Compared to mutual funds, farmland investment looks pretty good right now.
Most people with mutual funds have taken a big hit during the past year. Ironically, financial advisers have often urged farmers to diversify their investments. Ignoring mutual funds has been a paying proposition in the past couple of years.
It can make passing the farm to the next generation easier if there are significant off-farm assets and mutual funds are supposed to be viewed as long term. You only crystallize a loss if you sell. However, many people are wondering if they have enough years left before retirement to recoup this big crash in values.
While grain prices have dropped dramatically from their peak in the middle of last year, the sector is still optimistic. With fertilizer prices coming down, there's a reasonable chance of making a profit in the grain industry this year.
In many cases, cash rents are softening. Unlike last year, there doesn't seem to be the opportunity for huge returns and that is being reflected in rental agreements that are up for negotiation.
Land prices, on the other hand, continue to strengthen. Top farmland in many parts of Saskatchewan has been trading hands at values of around $200,000 per quarter. That's $1,250 an acre. Even these top values are cheap compared to farmland in other jurisdictions.
As a farmer, if you buy land, you're also a land speculator. A piece of land usually has a tough time paying for itself, but you can make a lot of money or lose a lot of money depending on what land values do.
The last few years have seen organized outside investment in Saskatchewan farmland. Typically, these investors have purchased land and rented it back to a producer, often the producer who owned the land to start with.
The rental income doesn't make the investment companies a big return, but their bottom line looks very good in a rising land market. Leveraging investor dollars with borrowed money accentuates the upside, but would do the opposite in a falling market.
And values don't always increase. Starting in the early 1980s until the early '90s, Saskatchewan farmland values declined steadily.
At this point, grain land is in sharp contrast to land for grazing and hay. The cattle industry is in turmoil. There's been a big sell-off of the beef breeding herd, meaning less demand for grazing.
During the years, a number of government programs have encouraged producers to seed marginal grain land back to grass. This was considered the right thing to do from both an environmental and economic viewpoint.
These days, producers who have sold their cow herd are likely to take a look at their hay and grazing ground to see if it can be turned into grain production.
The Saskatchewan government has a program to sell Crown grazing land to leaseholders. Some producers who have looked into it say the government's asking prices are way too high given the state of the cattle industry.
But things are very different in the grain sector, which dominates Saskatchewan. These days, the grain industry and, therefore, land prices are running countercyclical to the rest of the economy.
You can find analysts who are extremely optimistic about the future of the grain sector and you can find others who claim the declining world economy is going to cause a crash in grain demand.
Many large grain producers rent most of their land rather than owning it. They've separated, at least to some degree, the business of grain production from land speculation.
For many others, the value of land has a big impact on their net value. They may not get rich farming, but if land values continue to escalate they might retire with a tidy nest egg. These days, that looks like a better retirement plan than mutual funds.
Kevin Hursh is a consulting agrologist and farmer based in Saskatoon. He can be reached at kevin@hursh.ca.