Apr 132017
 

Farmland Update – Small Price Increase

Farm Credit Canada just released its annual Farmland Values Report which provides a yearly overview of provincial and national land values trends across the country. As usual, it is this time of the year that I adjust the value of my Saskatchewan farmland using the average change of this report and the inflation rate (CPI.)

Unfortunately farmland values in east-central and southeast Saskatchewan remained unchanged in 2016. This is where my plot of land is. The FCC report points to the oil and gas industry slowdown as the main reason for the lack of appreciation. However, other parts of Saskatchewan did see increases. 🙂

There was 0.00% increase in value to my farmland according to the report. The overall inflation rate in Canada was 1.43% in 2016. The average of these two numbers is 0.715%. Therefore I will be adding $3,000 to my farmland value from $433,000 to $436,000 in my April net worth update. 🙂

Ever since I started to invest in farmland, the FCC reported values is SK have always appreciated faster than CPI. This is the first year where the inflation rate has surpassed that of the annual FCC report.

Despite the stagnation in some parts of Saskatchewan, the overall appreciation in Canadian farmland was pretty good. Each province saw positive growth in aggregate, and the average increase across the country was 7.9% for 2016.

Luckily my farmland operation is profitable and I have a rental contract for the next 2 years so I am not too concerned that my farmland did not appreciate in 2016. I just hope it retains its value for the next 4 years, at which time I will probably sell it to free up capital for other, more liquid investments.

I bought my farmland in 2012. If I had to grow my own crops I would probably start with fruit farming. I think I would be berry good at that. 😀 But for now, I am happy just being a landlord.  My tenant always pays on time and the land’s value has gone up a lot so far.

But as we can see, the growth has been slowing since 2013. I believe the hay-day of farmland investing is behind us. Interest rates can’t go much lower than it already is. A weakening of the Canadian dollar and more foreign investments can spur a little more growth in the farmland market, but it’s not a guarantee.

 

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Random Useless Fact:

Domino’s has over 8,000 stores across 82 countries, making it the 2nd largest pizza chain after Pizza Hut.

Apr 142016
 

To become a successful farmer you have to be outstanding in your field, if you know what I meanBut as most investors know, commodity prices have been in a slump over the past couple of years. This means many grain farmers have to live a very tough life. Perhaps some of them barley survive from wheat to wheat! But things may not be as bad as they seem because crop sales in 2015 were some of the strongest Canadian farmers have ever seen, and was cited as a contributing factor to growing farmland prices.

 Canadian Farmland Values Grow 10.1% in 2015

The national agency, Farm Credit Canada, recently released its annual farmland value report about the previous year’s farming landscape. As it turns out in 2015 the average Canadian farmland price increased 10.1%. This is absolutely incredible! 😀

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Farmland prices are assessed using recent comparable sales. These sales must be arm’s-length transactions. All provinces saw their average farmland values increase and Manitoba experienced the highest increase at 12.4%. The full report is on FCC’s site.

After this year’s adjustment using the 9.4% Saskatchewan increase from the new FCC report my farmland should now be worth $129/acre more than last year. Since I have about 300 acres of Saskatchewan farmland, that’s almost $39,000 of capital appreciation in one year. Whoop Whoop!

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Farmland Historical Performance

Here’s a look at historical farmland values in Canada from 1985 to 2015 according to FCC.

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Aug 082015
 

Profitable Farmland

Sometimes when I run out of topics to write about for the blog I would visit the fabric store to find new material. 😀 But other times, I am inspired by visitors like you! A while ago a reader requested I do a profit and loss statement for my farmland. Great idea! So today’s post is a financial update about my farm’s earnings.

As you might recall when I first bought my farmland I was losing money on it. Well, after a few years I am finally in the black! 2015 represents the first year my farmland is profitable. Yay! 🙂

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Revenue from my farmland comes in the form of rental income. Both farms are leased to the same farmer who grows crops on it every year. Expenses include interest on bank loans and property tax. There are not a lot of costs associated with owning farmland. It’s only land so there’re no buildings or lawns to maintain. Let’s take a closer look at 2015’s numbers.

Revenue is down about $1,500 from the previous year because crop prices are lower. Since the prices of soft commodities like wheat and canola have fallen I’ve agreed to lower the rent for this year. If crop prices rise in the future I will be paid more.

As for expenses, it is dramatically down this year thanks to the lower cost of borrowing. 🙂 Many were hesitant to borrow money last year because they thought when interest rates go up they will have a harder time servicing their debts.

That’s not wrong, but I don’t personally adopt that kind of mindset because timing rate hikes is a fool’s game. The central bank actually lowered rates this year, twice. So now investors like myself, who have already borrowed money, are paying less interest than before. And our investments continue to perform well. Here’s a look at my current farmland loan situation. I only have about $200,000 left to pay off.

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Prior to now I was paying 3.89% interest rate on my loans. But now it is only 3.43%. 🙂 Both my loans share the same interest rate. The reason I have two loans is because I bought my farms separately – one in late 2012, and the other in 2013.
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With my current $200,000 balance, I would only pay $6,860 a year for interest. The total property tax this year is about $1,600. However, I can save about $80 if I pay my property tax before the end of this month, which I plan to do.

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So after a few years I am finally making a $100 profit! I can’t wait to spend all that money. But as I wrote back in 2012, most of the gains from farmland investing is from capital appreciation. According to Statistics Canada, from 1981 to 2014, farm asset values have increased by more than 300% to over half a trillion dollars today. Last year Saskatchewan farmland prices experienced the highest average increase at 19%. This represented about 150% return on my investment due to my 8x leverage strategy.

