“Of all the things I’ve lost, I miss my mind the most” – Ozzy Osbourne
It is a special day when I get to use an Ozzy quote in any of my blogs! It is fitting as we discuss land prices and the fact that Western Canadian farmers are still in a seller’s market. If I hear the question, “What is land going to do?” one more time I just might start quoting Ozzy in my everyday life.
Let’s get to it. The good, the bad, and the ugly of land today.
When I get asked by entrepreneurs outside of agriculture why our business practices are so far behind, I often lead with the same line “farmers became millionaires overnight, and nobody ever told them”. It’s the truth in most cases, as over the last two decades we have seen unprecedented accumulation of equity and wealth in land. If you were lucky enough to farm and grow in acres over this period, you were rewarded with what most market investors would call a 10X. I bought my first quarter of land for $60K, and guess what, it was overpriced. This is the running joke as land has “always” been overpriced.
So here is the good – we have more wealth and equity in agriculture than at any point in our past (even inflation-adjusted). To look at land values negatively, as most of my clients do, would be ironic. We could always go back to the 80s and try to farm because I am pretty sure that was no joy either. Land values have made the “family office” more money than most people will ever make. That is why the government continues to attack farms, they are the top 1% wealthiest business owners in Canada. The secret is out.
Starting a farm today is not possible without help. Don’t shoot the messenger, but the truth is if you are outside the industry and looking to start farming you better focus on networks and relationships. As the “large farm” hatred gets larger, you may have a higher possibility of working with someone who doesn’t want to see this as their legacy. But know that with the amount of capital and financing required to start farming, you are behind the eight ball.
In terms of succession, there will also be limits. I have always said the worst part of my job was having a small acre farm come into my office and want to discuss succession. “I wish you had come ten years earlier” is often my best answer. The time to work on succession, and growing the farm to the right size for multiple families, is before it happens. When your children are ten and just starting to ride the tractor. If you don’t start then, you better be large enough to split the farm in half and still pay for the life you want. The price of land will have the largest effect on your transition planning. If there is no money, talking about feelings and roles between family members is irrelevant.
Another secret out of the box – it is not investors that are leading you to your demise. This is the case in some situations, but in most, farmers are cannibalizing themselves. Investors have a bottom line that they need to consider, and whether that is an annual return of 1% or 3%, at today’s prices this is not often attainable. However, average that interest or rent over an entire farm and you can make the numbers work. Or lie to yourself enough to make the purchase.
Most of my discussions these days are about whether you are buying land for succession, investment, or operation. If succession, see above for my points on growth for the next generation. If investment, land is still averaging above 10% return on investment per year so if interest is around 6%, it still makes sense (whether you can service this debt is another discussion).
The part that gets missed today is operations. You will not make money on that land at today’s interest costs and today’s margins. If you pay cash that’s another story, but unless you are averaging the cost of capital over all your acres you will not make money on these new acres. You will farm them for a loss, in essence, more work less money. But overall, the investment side still will yield a return.
Do I believe land will ever drop? The million-dollar question.
If it does, there will be many operations in Western Canada that will be under-secured on their land debt, I know that. I also know that right now land is an inflationary hedge, a real asset like gold, and we have more working capital and equity in agriculture than at any point in the past. In the end, you can’t make more. And for that reason, land may continue to be too much of a good thing.