US farmland prices, particularly in the Mid-West, are moderating and in some places actually declining modestly from their peak in 2013/14. US farmers have faced headwinds from a strong US dollar, soft USD-denominated commodity prices (particularly for soy and corn) and a continuing drought in some parts of the country. In contrast, the outlook for Canadian farmers continues to be bright. Farm Credit Canada recently forecast that farm cash receipts will increase by 5.8% in 2016 and increase further by 3.8% in 2017. Moreover, in a report released in September, FCC further highlighted the current financial strength of the Canadian farm sector relative to historical trends:
- liquidity is strong with a current ratio of 2.40, in line with the sector’s 15-year average;
- historically low debt-to-asset ratio of 15.5% vs a 15-year average of 16.7%; and
- return on assets of 2.3%, not far off the 15-year average of 2.6%
Why is the outlook for US farmers so different than for Canadian farmers? And how likely is it that soft or declining farmland prices in the US will lead to a similar trend in Canada?
In previous blog posts I’ve discussed the primary reasons for continued optimism for Canadian agriculture, despite the difficulties faced by the US sector, such as: stabilizing crop prices, a favorable and stable USD/CAD exchange rate, and robust export demand for a broad range of crops produced by Canadian farmers (especially canola and lentils) and the strong financial position of Canadian farmers.
In addition to these factors, there are structural differences between the Canadian and US agriculture sectors that tend to insulate Canadian farmers (and, therefore, Canadian farmland prices) from declining corn and soy prices that are the primary cause of US farmer’s current difficulties. At Bonnefield, we frequently point out the competitive advantages of Canadian farmland in terms of access to water, a more benign outlook for climate change and less degradation of soils.
However, a less-well understood advantage of the Canadian farm sector is its broad diversification. Canadian farmers are far less leveraged to corn and soy prices than their US counterparts. A staggering 178 million acres, or some 55% of all US crop land, is seeded to either corn or soy. That’s a significantly larger land mass than the entire country of France, devoted to the production of only two crops. In contrast, only about 13% of all Canadian farmland is used to grow corn and soy. Phrased differently, the entire Canadian corn and soy crop, covers only 5% of the land mass used to grow these crops in the US, an area much smaller than the Province of Nova Scotia. This fact is the single biggest reason why US farmland prices are so much more heavily levered to corn and soy prices than Canadian farmland.
The charts above illustrate the greater diversification of the Canadian agricultural sector. Indeed, if the US acres devoted to cotton production (a crop not grown in Canada) were removed from these figures, it would illustrate even more dramatically how leveraged US farmland prices are to the market prices of corn and soy.
An additional factor that exacerbates US farmers’ vulnerability to declining corn and soy prices is the prevalence of mono-cropping in the US corn and soy sectors. A combination of unique climate and agrological factors enable some large-scale US farmers – particularly in the Mid-West – to avoid traditional crop rotations and pursue mono-cropping of a single crop year after year. This practice is virtually non-existent in Canada. Mono-cropping puts additional stress on soils and requires intensive farming techniques involving significantly higher use of fertilizers, herbicides and pesticides in order to achieve consistently high yields year after year. The higher costs involved in these intensive farming techniques are not much of a concern in times of high and rising crop prices. But in a soft price environment, higher costs contribute to tighter margins and less financial resilience – a trend we are currently seeing in much of the US farm sector.
So are softening US farmland prices a leading indicator of what could happen to Canadian farmland prices? Potentially, but not likely. US farmers are far more exposed to soft corn and soy prices than Canadian farmers. Canadian farmers benefit from (i) greater crop diversification, (ii) strong demand, high prices and less international competition for leading Canadian crops like canola and lentils, (iii) a favorable US/CDN exchange rate, (iv) strong financial fundamentals of the Canadian farm sector, and (v) a bright outlook for continued farm profitability. In our view, any softness in Canadian farmland prices would likely be short lived and represent a buying opportunity.
A more likely scenario is that Canadian farmland appreciation rates will revert to long-term norms after several years of outsized growth in the 2010-2014 period.