Finding Value in Farmland

Compared to other types of investments farmland is still an attractive long-term hold. To analyse stocks investors often use the price to earnings ratio. The lower the P/E ratio is, the more return on investment the stock should generate over time. This is a useful way to find the best-valued stocks. With farmland, we can evaluate similar metrics by using the price of land relative to its income-earning potential. So instead of using price per share, we can use price per acre of farmland. And instead of using adjusted earnings we can use cash receipts. Farm cash receipts are not the same as net income, but it does a better job at tracking the patterns in farmland values. Below is a chart showing the average P/E ratio in different provinces over time.

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Apr 162015
 

Canadian Farmland Values Up Again

Okay, it’s that time of year again when the national agency, Farm Credit Canada, release its farmland value report about the previous year’s farming landscape. As it turns out in 2014 the average Canadian farmland price increased 14.3%. 😀

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Meanwhile residential real estate prices increased only 5.2%, according to the Canadian Real Estate Association. Of course the most strategic way to invest in a portfolio of properties is to be exposed to both residential, and agricultural real estate. Farmland prices are assessed using recent comparable sales. These sales must be arm’s-length transactions. The highest price increase was an incredible 18.7% in Saskatchewan, the land of living skies. The full report is on FCC’s site.

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As luck would have it I decided to buy some Sask farmland a few years ago. 😉 Back then I had blogged about why land in Saskatchewan was the bee’s knees because of how undervalued it was compared to other provinces and neighboring States.

 

The Greatest Advantage of Real Estate Over Stocks: LEVERAGE

I leveraged 8:1 to secure my position as a farm owner. This meant I borrowed $7 of the bank’s money for every $1 of my own money to invest. So an increase in Saskatchewan’s farmland value of 18.7% last year actually means a redonkulous 150% rate of return on my capital. Not too shabby. 😉

My farmland was worth about $1210/acre last year, so after this year’s adjustment it should be worth $226/acre more now. Awesome sauce! 😉 $226 doesn’t sound like a lot of money to get excited about, but since I own 310 acres it all adds up pretty quick. 🙂

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Investing in farmland isn’t for everyone but hay, maybe I have it in my jeans. 😀

As much as I like to feel wealthy on paper, when one particular asset class consistently outperforms all the other ones I’m faced with an asset allocation problem. Farmland now represents about two-thirds of my financial investments (all assets except primary residence.) This means I am not very diversified anymore. 🙁 Although I realize this must be the ultimate first world problem, lol. 😛

Continue reading »

Apr 172013
 

Earlier this week Farm Credit Canada, the leading agriculture lender, released their farmland prices report for spring of 2013. FCC appraisers estimate market value using recent comparable sales. These sales must be arm’s-length transactions. Here’s a summary of the report. During the second half of 2012 Quebec experienced the highest average increase at 19.4%. Saskatchewan, where my farm is located, experienced a 9.7% increase. Remember folks these are not annualized appreciation. The changes were only during the span of 6 months ending December 2012.

13_04_fccreport, farmland prices in 2013

Last year I wrote about my experience buying a farm near Regina, SK and included all the details like working with a tenant, the rental rate, the financing process, etc.  Near the end of that long post I wondered if my new farm would be a good investment or not. Well now we can find out 😀 With this FCC report I can finally adjust the price of my farm to reflect its more current value by taking the average of the FCC report and the inflation rate. This valuation method is designed to keep my net worth less volatile, and curb the effects of false signals such as speculation. Since I bought the farm in October which was right in the middle of this reporting period, it wouldn’t be fair to use the full 9.7% appreciation for Saskatchewan farms. So let’s use 3% instead to stay on the conservative side. Meanwhile inflation (CPI) was about 0.3% during the same Oct to Dec period. Average = 3.3% ÷ 2 = 1.65%

So the farm I purchased last year for $150,000 should be worth at least 1.65%, or roughly $2,500 more at the beginning of this year. Woot! So yes, my farm HAS turned out to be a good investment so far. It feels good when an investment pays off like that!

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13_04_fccvaluereportAnyone who followed me into the exciting world of farmland investing last year probably have also done pretty well, especially if they bought in Quebec haha. $2,500 return in 3 months is not too shabby 😀 This is why I love investing! After making the initial investment I literally did nothing with my new farm except sit back and watch it appreciate. This was the easiest $2,500 I’ve ever made, at least on paper anyway 😉 The stock market had a bad start this week, especially resource companies 🙁 but that’s why it’s important to diversify 😀 When one investment fails to perform it’s good to have others to fall back on.

And thank goodness for leverage. By using other people’s money, I was able to purchase the farm with just $20,000 of my own money. A subtle 1.65% increase in the value of the land is like a ($2,500/$20,000) 12.5% return on my initial investment! I’m so thankful for people who keep large deposits and emergency funds in their bank accounts instead of investing that money for themselves. These generous people with their rainy day funds deserve more recognition for saving hard every day to keep our financial institutions well capitalized and filled with liquidity so that banks can continue to lend money to investors like myself 😀 TD would have never lent me $130,000 to buy the farm if we didn’t have such a supporting and robust financial system in this country 😉

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Quick updates:
[Edit on Aug 24th, 2013] Just read a news release from last month that Ontario loses about 100 acres of farmland every day. This is part of the reason why agricultural real estate is a great investment right now. When supplies diminish, people are willing to pay more for it. Farmland in other provinces are going through the same trend. Good news for farm owner 🙂 [/edit]

[Edit on Sept 29th, 2013] Just read a recent RE/MAX report on the latest Canadian farmland price trends. The average price of Saskatchewan farmland is now well over $1000 per acre. A huge change compared to previous years.

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The location of my farm is in East Central Saskatchewan. According to this report prices in 2013 are 6% to 25% higher in that region than last year. Jumping jellybeans! That’s great news for farmland owners 🙂 You may download the full report in PDF format here. [/edit]