Ontario farmland values nearly double national average

High commodity prices and pent-up demand for Ontario property continue to raise farmland values despite higher interest rates.

Farm Credit Canada’s (FCC) recent mid-year land values report again highlights across-the-board increases in average farmland values, but Ontario figures are nearly double the national average. 

FCC analyses highlight an 8.3 per cent increase in farmland values nationally in 2021. This follows gains of 5.4 per cent in 2020. Information published Oct. 4 indicates growth continued at 8.1 per cent in the first half of 2022, echoing year-over-year increases seen in the United States. 

Why it matters: Commodity prices, yields and interest rates affect land values, so producers need to keep their budgets flexible.

The main drivers of farmland values were strong in the first half of 2022, the report said. “Commodity prices were robust, strengthening farm cash receipts. Higher interest rates and elevated farm input prices seemed to have had minimal influence on the demand for farmland.”

Ontario farmland values averaged 15.6 per cent for the first six months of 2022, for a 12-month gain of 27.7 per cent.

Land purchases that drive larger value increases are generally in less expensive areas of the province but there is lots of variability across regions. Increases observed in the southeast and central-east regions had average six-month changes ranging from 20 to 24 per cent. Average increases in the western part of the province range from 10 to 17 per cent.

[RELATED] Producers drive land value market, realtors say

Commodities suppress interest impact

Such averages reflect most individual valuations, according to Hillary Kerkvliet, a London-based senior appraiser with FCC. Strong increases across the board – not just in the south and central-east – are being driven by higher profits. Investment pressure from outside the agriculture sector remains a factor, but the volume of demand is coming from farm operators themselves.

“You see some [outside] investment. Some years there’s more than normal, others less. It’s not the majority of transactions though,” says Kerkvliet. What’s happening in the province now is in part a delayed response from lower interest levels in 2021, she added.

“There’s so many factors that influence farmland. It’s so hard to comment. The market definitely appears to be changing more than normal.”

Pent-up demand for land

Ryan Parker, partner with London area real estate appraiser Valco, reiterates that higher crop prices are a critical element in current land valuations. They have provided a significant insulating effect against quickly rising interest rates which, in other circumstances, would have cooled the land market.

“Crop prices the last few years have been phenomenal. It allows for great cash flow, but things are going to be delayed anyway. On one hand you have leftover cash from last year, maybe they are locked into a lower rate…it’s not that these interest rates are going to hit everyone in the first six months,” says Parker.

“The other part of it is some serious pent-up demand. People who wanted to buy a farm the last few years have struck out every time. There are still a number of buyers that would like to buy a farm.”

Known and unknown unknowns

Parker says a slowdown will eventually occur, with early signs appearing in the form of comparatively fewer sales. This can be more readily seen in the sale of poorer farms, for example, or those with houses and other buildings.

However, Parker does not foresee values trending downward or any kind of mass correction.

Good commodity prices are a significant factor in light of higher business costs – interest, inputs and others. For better or worse, Parker says the industry appears to be operating with the understanding that “we’ve entered a new era of prices,” where corn, soybeans and other commodities will no longer fetch low per-bushel dollars.

Chad Lawley, agricultural economics professor at the University of Manitoba, said over-leveraged operators will face greater risks.

While FCC numbers confirm what has been widely expected, he says it’s important to remember how macro-economic forces had a huge influence on the farmland market during the 1980s.

“Big increases in interest rates could cause big decreases in farmland prices, or at least they did in the past…I don’t know how out of control inflation is going to get. I don’t know where interest rates are going to go, and commodity prices remain strong.”

J.P. Gervais, FCC’s chief economist, said higher borrowing costs will slow the demand for farmland, but a repeat of the 1980s doesn’t seem probable in today’s climate.

“I do think [rising interest rates] are going to slow down the rate of appreciation, but I think the outlook remains optimistic,” said Gervais.

“When you think about the 1980s farm crisis, what made it a crisis were not only the high rates but also the low commodity prices.”

While prices may soften, he believes a crash is highly unlikely.

“I have to work really hard to find a scenario in which we’re going to see prices collapse. A lot of things can bring volatility to the marketplace.

“There are some scenarios in which you could see prices coming down, but it’s all about probabilities. And I would say right now, there’s a higher likelihood of prices that remain elevated.”

– With files from Don Norman, Glacier FarmMedia