Despite significant interest rate hikes, Farm Credit Canada (FCC) is reporting continued increases in farmland values across Canada.
According to the FCC report, Manitoba’s average farmland values increased by 6 per cent in the first six months of 2022. Alberta values were just behind that at 5.9 per cent and Saskatchewan was just above the national average with an 8.4 per cent increase. The biggest increases were seen east of the Manitoba border, where competition for arable land is strong but supply is limited with Ontario leading the way at a 15.6 per cent increase.
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“Strong farm cash receipts, buoyed by robust commodity prices, have managed to quell some of the profitability challenges from higher interest rates and farm input costs,” says J.P. Gervais, FCC’s chief economist.
Interest rates have risen 300 basis points since the beginning of the year. But it’s important to note that more than half of those increases occurred after the dates of the FCC study. In addition, the Bank of Canada has said that more rate hikes are inevitable. So, while the numbers look pretty rosy up until June, the pressure of rising interest rates isn’t over.
Chad Lawley, agricultural economics professor at the University of Manitoba, says that while the FCC report is optimistic, it’s justifiably so – at least for now. “An increase in interest rates is obviously going to reduce demand for farmland,” says Lawley. “It increases risks for those who are already over-leveraged,” he says. But he has little reason to doubt the nuts and bolts of the FCC report, noting the organization has good data and a long track record of tracking farmland value changes. “It looks like the sort of tracking fundamentals that we’d expect.”
Data: Farm Credit Canada
However, Lawley says it’s important to remember that during the 1980s farm crisis, macro-economic forces had a huge influence on the farmland market. “Big increases in interest rates could cause big decreases in farmland prices, or at least they did in the past,” he says. However, he says he’s not ready to predict a repeat of the 70s and 80s. “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.”
The 1980 farm crisis occurred at a time when debt was high, inflation was rampant, and interest rates rose dramatically in an effort to control inflation. The crisis saw land values plummet, and farm foreclosures skyrocket.
Gervais says any repeat of that type of scenario doesn’t seem probable in today’s climate. “Nothing is impossible,” he says. “But I don’t think this is likely.” He says there’s little doubt that higher borrowing costs will slow the demand for farmland, but with rising farm incomes, he is quite certain any repeat of the 80s should be avoidable.
“I do think [rising interest rates] are going to slow down the rate of appreciation, but I think the outlook remains optimistic,” says 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,” he says. And, while prices may soften in the future, 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,” he says. “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.”
Nevertheless, Gervais recommends farmers remain cautious and maintain a risk management plan that protects their businesses against unforeseen circumstances like lower commodity prices and higher interest rates.
Farm cash receipts climbed 14.6 per cent year-over-year for the first half of 2022, and with commodity prices remaining strong, receipts are projected to increase 18 per cent for the full 2022, relative to 2021.
