All Things Considered: February 2012

Listening to the conversation around the table at a farm meeting in Delhi, Ont., a few weeks ago I started flashing back to other conversations I had heard while living in Swift Current, Sask., and Petrolia, Ont.

Listening to the conversation around the table at a farm meeting in Delhi, Ont., a few weeks ago I started flashing back to other conversations I had heard while living in Swift Current, Sask., and Petrolia, Ont.

The talk in Delhi had turned to farmland prices and how they are surging. It was the same conversation as those I heard in Swift Current and Petrolia more than 30 years ago, except with bigger numbers attached.

This time good corn and soybean land in Southwestern Ontario is said to be selling for $10,000 an acre and rising. Thirty years ago, the dollar amounts were lower but the momentum and the motivations were the same.

Grain prices were high and rising (I even attended a meeting where a guy slapped a ruler on the end of a price chart and said wheat was headed for $20 a bushel and argued that land was grossly undervalued).

Interest rates were low, borrowing against equity was easy and there was a hungry world to feed. Nothing could possibly go wrong – until it did.

Grain prices fell off a cliff, interest rates rose and international markets collapsed. Farm equity melted away, debts that a year earlier looked easily manageable became unsustainable and farmers learned that while much of the world was still hungry, it was also broke and couldn’t pay.

Land prices collapsed and the rock solid equity many had borrowed against turned out to be more chalk than granite.

By the mid-1980s the federal and provincial governments, which had been dismantling farm programs as fast as they could during the good years, were cobbling together billions in ad hoc farm payments. But it was never enough.

Farm activism took centre stage. There were farm blockades to prevent equipment seizures and foreclosures. There were forced auctions where activists dominated the crowd and the bidding for everything topped out at a penny. The euphoria of the late 1970s and early 1980s had been replaced by loud desperation.

Maybe it’s different this time. Crop prices are up and look like they’ll stay up for a while. Interest rates are low and look like they’ll stay down for at least the next year or two. Farm cash flows are in better shape than they’ve been in decades.

And there doesn’t appear to be all that much land changing hands. Some farmers with small, by today’s standards, holdings and children who don’t want to farm, are retiring and selling out. There are also likely some who figure this is a good time to take the money and run, but it is hardly a land rush. This lack of supply likely pushes the value of the land that comes on the market up.

But that is small comfort to the worrywarts.

A year ago, Sheila Bair, chair of the U.S. Federal Deposit Insurance Corporation warned: “Over the past dozen years or so, the United States has experienced classic asset price bubbles in the stock market and the housing market.”

“Where might asset bubbles be forming today?”

“One candidate is U.S. farmland values,” she said.

In Iowa, for example, a new record high price – more than $15,000 an acre – was recently paid for a quarter section (160 acres) of corn land. This was almost a third higher than prices paid for similar land earlier in 2011.

In Canada, land prices are on a similar track and farm debt loads are higher than in the United States. This increases the risk. In investment circles the advice is to buy low and sell high. But many, many people do the opposite. They get caught in the euphoria of the moment and buy high, and then when things don’t continue as hoped, in desperation, they sell low.

If they borrowed to buy, the situation becomes very bad. The debt and the payments persist, but the asset is gone.

So what are farmland values in Canada doing? Farm Credit Canada (FCC) reports that Ontario farmland values increased more than seven per cent in 2010 and rose again in 2011. Saskatchewan farmland is rising at an even quicker clip.

On some good vegetable land in Southwestern Ontario price increases of four per cent per month have been reported and some poorer land has risen by 50 per cent in three years.

Under current circumstances these prices may make sense. But circumstances change and sometimes can change very quickly. If I had a time machine and could go back to the early 1980s and revisit the conversations in Swift Current and Petrolia I would ask: “What happens if interest rates double or triple? What happens if grain prices fall by half? What happens if next year looks bleak and the future bleaker?”

Maybe it is different this time. Maybe history doesn’t repeat itself. Maybe I’m trapped in a far too painful past. But I worry that, while history may not repeat, sometimes it does rhyme.