Farm Income Key to Farmland Values: Gervais

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Since peaking with a 22.1% year-over-year increase in 2013, annual gains in Canadian farmland values have slowed for three consecutive years.

But Farm Credit Canada Chief Economist J.P. Gervais isn’t worried about those slowing gains turning into actual declines, as long farm income can hold up. And in a webinar Tuesday, he said he remains confident Canadian farm income can do just that, even in the wake of swelling global grain supplies and generally lower commodity prices.

“The key (for farmland values) moving forward is, are we going to be able to sustain farm income? And I have every reason to believe we’re going to do that.”

Earlier this month, FCC’s annual Farmland Values Report showed Canadian farmland values increased an average of 7.9 % in 2016, compared to a 10.1% increase in 2015 and a 14.3 % increase in 2014. The report attributed the slowing gains to the levelling out of commodity prices and some “challenging weather conditions,” particularly on the Prairies where overly wet growing conditions resulted in quality problems and a large amount of crop that was stranded in the field at harvest.

But in taking a closer look at the report, Gervais pointed out that none of the 51 regions across Canada where land values were examined actually saw a decline compared to a year earlier. Indeed, there were only seven regions were land values were actually flat, while the remainder all showed at least some measure of increase.

In general, Gervais said the increases in Canadian farmland values reflect the gains in farm income. For example, there was a massive increase in farm cash receipts (mainly due to sharply higher crop prices and rising production) from 2005 into 2014, a period when farmland values were increasing sharply as well. In fact, during the last four years of that period, from 2011 to 2014, nationwide farmland values increased an average of 17.6%. In comparison, in the prior period from 2000 to 2003, farmland values climbed much more modestly, averaging only a 3% gain.

For 2016 and this year as well, Gervais said the forecast for Canadian farm income is mostly steady, as the lower Canadian dollar (compared to the U.S. dollar) helps to support returns on this side of the border.

With little upside expected in oil prices – one of the main drivers of the Canadian dollar – he said he believes the loonie will average about 75 cents US in 2017, enough of a discount to the American greenback that Canadian farmers will do better financially compared to their U.S. counterparts. In contrast, a move to around the 85-cent level would likely be enough to push some returns into the red, he added.

“The Canadian dollar has a tremendous impact on the marketplace.”

Also helping to support Canadian farmland values going forward should be the continuation of low interest rates. Although he said he doesn’t expect the Bank of Canada to raise its key benchmark rate this year, Gervais warned that it’s still likely Canadian farmers will see some increase in borrowing costs in 2017, simply because of the trend higher south of the border.

Regardless, the increases are likely to be modest, still keeping borrowing costs historically low, Gervais said.

Source: DePutter Publishing Ltd.

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