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%. 😀
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.
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. 🙂
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. 😛
The Most Dangerous Words in Investing: “This Time it’s Different”
Based on the historical data of Canadian farmland values below (left column is the national average) it’s clear that the last 8 years of price increases have been somewhat of an anomaly.
Is Farmland Becoming Overvalued?
A national average increase of 13% per year since 2007 is certainly not normal. So this begs the question, is Canadian farmland in a bubble? Well maybe. But then again, maybe not. Farmland in the U.K., the United States, and many other countries have experienced similar value gains like in Canada so if we are in a bubble, we are certainly not alone.
The Federal Reserve’s plan to manipulate the markets into transferring wealth from the savers and ill informed general public to the already financially privileged and government bodies has resulted in many stark consequences. One of which is the creation of asset bubbles all over the world.
Today’s high asset prices prices are based mostly on credit, rather than real wealth. Like I mentioned earlier, I borrowed $7 for every $1 I paid into the farmland. I’m counting on someone else to borrow even more money to buy it from me one day so I can realize a profit. When the insatiable appetite of speculators meet the willingness to lend by financial institutions, it creates a potentially unstable glut of financial indebtedness. This situation can only last as long as abundant credit is available. But this is not a bottomless punchbowl. As soon as borrowing begins to slow and credit starts to evaporate then we will begin to see the first signs of trouble.
In the past we’ve seen stock market bubbles pop, housing bubbles burst, and yes, even farmland prices have sharply corrected in the 1980s. Right now in 2015 it’s quite a fascinating time to be an investor because it feels like almost everything is in a bubble.
I don’t care whether or not Canadian farmland is in a bubble, and I don’t try to predict when bubbles burst. Those questions are not particularly important to me. What I’m more interested in is finding out what are the best asset classes to hold that will provide me with a relatively competitive expected return right now, but will also protect me, (or at least lose less value relative to other investments) during the next recessionary period in the financial markets. 😀 And based on that criteria I just outlined, farmland will continue to play an important role in my long term strategy. 🙂
With a dovish outlook on monetary policy in all western countries for the foreseeable future and no politician with the conviction to advocate a long term fiscal plan to a real economic recovery, it appears cheap money and inflated asset prices are possibly here to stay for awhile.
Random Useless Fact:
Beavers can live up to 24 years in the wild.
This farmland investment of yours has intrigued me for years. That’s a crazy good yoy return you’re getting!
Farmland is far from cheap and that’s been the case for quite awhile. I’m wondering what the case will be in another decade or so.. But my crystal ball is broken.
That’s a good question. I don’t know either, but I think a lot of what will happen in another decade will be determined by interest rates and crop receipts.
Are there any Canadian REITs that are tied to Farmland?? If not you should create one for us… 🙂
I haven’t seen any Canadian REITs, but there are a couple in the U.S. However in Canada we have hedge funds and private farm managers. One company that I looked into is called AgCapita. My friend invested $10,000 and is getting about 12% return every year since 2012. You can do an internet search for AgCapita if you want to find out more info. I think they only sell funds to investors with a certain level of income or net worth, but from what I can tell it’s not really enforced, lol. Like they don’t check or anything.
That’s a pretty impressive increase. Any thoughts on when you plan to sell the farm land to take the profit?
I think I’ll sell when either I need the liquidity for something else, or when interest rates are so high that I have trouble paying the farm mortgage. So far it doesn’t appear I’ll be selling any time in the near future. :0)
It’s still cash draining, isn’t it? Because you had to decrease the land rental? I’m looking for a small farm nearby, or development real estate around here. I saw a 4 acres in the city, I should have gotten it, instead I was playing chicken. 🙂
Yeah, I spend more money paying the bank than I get in rent right now by a few thousand dollars each year. Ah well. Thankfully the capital appreciation makes up for the difference. I saw a development property in my city too. It was 1 acre, but was asking for $500K which sounds too expensive.
Congrats on talking the plunge. I invested in a Sask. farmland fund a year before you bought the farm (ha ha). My position just sold and I made ~12.5%/yr. for participating in exactly the same era of price increases.
What this very valuable lesson demonstrates is it is almost always far better to be an outright owner/have direct ownership of an asset rather than be a tertiary investor.
Interesting tale. :0) 12.5% per year is still pretty good. The returns of investment funds can drastically change depending on whether or not management uses leverage. The issue with my current strategy is if prices were to fall next year my net worth would drop faster than a diversified farmland fund.
You can cash out with the increase of $70k NOW!
I’ll wait for now and cash out in the future. I’m not sure what I’d do with all that money right now yet.
Thanks. This increase has put my asset holdings at close to $900,000. I’m quite excited. :0)
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