Land on the move
— Agriculture is changing. Canada is changing too. So, how should your land strategies change?
Gord Gilmour
Associate Editor, Country Guide
March 15, 2008, page 14
It all adds up to the potential for 2008 to become one of history’s pivot points.
Much of human history is a struggle over land, and especially over productive farmland. In the past century alone, farmland has been homesteaded, collectivized, reformed, bought and sold on the open market, and paved over for condominiums.
More recently, here at home, we’re learning that our days of discounting our land and our farmers — and their combined productive capacity — and failing to recognize that they are the single most vital resource in the world, have got to end.
Land prices in Canada are starting to climb, although slowly in most regions. “It might be because farmers don’t quite believe it yet,” says Ontario land appraiser Bob Brooksbank, citing repeated past experiences with grain price spikes that were quickly eroded in subsequent years.
Momentum is growing, however, as mounting population pressure, growing affluence in emerging economies, and expanding non-food uses for grain crops all take a bite out of this finite resource.
Grain prices are up, farmers are generally optimistic for the first time in a generation and the rural economy is on a roll. But now more than ever it’s important to recognize the value of the land that supports and nourishes our rural roots, especially as a larger and larger portion of Canada’s farm population nears retirement.
Ordinarily in late winter Dave and Gail Bailey would be deeply immersed in planning what to plant this spring on their 1,100-acre mixed grain and cattle operation. But this spring the couple is faced with new and different dilemmas — picking paint colours and floor treatments.
“I’ve been doing a lot of interior decoration these days,” Dave says with a laugh, referring to the inevitable bout of home improvement work that always comes with setting up a new household.
Turnover coming
The Baileys spent much of the winter wrapping up the sale of their land and making arrangements for their 100 cows at their operation near the village of Glaslyn — about three-quarters of an hour north of North Battleford in west-central Saskatchewan.
Today they’re busy settling into their new life in Saskatoon after selling their land to an oilfield worker who grew up on a cattle operation in Alberta. Neither of the couple’s two sons was interested in farming, making a sale outside the family a necessity.
“Our boys went and got educated and they got so smart they decided they didn’t want to come back,” says Dave.
This isn’t a new story for rural Canada but observers say it’s likely to become more and more common in the coming years. Simply put, many Canadian farm couples who got into the business in the 1960s and 70s are now nearing the end of their careers.
In some cases the transfer is to a family member, but in many cases that’s not an option. For farm families whose children came of age in the 1980s and 1990s, times were tough and economic reality led these farm kids to explore other career options.
Today they’re scattered throughout Canada working in every sector of the economy from the energy industry to health care — and it’s unlikely many will be coming back after decades off the farm. However, that’s not to say there’s no interest in farming at all from younger Canadians.
Lyndon Carlson, senior vice-president of marketing for Farm Credit Canada, says he’s still bullish on the prospects of agriculture because of the interest he’s seeing from younger people today despite any past setbacks. The organization made roughly 16,000 loans to farm operations across the country last year, with about a third of them being made to farm operators under 40.
“Lots of younger people want to go farming,” Carlson says. “More and more it’s becoming a choice — these are people with post-secondary education and lots of options. They can do anything and they’re choosing farming.”
At least in part, this renewed interest in agriculture is likely a reflection of a growing conviction from farmers in all sectors that the industry has turned a corner in the past little while.
Carlson cites a recent survey of farmers that shows the majority of all farm producers think they and their farms are on the upswing and that their operations will be better off in five years’ time. For an industry that’s been depressed for close to a generation, this marks a sea-change in thinking, with optimism the rule rather than the exception, Carlson says.
“We’re even seeing people in the hog and beef sectors who are saying ‘Times are tough right now, but we’ll get through this and thrive,’” Carlson says.
One observer says it will be tough to translate that interest into action however, given the high capital cost of farming. At the National Farmers’ Union’s Saskatoon office, Darrin Qualman says young people without a family background will face a tough challenge, but that the underlying better economic times will likely help.
“It’s not like we’re talking about gets ting people back onto farms that will never make any money,” Qualman says. “The markets have delivered a bit of a ‘gimme’ with $8 wheat, $12 peas and $11 canola.”
One area where the hurdle for new farmers is highest is central Canada, where observers say price pressure frequently comes from non-agricultural land uses, resulting in land prices that often far exceed productive capacity.
For example land surrounding the city of Stratford is hovering around between $6,500 and $7,000 an acre, while land in north Lambton County has been selling for around the $5,000 to $5,200.
Brooksbank, president of the Ontario chapter of the American Society of Farm Managers and Rural Appraisers, says cash crop farmland in that province is moving its value to up slightly, but that higher grain prices haven’t resulted in a runaway in land prices just yet.
For generations outright land ownership has been the preferred model, with a bit of rented land from local retirees thrown in for good measure. But the business-savvy farmers of today are exploring new ownership models that don’t necessarily depend on owning the land that they farm, at least in the traditional sense.
Carlson of Farm Credit Canada, says the two traditional options — buying land with a ‘traditional’ amortized loan and renting or leasing — are still popular, but today they’ve been joined by a middle option.
“We’re seeing farmers who are putting down security to acquire ownership of the land but they only want to pay the interest, not the principal,” Carlson says.
This strategy has a number of advantages for producers. Their out-of-pocket expenses are lower, all of their payments are now tax-deductible and the strategy provides a farmer more security than any rental arrangement would.
It can even work out as an investment strategy, allowing a farmer to capture any increase in the value of land during the period they own it. “It’s not a bad investment if land values increase over time,” Carlson explains. “It may ebb and flow, but land values generally increase.”
