Farming in Peril: The Rising Costs of Farmland Cloud the Future

 

Farmland is considered a major asset for farmers, but its values are putting it out of reach for young farmers and those entering the industry. Concerned about the acquisition of farmland in Canada, the Senate tasked its Standing Senate Committee on Agriculture and Forestry to report on farmland values and its potential impact on the farming sector. The Committee’s report called A Growing Concern: How to Keep Farmland in the Hands of Canadian Farmers was released in March. The Senate Committee chair, Senator Diane Griffin spoke to Beef Business about the results and recommendations of the investigation and how rising farmland values could shape the future of Canada’s farming sector.

“There was a lot of concern through the Senate about the price of farmland in Canada,” Senator Griffin explained the motivation behind the Committee’s work. “It may be causing a problem for farmers, especially young farmers to get into the business. So, it seemed an opportune time to produce a study and find out exactly what’s going on and make any recommendations that are applicable to the role of the federal government.”

Roots of the Report

The report’s title reflects the growing concern that the Committee had heard during their other work. The family farm has been the backbone of rural Canada for generations. The Committee members had been hearing about the rising costs of farmland in Canada and concerns families had about the ability to pass their farms onto the next generation. “It’s just because of the rapid increase in land prices that it has become more obvious and more of a concern,” Griffin stated. “Also, the average age of the farmer is getting to be rather senior, and the problem is we are going to have a huge turnover in the next generation.”

The Committee members examined three questions: (1) The causes of the increasing value of Canadian farmland; (2) The concerns of agricultural stakeholders and the challenges they face in acquiring farmland; and (3) The possible solutions. The first part of the report focuses on the use of farmland and changes in farmland values. The second part explains changes in farmland values and their impact on farmland availability. The final part outlines ways to ensure access to farmland for future generations of Canadians. In addition, this report describes the underlying challenges associated with access to farmland, including farmers’ financial capacity, ownership types and the profitability of the agricultural sector.

The report made recommendations to the federal government, which doesn’t have a large function in land matters, but, “it could play a useful role in the future of ensuring that farmland remain accessible.” The Committee chair noted that many of the farmland issues were under provincial jurisdiction. “Generally, it is the provinces that control land use,” she said.

The crux of the issue, according to the report, is that it is critical to preserve productive agricultural land if Canada hopes to remain competitive internationally and protect its biosecurity and food security. Retaining productive farmland is also an important moral issue, the Committee maintains. By 2050, an estimated 70 per cent more food needs to be produced globally to feed the world’s growing population. Canada can make a substantial contribution to this goal, already being a major contributor to world food production. For example, in 2012, 63 per cent of food and fodder crops in Canada were produced in the prairie provinces.

Key Contributing Factors

The prices for farmland fluctuated across and within provinces for a range of reasons, the report determined. Ontario fetched the highest at about $10,000 per acre, according to Statistics Canada data on the value per acre of farmland and buildings in 2015. The largest increases were seen in Alberta, Manitoba, and Quebec, where values jumped 10 per cent or more. Saskatchewan had the lowest land value at almost $1,200 per acre on average. “Saskatchewan was one of the places where farmland has not increased in value as rapidly as it has in many other places,” stated Griffin. “There are a number of reasons for that.” Productive farmland varied by province and one reason is that land isn’t as scarce in Saskatchewan as it is in smaller provinces. In other provinces, values ranged from nearly $1,800 to almost $3,000 per acre.

Since farmland is a major asset for farmers, it was important to understand the use of farmland and the changes in farmland values in Canada, as well as the factors behind the upward trend in values. According to Statistics Canada, most agricultural land is found in the Prairies, Boreal Plains, and Mixed Wood Plains ecozones. Farm area accounted for about 7 per cent, or about 65 million hectares, of the total land base in Canada, according to the 2011 Census of Agriculture. More than two-thirds of this land is considered arable, meaning it has the potential for crop production. The total value of farmland and buildings was estimated at $276 billion, of which 74 per cent were owned by farmers and 26 per cent were leased. Farmland accounted for 67 per cent of total farm assets in 2015.

The senator pointed out that many factors contribute to the rising prices of farmland, and each province had its own unique combination of factors influencing values. These include economic, environmental and demographic factors, and commodity prices. “They are all factors in what the going rate for farmland is in any given area,” the Committee chair stated. One factor stood out. “The closeness to cities seemed to be a major factor everywhere,” said Griffin. Urban development around large cities offer higher prices for agricultural lands making it harder for farmers to compete.

