Demand for Canadian farmland remained strong in 2020 due to record-low interest rates and improved crop production revenues. According to the FCC Farmland Values Report, farmland values increased 5.4% in 2020.
Average farmland values have increased every year since 1993 and were more pronounced from 2011 to 2015. Since then, Canada has seen more moderate single-digit increases. But despite low interest rates and high farm revenues in 2020, affordability was at its second-lowest level in the last 20 years.
In this post, we look at the farmland values report findings through the lens of ownership costs.
Calculating farmland annual payment
Most farmland is purchased with a combination of equity and debt. And the affordability of farmland is a matter of land prices, financing costs and farm revenues.
Let’s assume we have a new land purchase with a down payment of 25% and a loan amortized over 25 years. The annual payment will be based on the loan interest rate.
To determine the farmland annual payment, we’ll use the effective average business interest rate (a weighted-average borrowing rate of bank and market interest rates), which averaged 2.7% in 2020.
Farmland values and annual payment tend to evolve at the same pace but differ as interest rates rise or fall. Despite rising land values in 2020, lower interest rates reduced payments. Average Canadian annual payments per acre declined 4.3% to $142/acre in 2020 despite land values increasing 5.4%.
Measuring affordability
A measure of affordability is obtained by comparing land payments relative to gross revenues derived from crop production. We used average provincial yields and prices to measure revenues – a soybean-corn rotation in Eastern Canada, a canola-wheat rotation in Western Canada and a potato-wheat rotation in Atlantic Canada.
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