A University of Saskatchewan study on farmland values in that province has found, with some ups and downs, owners of farmland in that province earned an average annual rate of return of 9.4 per cent on their farmland. Also, a study by the Hancock Agricultural Investment Group has found that in the U.S. farmland increased by almost two per cent more than the average annual rate of inflation from 1941 to 2002.
Another model that’s emerged is more renting and leasing of farmland. The latest Canadian agriculture census shows farmers renting nearly 10 per cent of their land, on average.
Brad Farquar, vice-president of the Regina-based Agricultural Development Corporation (ADC), which specializes in farmland investments for non-farmers through investment funds, says a capital-intensive business like agriculture can always benefit from business models that result in lower capital requirements.
ADC buys and manages land and can even buy land from one family member and lease it back to the younger generation.
“This can really help with succession between generations,” Farquar says. “If the sale is structured in this way the seller gets first crack at it.”
While surrendering ownership will always mean less secure tenancy, Farquar notes that it’s in ADC’s best interest to establish long-term relationships with reliable producers and that the investors who are putting money into these funds aren’t interested in farming themselves.
“If someone’s a good farmer and they’re committed to the industry, bottom line is there’s no reason for us to want to switch tenants,” Farquar says.
Industry observers say that in many cases the limiting factor for companies such as ADC isn’t the number of farmers willing to sell their land. In fact, it’s having enough tenants on hand to rent the land after it’s sold. This gives farmers added leverage and has made for some lease arrangements that are very secure, says FCC’s Carlson.
“We’re seeing some five and 10 year leases that can provide quite a bit of stability for the farmer,” Carlson says. “But then you’d certainly want that if you were going to go and invest $350,000 in another combine.”
The world may be a big ball of dirt, but the irony is there isn’t much land to go around. The best estimate comes from the United Nation’s agriculture arm, the Food and Agriculture Organization (FAO), whose statisticians say there’s about 3.7 billion acres of arable farmland on the planet.
It sounds like a big number, but the figure for human population is even bigger — 6.6 billion, with another 90 million souls being added every year.
This constant population growth has put more and more pressure on land. We’re all relying on just over a half-acre of farmland to provide most of our food needs.
According to FAO stats, Canada has roughly 112 million acres of cropland. Yet other countries have far more land. China, for example, has around 354 million acres and India boasts more than 394 million.
The key difference is, of course, population. China and India each have more than one billion citizens, compared to around 33 million in Canada. Boiled down to acres per capita, the numbers are telling. For every Canadian man, woman and child there are 3.4 acres of cropland, compared to 0.27 acres in China and 0.36 acres in India.
In an ever more crowded world, farmers in other countries are casting an envious eye on Canadian farmland. The trend isn’t a new one and Cana-dian farmers are almost all familiar with Scottish, Dutch or German neighbours who came over to try their hand at running a dairy or cropping operation on this side of the pond.
“We have seen this happening, especially a trend to Dutch farmers moving into places like Ontario and Alberta,” says FCC’s Carlson. “The Netherlands has actually paid incentives for farmers to leave because there’s such a shortage of land in that country.”
Now, this interest is extending to other parts of the globe. Sanjoy Majumder, a reporter with Britain’s BBC based in India, recently reported a visit to a farm in the Punjab where the farmer, Harkirat Singh, was planning to sell 150 acres of citrus orchard and relocate to Canada.
“With the value of their land increasing, they are able to generate enough money by selling a part of their farm to buy a farm of their own in Canada,” said Majumder.
This interest reflects a rapidly growing population in India and a new found affluence in the country that has boosted land values.
Singh told Majumder that land in the area was selling for $13,000 an acre five years ago, but now was worth an estimated $220,000 an acre, mainly due to interest from real estate developers.
One thing that’s unclear, however, is whether this interest is going to actually translate into more farmers from non-traditional areas moving to Canada. When contacted by Country Guide, BBC reporter Majumder said red tape can be a major obstacle — one the subject of his story had encountered first-hand.
“He’s still here waiting for his papers,” Majumder said.
It’s said that change in inevitable and nowhere is that axiom more apparent than in the agriculture sector today. What’s also apparent is that this change isn’t necessarily a bad thing, says Dave Bailey, of his family’s move off the farm.
He expects a lot more land sales will be the norm in the coming year as older farmers take advantage of the better times to head for the exit and start the next chapter of their lives.
“This isn’t a sad story, we left the farm with dignity” Bailey says. “We had a great life on the farm and raised two wonderful boys and got them educated. We then made the decision we wanted to move on — but it was our decision.”
Cheap at twice the price
Western Canada still has some of the cheapest arable farmland in the world. In fact, it’s so cheap that a number of investment funds are now pitching Saskatchewan farmland to investors looking to hedge against inflation.
Two of the biggest are ADC in Regina (see main story) and Amcapita Investments of Calgary. Both appear to be pursuing a strategy of buying land and then leasing it to local farmers.
Much of this interest is related to a combination of stronger grain and oilseed prices, along with recent relaxation of farmland ownership regulations and a conviction that Saskatchewan farmland — which makes up close to half the country’s arable acreage — is underpriced.
ADC’s website lays out its pitch to prospective buyers in black and white, saying that Saskatchewan land is “significantly cheaper than equally productive land in Alberta, Manitoba or North Dakota.”
ADC says the average price in Saskatchewan is $309 an acre, compared to $817 in Alberta, $511 in Manitoba and $560 in North Dakota.
Because of this low price some worry this low-priced land is ripe for the picking. One estimate is that at current prices all the farmland in Saskatchewan could be had for $22 billion — or that $1 billion would represent the standard downpayment for half the land in the province.
Darrin Qualman, of the National Farmers’s Union says the reality is even successful farmers don’t have that kind of money kicking around — but a lot of others do.
“There are a lot of companies out there that $1 billion is nothing to,” Qualman says.