The amount of productive farmland varies by province, and despite the land’s use or potential for agriculture, it is not always used for farming. Arable land in Canada has multifunctional uses, the Committee found. In addition to agriculture, potential farmland is also used for industrial projects tied to energy production, for urban development, and almost 20 million hectares functions as wildlife habitat, including natural grasslands for pasture, woodlands, and wetlands. Given the importance of farmland to the economic development of the agricultural sector and the economy in general, the Committee heard from stakeholders that it was important to preserve access to this strategic resource.

A main factor of concern highlighted in the report was that farmland is being acquired by non-agricultural investors, financial institutions, pension funds, private investment firms and private companies as well as foreign entities. The main purpose for these investors is not to practice agriculture, but to get a return on the investment, driving up land values. There was a concern that farmers would be competing with foreign investors for land that could be taken out of farming, influencing production structure.

At the same time, the Senate Committee’s analysis showed that foreign ownership doesn’t mean land is lost to agriculture. Some private companies invest in the agricultural sector by partnering with pension funds in the form of sale-leasebacks. “They usually rent it back to farmers,” said Griffin. According to Statistics Canada, the total area rented or leased by private interests increased from 2 per cent in 1986 to 27 per cent in 2011. But in leasing, farmers have less financial stability, impacting on their future planning. “The problem is farmers don’t usually have the same security long-term through a lease mechanism as they would for ownership. So, it puts them at a disadvantage in terms of their long-term planning and their security,” Griffin stated. As well, with land ownership, the farmers invest in their communities and give more consideration to the preservation of the land over the long term. As the senator noted, “Whether or not they actually sell the land, or whether they pass it on to the next generation and family, the point is – they have a vested interest when they own the land, compared to when they are leasing land.” Landowners invest in their communities while engaged in agricultural production, but investors are mainly concerned with their return on investment. To this end, the Committee found that strengthening the legislative framework for farmland protection would make a major difference.

The Committee also heard from stakeholders that the environmental activities of some conservation organizations could affect the price of farmland. However, environmental stakeholders reported to the committee that the goods and services derived from these ecosystems are essential for the survival of plant and animal species, including threatened and endangered species. The groups also found that holding land is expensive and they were more likely to partner with farmers on environmental projects. The report determined that environmental activities could have an impact on small areas not on large scale production.

Further, livestock producers worry that grazing lands might be taken back for environmental measures. “No, I can’t see that happening because grasslands are going to be exceedingly important as a carbon sink,” said Senator Griffin. “I can’t see in Canada that we would ever want to decrease the amount of grazing land. I can see us actually increasing it.”

Another factor influencing land values was the rise in commodity prices. More income and relatively low interest rates have allowed farmers to buy up more land to benefit from economies of scale creating relatively high demand for farmland among farmers. According to the report, the increase in production capacity, through the acquisition of additional land and technological advances, is also needed to meet the increased demand for food from importing countries.

The report identified demographics as another factor. With the average age of farmers estimated at 54 years in 2011, stakeholders said that selling land was a way for some farmers near retirement to have a source of funds. Furthermore, they get higher prices when converting to it to non-farm use. As a result, urban development is generally on the best agricultural land and plays a role in increasing farmland values. At the same time, this high value of farmland poses a barrier to young or new farmers trying to access farmland and enter the industry. Moreover, the increased debt load was a factor that concerned established farmers. The Committee was concerned about the long-term ability of farmers to pay for the highly-priced land they are buying today. “At the end of the day, the thing that stood out that is similar everywhere is that farmland prices have been increasing and it does make it increasingly more difficult for young people to get into farming because they just don’t have the capital to get started,” Griffin said. This can affect their profits and the sector’s overall economic development. Young farmers told the Committee that the only way to enter the business was through leasing. The growing amount of leased land concerned stakeholders because leasing makes farmers employees rather than owners, exposing them to additional risks. As a result, the Senate Committee saw a need to support for young farmers to maintain the sector’s activities.

Recommendations

The Committee developed five recommendations based on their report findings. The first recommendation was made to the Department of Finance Canada about the lifetime capital gains exemption. “It was sure drawn to our attention by farm experts who presented to the Committee that this was an issue for them in terms of people being able to sell their land and pass it on to the next generation, and it’s causing issues in terms of facilitating the transfer,” Senator Griffin noted. Although the federal government actually has a limited role to play in land values, Griffin indicated that it can make an impact at the financial level. “One of the big things that the federal government plays a role in is related to the capital gains tax. Right now, the maximum amount of capital gains tax exemption that is available for an eligible farm is $1 million,” she stated. “Especially near larger cities and for larger farms, this amount is inadequate to cover what the value of the land would be. So, we are recommending that the exemption limit be reviewed.”

