4 minute read
Land Value
Land values in 2021: the biggest increase since...?
Vincent Cloutier
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With nearly 20 years of experience in the Canadian agri-food industry, Cloutier is a member of National Bank’s Agriculture and Agri-Food team. Having served in recent years as Senior Economist at La Coop fédérée (now Sollio Groupe coopératif) and Director of Economic Affairs at Les Éleveurs de porcs du Québec, he specializes in international trade and agricultural policies.
A graduate in agronomy and agri-food management from Laval University and a four-time participant in the prestigious Harvard Agribusiness Seminar, Cloutier supports National Bank’s agricultural and agri-food financing teams with his expertise in business environment analysis. After a few years of reasonable growth the table is set for a faster increase in land values in 2021. Need proof? Grain prices, interest rates and the structural scarcity of milk and poultry quotas, depending on the area, will act as powerful accelerating factors.
Over the past 35 years, land values have increased faster in Quebec and Ontario compared to the Maritimes and Prairies. This included some dark periods in grain production, which many farmers prefer to forget. According to data compiled by FCC, over the last five years, it has been much more consistent: seven per cent annually.
An accelerating global context
The price of grains was very high in March. It will be recalled that in the last period of such prices, around the turn of the 2010s, land values had increased in the double digits at an annual rate. It’s too early for such an amalgamation, but without fail the grain markets fill some people with joy and others with regret. Unless African Swine Flu strikes again in China, and it appears plausible, slowing the recovery of the hog herd, or abrupt weather changes in South America, 2021 may well be history in its own way. And one shall remember that land values have mostly evolved parallel to field crop profitability, not so much to interest rates.
Record high canola prices, the market positioning of Canadian beef, the expansion of potato production in Western Canada and the trend towards vegetable protein are all promising. On this last point: in the wake of Beyond Meat and Impossible Foods, the incursion of PepsiCo, Tyson, Marfrig (Brazil’s No. 2 beef packer to JBS) and Maple Leaf into vegetable proteins is a harbinger of a major trend. In short, this acceleration will inevitably increase interest in farmland.
Buying and financing farmland
Financing agricultural land is both easy and complex. Easy, because our confidence in the fundamentals of the industry is unwavering. Complex, because the ratios linking the profitability of agriculture to land values differ from those observed in other sectors of the economy.
Beyond the powerful, often emotional and exhilarating, appeal that comes from the availability of accessible, sometimes contiguous land, some basic issues are inescapable. How do additional acreages fit into the company’s strategic planning and long-term goals? Does the existing machinery fleet allow for cultivation without additional investment assuming labour is available?
At the same time, farm profitability coupled with high asset values raises the inevitable issue of cash flow management. Given the uneven effectiveness of income security programs, maintaining sufficient flexibility to get through difficult years remains essential. On this point, it is surprising how much collective wisdom is being expressed. According to Statistics Canada’s Farm Financial Survey, the short-term financial structure of field crop and beef cattle farms is better than those under supply management. This is a natural and wise response to a volatile environment.
In the short-, medium- and long-term, land is an asset of undeniable quality. The markets eloquently reflect this, and it will be doubly so this year. Your humble servant shares this unwavering confidence.
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