Grainswest - Spring 2019

Spring 2019 grainswest.com 35 BY IAN DOIG • ILLUSTRATION BY JASON LIN Outsized land values a burden to new and expanding farmers CCORDING TO FARM financial experts, the escalation of land value is shifting the farm-financial paradigm and may change the firmly rooted impulse to build farm operations primarily upon owned acres. There’s truth in the general perception that land value has increased excessively, and in parts of Alberta, this is certainly the case, according to J.P. Gervais, Farm Credit Canada’s (FCC) vice-president and chief agricultural economist. Lately, he noted, increases in the cost of farmland have outpaced growth in farm cash receipts. He hesitated to characterize the entire market as excessive. “One of the first indicators you’re looking at … is do farmland values make sense right now?” MAKING SENSE OF LAND VALUE Canadian annual gross farm income jumped to $62 billion in 2017 from $36.9 billion in 2007 as productivity improved. During those years, annual crop-receipt growth in Alberta was seven to eight per cent. This growth only began to moderate in 2017 and 2018. “The last decade, it’s the greatest I’ve seen in terms of farm income,” said Gervais. The cost of farmland naturally increased in tandem, doubling in Alberta over the last five years and rising 7.3 per cent in 2017 alone. The fact this escalation is largely due to the robust health of the nation’s agricultural sector is cold comfort to those who’ve seen their farming ambitions downsized or priced out of reach. The rate of increase, at least, appears to be tapering off, suggested Gervais. While he predicted the next 10 years will not mirror the previous 10, he was nonetheless positive about the economic future of the ag sector. The FCC will release its 2018 FCC Farmland Values Report at the end of April. When he spoke to GrainsWest in January, Gervais said he expects the report to show rising interest rates slowed the growth of the value of farmland for the first time in years. “We’re definitely in an environment where—though I don’t believe the rates are going to climb significantly—we do have to recognize the environment has shifted,” he said. Despite the limited supply that continues to support land prices, Gervais predicted the levelling out of farm income will contribute to the slower pace of growth. This will require a shift in expectations, he added. The escalation of land value makes sense within the context of a strong agricultural sector, but it is reshaping farming models. “It makes it harder for farmers to expand,” said Gervais. This has shaken the traditional capital- intensive model that focuses on buying adequate land to operate on a competitive scale. Two contrasting models have developed in response: smaller farms and even-larger farms. The smaller ones feed a variety of specialty market niches while large operations continue to satisfy the country’s net export business model. STRATEGY AND RISK MANAGEMENT The price of land is a key part of any farm-planning equation. “The important thing, first and foremost, is what’s your strategy?” said Gervais. “Where do you Expensive acres