Secondly, the Committee recommended that Agriculture and Agri-Food Canada, Statistics Canada and Natural Resources Canada continue to cooperate to improve the data on the classification and use of farmland. In turn, they could assist provincial departments, informing them about technological advances in imaging and remote sensing, and the way in which the resulting soil maps could assist provincial land-use planning. The participants also recognized that land-use planning is primarily a municipal matter. Access to appropriate technologies would make it easier to create soil maps to provide a better understanding of soil condition and quality changes in land use and ownership types.

The third recommendation is that Innovation, Science and Economic Development Canada renew the funding for the National Research Project on Farmland Protection through the Social Sciences and Humanities Research Council. This renewal would encourage cooperation between provincial land-use planning experts and would support the development of standardized analytical frameworks and tools that would enable harmonized land-use planning data to be obtained for all provinces.

The fourth recommendation is that the federal government work with its provincial counterparts to take advantage of initiatives such as the National Research Project on Farmland Protection to enhance tools for better tracking of land transactions. The final recommendation is for the federal and provincial governments work together to protect and promote the use of land for agricultural purposes.

Conclusions: Status of Farming

A variety of factors have contributed to the rising value of farmland in Canada, so no one factor is to blame. “It is a cumulative effect of a number of factors coming together,” Senator Griffin stated. Some reasons for rising land values brought to the Committee’s attention were the importance of economies of scale, investments by non-agricultural interests, environmental issues and policies, demographic pressures, and an aging population. Farmers, including the next generation, sometimes do not have the borrowing capacity to handle these higher prices.

The high prices of farmland will have a general impact on Canada’s food security. “If we had a large corporation, either a pension fund corporation, or non-resident corporations, only owing Canadian farmland, that doesn’t give me a very comfortable feeling for the food security for the future,” Griffin said. The report also noted concern about potential changes to the agricultural production structure resulting from the loss of family farms and a shift to large-scale farms. At the same time, the Committee members heard that the agricultural sector needs to be competitive in order to maintain its activities. A lack of competitiveness hurts farmers’ incomes, which could lead them to quit farming or abandon land that is suitable for agriculture.

To better protect farmland and its use for agriculture at the provincial level, the report recommended strengthening the legislative framework for farmland protection. Under the Constitution, the provinces have jurisdiction over the ownership of Canada’s farmland. Alberta, Manitoba, and Saskatchewan restrict land ownership by foreign interests. Saskatchewan has amended its legislation to restrict the types of investments allowed by tightening the definitions of pension plans, administrators of pension fund assets, and trusts as non-Canadian-owned entities in order to prohibit them from purchasing farmland.

Moreover, the responsibility for land-use planning is a provincial responsibility, which is delegated to local government. Each province enacts its own legislative measures. “What is important is that all potential uses and users are considered when the landowner is doing an environmental farm plan,” Griffin stated. “Environmental farm plans are becoming increasingly popular across Canada.”

Farming in Canada has traditionally been based on the family farm model. However, changes to financing and the production structure may threaten this model. The senator doesn’t think the family farm will go by the wayside anytime soon, but she did identify the rise of other types of farming models. “There are many models. There are smaller specialized niche farms that may be organic and may be producing crops and selling into a fresh market and a nearby town or city,” she described. “Then, there will continue to be large farms such as the large wheat farms that are still owned by one family.” The challenge for the family farm in the future, said Griffin, will be farm succession. Factors influencing succession decisions include families having fewer children, and a wider selection of job and educational options available off the farm. “It’s going to get increasingly difficult for them to pass the farm down to the next generation in the same family,” she noted about the succession of these farms.

Nevertheless, the senator forecasts that the face of farming will soon be changing in Canada. “We now have the aging baby boomers who are now looking to make their decisions – if they haven’t made them – about what they’re going to do with their property. So, we’re going to see quite a change here in a few years.”

Where Does the Report Go Now?

“It’s been presented in the Senate and we will shortly be moving it on to the government,” the senator explained where the report is headed next. The Agricultural Committee drafted its recommendations, intending them to go to the government as policy recommendations. Legislation was not the primary goal of the report. “We see policy and financial instruments as being the place where this report plays the greatest role,” Griffin said. “And by financial instruments, I am referring to the capital gains tax exemption being raised for eligible farm property.”

After tabling the report, Senator Griffin and her Committee remain hopeful for the future of farming in Canada, reflected by the sincerity of the stakeholders who participated in their work. “We’re dealing here with very knowledgeable people, some of whom have been on the land all of their lives. They put their heart and soul into it, and they’re looking ahead into the future – both for themselves and for their land,” she concluded. “I imagine all farm families feel the same way. There is quite an attachment to land.”