What are the drivers of farmland values?
In 2011, a Bonnefield Research Paper entitled Factors that Drive Canadian Farmland Values examined the key drivers of farmland values in Canada. Examining Farmland over the past 60 years, the paper examined five drivers:
- Farm Revenue
- Farm Productivity
- Commodity Prices
- Farm Profits
- And interest rates
The two predominant determinants of farmland value were farm revenue and farm productivity. The other three components had less of a correlation on farmland values according to the research paper.
Understandably, commodity prices and farm profits should have less of an impact on farmland values in the short term. Commodity prices in the short term have always been volatile. If they did have an impact on farmland value there would be significant fluctuations in farmland values on a year to year basis, which has not occurred.
However, commodity prices do impact farm revenues and therefore do have an impact on farmland values in the long term. In the long-run food has kept up with inflation. No doubt, because of the fact that food is a necessity and is a core component to inflation itself. Therefore, while one should consider long-term commodity prices when assessing the decision to sell or by farmland, short-term commodity prices should not dictate one’s assessment of value in the short-term.
Farm profits impact on farmland values was also indicated to be less of an impact. This too makes sense based on the fact that consolidation in any industry and valuation of assets is determined based on the consolidators incremental profits and not on the sellers. As a result, as farms consolidate and become larger and more efficient as a result of consolidation, farmland property will continue to increase. Again, these two have less of an impact on farmland values than farm productivity and farm revenue.
Interest rates, according to the paper, have less of an impact on farmland than farm revenue and farm profits. This is likely because of the long-term risk-free interest rate - that being 10-year government bonds – has remained relatively predictable and stable for over the past 40 years. Governments have focused on managing inflation, which ultimately maintains a low and stable risk-free interest rates. By having predictable interest rates in the long-term they have less of an impact on farmland values.
An understanding of the drivers of farmland values help us to have a better understanding of farmland values and what impacts it not just in the short-term but in the long-term as well.