Land prices likely to continue chugging higher

As farmers, an array of concerns might keep us awake on any particular night, but one fundamental issue bedevils many farms on an ongoing basis without any easy answers – access to farmland.

Regarding when and how to market your grain, there’s no shortage of advice even though it can often be contradictory. The same goes for when to buy fertilizer and other inputs. Eventually though, grain is sold and fertilizer purchase decisions are made.

With steadily increasing price tags, equipment purchase decisions can be stressful, but that also tends to come and go and not be a steady source of torment.

Buying or renting farmland is a much bigger deal. The opportunities keep getting scarcer and the stakes keep getting higher.

Those who farmed through the 80s often have a different view of the land market than those who came later. Farmland prices peaked in the early 80s and then quite steadily declined for most of the next decade. Interest rates soared while farm revenue languished.

Land prices from back then seem amazingly cheap now, but at interest rates at 18 or 20 per cent or even higher, many farms lost land to lending institutions and many others exited the business.

Timing is a big factor in farming success. A relatively young farmer expanding the land base in the early 80s had one heck of a rough ride. That lesson learned, if they survived, they were hesitant to expand when the tide gradually turned in the early 90s and they were still hesitant when the bull run in land prices started around 2008.

In retrospect, it turned out to be a marvelous strategy to borrow and buy as much as possible. A whole generation has never faced the reality of falling land prices. To them, it’s an improbable concept.

With the rapid rise in interest rates over the past year, some believe a repeat of the 80s could be nigh. They envision more interest rate increases causing investor money to be pulled out of farmland and farmers struggling to make mortgage payments.

With more land on the market, prices slacken and then move downward eroding equity and fueling the downward cycle. Suddenly, the patient farmer is able to buy land at a much more reasonable price.

While this scenario is possible, it would depend on interest rates going much higher and farm income levels dropping significantly. The pent-up demand for farmland and strong farm balance sheets will likely maintain upward pressure on values for the foreseeable future.

Whereas the rise in interest rates over the past year may have cooled the housing market, farmland values and cash rental rates seem largely unaffected. Big farms continue to get bigger, with small and medium-sized operations often unable to see much opportunity for expansion.

When a farm comes up for sale, neighbours may not even get a crack at competing for it. The rental market has become so competitive that some individuals approach landlords and attempt to poach land away from their neighbours.

Many farms want to expand, sometimes to bring another generation into the farm and sometimes to reduce reliance on rented land. Farming more acres is often seen as necessary to assure future viability. Aggressive bidding on land has been handsomely rewarded for many years. Prices that seemed outlandish at the time are a bargain in retrospect.

Logic would say that prices can’t continue their escalation indefinitely, but for now the trend seems to be intact.