Farm Credit Canada has released its Farmland Values Report, revealing that on average, land prices increased 5.4% in 2020. Multiple consecutive annual increases in farmland prices have pushed land values to an all-time record high.
Leasing farmland is becoming increasingly popular, as in 2016, 43% of all farmland in Canada was leased, an increase from the 39% in 2011. The statistic shows young farmers are more likely to rent land, as 50.6% of farmland was rented land for operators under 35.
The Rent to Price (RP) ratio is a tool used to assess trends in cash rental rates relative to the price of farmland. The RP ratio is calculated by dividing the cash rental rate per acre, by the value of farmland per acre, then multiplying the result by 100. The weighted average RP ratio across Canada is 2.7%, with great variation between the provinces.
Prairie provinces are the closest to the national average, however, the range of ratios within each province is wider than others. PEI holds the highest average RP ratio, because revenues from specialty crops are generally higher than revenues for grain and oilseed, creating an upward pressure on rental rates. For instance, Western New Brunswick’s RP ratio was at the high of the of province’s range, likely to the surplus of potato growers, a specialty crop.
A list of factors that influence the RP ratio include:
• Availability of cultivated land to rent vs concertation of operations in an area
• Interest rates
• Farm revenues
• Duration of the land rental agreement
• Type of agreement
• Quality of land
• Environmental considerations
According to FCC, there is a correlation between land prices, rental rates, and farm revenues – its no surprise that over time they tend to move together.