Supply and demand combined with strong commodity pricing and low interest rates drive Canadian farmland values to new highs in 2021.
By Andrew Joseph, Farms.com; Images courtesy of Farm Credit Canada.
Farm Credit Canada (FCC) said in a recent report that Canadian farmlands have reached an all-time high value in 2021.
According to Lyne Michaud, É.A., Senior Analyst, Valuations with the FCC, the increase in farmland values for 2021 was driven by strong commodity prices and low federal interest rates.
More good news is predicted for 2022, as the strong commodity pricing is expected to continue along with the higher interest rate.
To reach their own scale of operation and to lower financial risk, Michaud points out that renting farmland may be an acceptable alternative.
Examining cash rental rates across the provinces, the FCC looked at the Rent-to-Price (RP) ratio. This is the cash rental rate per acre (based on the gross rent price generated by the land) relative to the value of farmland per acre:
Rent to Price (RP) ratio (measured in %) = Cash rental rate per acre/Value of farmland per acre
Michaud explained that a higher average price of farmland will result in a lower RP ratio even if rental rates don’t adjust upward proportionally.
The weighted average RP ratio of Canadian cultivated land is 2.50%, which represent a decrease of 0.2% versus last year.
What affects a per acre rent of land?
Not unexpected, the FCC pointed to numerous factors that could affect the per acre rent cost of land, including, but not limited to:
- Interest rates;
- Farm revenues;
- Duration of the agreement;
- Type of agreement;
- Quality of land, and;
- Environmental considerations.
Michaud’s analysis pointed out that these factors can vary in areas where demand for a certain type of farmland is higher, but supply is limited.
The FCC data below denotes the rand of rent to price ratio for province (where data is available) for the year 2021 versus 2020.
Range of Rent to Price Ratio in each province for 2021 compared to 2020:
Although rates for British Columbia were deemed “insufficient” for 2021, the FCC noted that farmland rates in Ontario gained 22.2 percent in 2021, with the RP ratio for 2021 at 1.45% against 1.70% in 2020.
Michaud’s analysis noted that because rental rates are often negotiated and set over more than a single year, the numbers take longer to catch up to large farmland values increases.
While the average RP ratios are the same as last year in Alberta and New Brunswick, the average RP ratio in Saskatchewan was 3.30% in 2020 and is now 3.00% in 2021.
The FCC said that most areas in the province recorded stable rental rates this year—with some exceptions—leading to a lower RP ratio given the increase in farmland values overall.
The same seems to hold true in the provinces of Manitoba, Quebec, and Nova Scotia.
Leading the way with the highest average RP, is In Prince Edward Island, where the average RP ratio was 5.50% in 2020 vs 5.20% in 2021.
This was expected, as revenue from specialty crops, like potatoes, are generally higher than revenue for grains and oilseeds on a per acre basis—all of which creates upward pressure on rental rates. Also, pointed out the FCC, land suitable for these specialty crops is often not as available for rent as other land that can accommodate cash crops.
What it means:
Yes, there is an intermingling of land prices, rental rates, and farm revenues, and a change within any of these can affect the other two.
Michaud’s report indicated that within the current environment, land prices are elevated and the outlook for farm income is positive given strong commodity prices.
For more information, visit https://www.fcc-fac.ca/.