When Farm Credit Canada (FCC) released its first-half of 2022 farmland values report earlier this week, reaction was somewhat mixed, ranging from “Well, of course prices are still strong!” to “This kind of growth is absurd given current conditions.”
As J.P. Gervais, senior economist with FCC explains, it’s important to look at the 8.1 per cent average growth in context to fully explore if the numbers are actually absurd or in-line.
“If you look at the first six months of the year… a lot of those sales were actually negotiated, recorded prior to the significant increase in interest rates that we got in July. And even prior to some of the start of the tightening of the Bank of Canada, it started out in March, right. So the July increase was really the big one…but it started out slowly,” he says.
In short: the interest rate and inflation impact really won’t show up until the second half of 2022 and in to 2023.
But the cost of borrowing is only one aspect of the land sale equation. Supply, farm profitability, and demand factors all play a role, too. And what does that look like going forward?
“I do think that we still are going to be in an environment where the supply of available land will be quite limited,” Gervais says. “That’s the really big unknown right now — the rapid increase in interest rates and the overall net impact on the demand for farmland.” (Story continues below interview)
That demand story really plays out in the Ontario market, where the numbers suggest a 27 per cent increase from July 1, 2021 to June 30, 2022. The strong crop of 2021 combined with strong prices made an impact, but so too does demand. Plenty of city money is flowing in to farmland.
“I do think in Ontario, more so than in Quebec, I think when you look at buyers of farmland, I think the pool or there is a an urban pool from on the market right now where land near GTA, and closer to urban areas is really in really strong demand. And I think that’s something that’s new, certainly, but perhaps growing or that has grown in importance. I do think that there are some external influences outside of the the Ag market that explains some of the increases that we’ve seen,” Gervais says.
There’s investors in the market too, of course, and farmland is an attractive investment for more than just farmers.
“It’s low volatility, and then good returns, so that makes it appealing. There’s just no denying that there is an interest from institutional buyers,” he says. “I would say that most of the vast majority of transactions that we have in our database are still an operation or a family farm or to another operation. And so for the most part, those are the transactions that drive the market. But having said that, there is no denying that in some specific location, the presence of a non traditional buyer that would perhaps you will change the entirely the dynamics of the marketplace.”