Real Estate in Farmland

We talk a lot about how there are different ways to invest in real estate, to fit different people’s goals. It could be a multi-family unit, a rent-to-own, or a flip. There is another sector of investment that we rarely talk about, and most people know very little about.

That sector is land.

Not development land, but agricultural land.

I could go into development land, but frankly, as I write this, that topic seems less interesting. 

And let’s face it, land on the edges of city limits will continue to be more lucrative for a farmer to sell to developers for suburban sprawl than to continue farming the land.

However, that is only a small portion of the farmland out there.

So here is a brief breakdown on what is happening all around us… literally, and hopefully this offers some bigger picture insights into what drives the prices of agricultural land.

Real Estate in Farmland
The Great Canadian Land Grab

According to Farm Credit Canada, farm prices nationally have risen an average of 12% a year since 2008.

If you think it’s just Canadian farmland that’s selling at record prices - Britain reports the price of farmland has tripled in less than a decade – and the USA reports major increases in land values, with an average increase of 13% from 2012 to 2013, which followed a 14% increase the previous year.

Whether it’s North America, Europe, or Asia - farmland prices have continued to rise and show no signs of stopping soon.

Here in Ontario, farmland values increased an average of 12.4% in 2014, following gains of 15.9% in 2013, and 30.1% in 2012. The average farmland values in the province have continued to rise since 1988.

In several areas of the province, demand for farmland has significantly outweighed the supply, creating competition for available land. 

That’s right... Competition for farmland!

And farmers have also been fuelling the price wars. By holding onto their farms, they have been driving down the availability.

Much like the sellers of residential real estate, if they sell, what do they buy. 

All of this, coupled with low-interest rates, has played a role in the rising values. Sound familiar?

But guess who else is getting in on the action?

Institutional investors have begun looking at agricultural real estate and started investing in Canada’s farmland. They then lease it back to the farmers, because the farm prices have proven to be a highly accurate hedge against inflation.

So, where is the demand for what farms produce coming from?

Well, here are some interesting points to help shed some light on this dynamic.

Canada is the world’s fifth largest exporter of agricultural and agri-food products. Per capita, Canada is the top global trader of agriculture and agri-food products, increasing export growth rates to Brazil, Russia, India, and China.

The United States is, and will remain, Canada’s largest trading partner for agriculture and agri-food products.

The removal of trade barriers for Canadian lentils to India could result in a 147% increase in exports over five years.

Also, the rising incomes in China present a major market opportunity for beef.

Furthermore, 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. 

A lot of attention is being paid to China and India as export markets because of their large populations and rapid economic growth. While both India and China are in the top ten of both agriculture, and agri-food importers and exporters, their low position on a per capita and per hectare basis shows the potential market opportunities, if trade opens up in those countries.

Is it all upside?

Well, good farmland, like the majority of income properties, is traded on economic terms.

So, if what the farm produces becomes less valuable, so drops the value of the farm.

Think, if rent goes down on your triplex, the triplex is worth less.

There is one thing that no one can control, or at least yet, and that is the weather. That’s something to keep in mind.

One thing is for sure, just like people need a roof over their head, people also need food on the table.

So, acknowledging the sheer magnitude of food needed to feed the over seven billion people in the world, along with the need to create communities and commercial developments, it’s no wonder that the grab for land is far from over.

As the world becomes more connected, what happens in China, for example, affects us here in Canada.

Land truly is a multi-dimensional resource that plays a key role in our economy. It’s more than space to build houses.

Just like buying a rental property and renting it out to a tenant, you can buy an acreage and lease it out to a farmer. The language may be slightly different, but the fundamentals are the same!

Buy some land, they aren’t making any more of it!