Real estate: today’s bidding wars are for farmland

Low interest rates and record high crop prices means high yields for land
HOLLAND MARSH, ONT- 22/04/09 - Images for an ongoing feature on the people who live and work in the fertile valley north of Toronto called the Holland Marsh. These characters, of diverse backgrounds, are all grouped into a single category called "Marshmuckers." The average age of farmers in the Holland Marsh is 55, and as farmers age, land gets passed from one family to the next if the children don’t choose to take up their parents business. (Photo by Peter Power / The Globe and Mail)pmp
Real estate: today's bidding wars are for farmland
Photo by Peter Power/The Globe and Mail

The hottest real estate investments aren’t in big cities. Today’s bidding wars are in the breadbasket.

Much like the frenzy that has swept Canada’s urban housing market, real estate prices are soaring in the hinterlands. Prices of farmland have shot up as much as 25 per cent across Canada this year. Fruit growers in B.C.’s Fraser Valley command $60,000 an acre. Bidding wars are breaking out for farms in Saskatchewan, while grain land in Alberta “can sell virtually overnight,” says a report this September from Re/Max. In some areas of southwestern Ontario, prices jumped 70 per cent in the past two years to $15,000 an acre.

Much of the enthusiasm for farmland has been driven by farmers enticed to expand their operations by low interest rates and record-high prices for corn, barley and wheat, thanks to the worst drought in a half-century that’s swept the U.S.

But it’s not only farmers that see a gold mine in cropland. Central Alberta’s oil sector has helped fuel a 25 per cent jump in farm prices. Nearly three-quarters of farms have oil and gas wells that are leased to oil companies for added income. Where once sellers could add three times the rental income of a well to the price of their property, they can now command five or six times, says Don MacDonald, a Re/Max realtor in central Alberta.

Institutional investors, too, have begun looking to agricultural real estate, says Tom Eisenhauer, head of Bonnefield Financial, which invests in Canadian farmland. Private investors own just “a few hundred million” of Canada’s $280-billion worth of farmland. Bonnefield owns 15,000 acres, mostly in Ontario and Manitoba, which it leases back to farmers. Farm prices, Eisenhauer says, have proven to be a much more accurate hedge against inflation than gold, a popular safe haven for investors. “If you’re a high net worth individual or pension fund, boring and safe and non-volatile looks pretty good,” he says. “It’s only been recently that boring has been removed” from agricultural real estate.

Farmers have been fuelling the price wars by holding onto their farms and driving down the supply of available land for the same reasons that investors are so keen to buy it, MacDonald says. “There’s the concern that landowners have right now: ‘If I sell my land, what am I going to put my money into?’ ” he says. “They don’t like the stock market volatility either.”

It’s not the first time Canada has witnessed a run on farmland. Prices soared in the 1970s before collapsing when interest rates shot up. Eisenhauer says this time it’s different. Farmers are less indebted now. A decade-long trend of falling crop yields in some of the world’s most populous countries has driven up commodity prices and increased the demand for Canada’s farmland. And unlike house prices, which have risen even as income has been stagnant, agricultural land prices tend to fluctuate in tandem with farm revenues, he says. “When you’re out where farmers are selling to other farmers, the vast majority of the really good farmland that’s in the middle of nowhere appears to us to be trading on economic terms.”

Others are less sure. High commodity prices, low interest rates and farm lenders falling over themselves to finance agricultural purchases have fuelled much of the recent boom. And as farmers know all too well, both interest rates and the weather can change with little warning.

Says MacDonald: “If the Americans next year have a big corn crop, that will change things.”