Does the farmland market make sense?

The Canadian farmland market has been strong for the last decade.  But a question on people’s minds is “does it makes sense?” To answer this, let’s examine the relationship between farmland values and farm income.

To track the value of farmland relative to crop receipts, we use the Farmland Price-to-Earnings Ratio (PE ratio). It measures the price of farmland as a multiple of crop receipts. Used to assess other financial assets, the PE ratio is one measure of the affordability of farmland compared to its long-term average.

Let’s use the PE Ratio to examine farmland values and crop receipts in Canada and the U.S.

Projected record 2017 crop receipts – what will the 2017 average farmland value be? 

Agriculture and Agri-Food Canada (AAFC) is forecasting Canadian crop receipts for 2017 at another record level, $34.5 billion, a 1.4% increase over 2016. This would be an amazing achievement, especially considering weather challenges in parts of the Prairies and Central Canada. Crop receipts have been setting record four of the last five years.

Despite strong crop receipts, the PE ratio exceeded its twenty-five-year average at the end of 2016. Will we see this ratio increase further away from its average in 2017? We’ll have to wait for the release of the 2017 FCC farmland values numbers next week for the answer. An average value increasing faster than 2% will make the ratio trend up.