can be reached at [email protected]

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