To become a successful farmer you have to be outstanding in your field, if you know what I mean. But 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! 😀
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!
Farmland Historical Performance
Here’s a look at historical farmland values in Canada from 1985 to 2015 according to FCC.
Holy 23-consecutive-years-of-increases, Batman! The country has not seen an overall decline in farm prices since 1992, lol. Over the past 5 years alone, Canadian farmland values in general have increased 111%. That means someone who purchased farm property in 2010 would be able to sell their land today for more than twice what they initially paid for it. And if they were to have used an 8 to 1 leverage ratio like me by borrowing money from the bank to invest, then their profits would be nearly 900%.
But anyone with common sense knows that this level of growth is not sustainable. 😕 If interest rates were determined by the free market instead of manipulated by central bankers, then a 2% to 4% annual appreciation of farmland on average would be more plausible over the long run.
Speculation and Risks
Furthermore, U.S. farmland prices have only increased 2.4% in 2015, according to the United States Department of Agriculture, and the Canadian agricultural landscape tend to lag the U.S. market by a year or two.
And if interest rates start to rise in the next couple of years, we could see farm values in many provinces stagnate, or even come down.
In my blog post earlier this week I argued that the U.S. could be on the precipice of another recession. The International Monetary Fund also put out a warning a couple days ago about weakness in the global economy. The IMF lowered its growth expectations for Canada, the U.S. and just about every other country and region in the world. So with a dovish outlook on monetary policy across the developed countries for the foreseeable future, it appears cheap money and inflated asset prices are possibly here to stay for awhile.
But as I’ve pointed out in the past, I don’t care whether or not farmland is in a bubble, and I don’t try to predict when bubbles burst. Those questions are not particularly important to me. Since I can’t read the tea leaves, what I’m more interested in is holding onto assets that will provide me with a reasonably competitive risk-adjusted return. Based on that criteria, farmland shall continue to be an important part of my investment portfolio, for now. 🙂
Random Useless Fact: