Saturday, March 15, 2014

The Right Time for Rural Land in BC's Interior

There are always junctures that provision an entry point to a market, it maybe that in British Columbia Agricultural land is at that point. There is a large inventory of substantive properties available, this large inventory has suppressed price of late – under 1 % per annum increase in the price since 2008. This flattening of the curve, seemingly at its nadir, has taken place with interest rates at an all-time low. There is a matrix of influencing factors that affects land prices, the ability to buy land and the ability to support that purchase ultimately are the key determinants in price setting.

Agricultural Lands in British Columbia have prices far beyond the ability of agriculture to support, agriculture land quality or capacity affects prices, but in no way accounts for the full value or the floor on land value. In British Columbia only 2.5 percent of the province is arable land, 95% of the province is crown land, couple these realities with the Canadian / Western cultural inclination to want to own land and one realizes that British Columbia ought to be exceeding the national average.

The matrix below indicates the degree to which BC has lagged the balance of the country in property price increases.  

Data - Farm Credit Corp.

The graph below indicates how little agricultural activity affects land prices; only when the orange line is below 1 are fundamental farm factors supporting price, if that is true of US crop land it is likely to be true of BC as well, perhaps more so given this graph focuses on cropping land. 

 Data - USDA

The challenge we face in BC is in having agricultural properties being self-supporting entities. Various farm types are more affected than others, note Beef Cattle operations in the matrix below – it has historically been the case that cattle have failed to carry land ownership cost or to withstand opportunity cost assessment.

Data - Farm Credit Corp.

Presently, throughout the province there is a large inventory of Ranch properties and prices are remaining flat, even, as stated above, in the face of low interest rates.  Throughout the interior, the predominate agricultural activity is ranching and ranching is presently enjoying a relatively good period – improved cattle prices and low interest rates, so one may deduct that the agricultural activity on ranches is less influencing on price than is ancillary factors (as supported by the USDA graph above & FCC quote below). There has been a long evolution in the lumber industry that has reduced labour requirement, thus, stifling local economies, add to that the violent correction in the US housing market (mitigated to some degree by exports to the Chinese market) and the interior has had slow growth for an extended period of time.

“Farm Credit - Agricultural Land Value Report October 2010 - British Columbia was the only province to see a decrease in farmland values by an average of 0.9 per cent over the first six months of 2010. Values were unchanged in the previous reporting period and decreased 0.7 per cent in the first half of 2009.In the first six months of 2010, economic factors largely external to agriculture had the greatest influence on farmland values. Economic uncertainty and the high Canadian dollar hindered investment in many sectors. This, in turn, led to lower demand for land and less expansion of existing operations. Overall, the B.C. land market was relatively flat during the first six months of 2010, with slight decreases in the Abbotsford, Clinton and Cloverdale regions. Sales of land for agriculture purposes were limited in some areas of the province.”

It is the sense of the writer that the US housing market will show mild improvement until about 2018 and at that point it should move into a long and strong growth pattern. This prediction is based on the belief that there was a confluence of cycle ends – major economic cycle, business cycle and technology cycle and well as, the resulting the commodity supper cycle correction or slowing – all of which collided with a grotesques financial deepening to create the down turn in 2008 – the real world economic cycles are now, one by one, running their course. One would anticipate that the inverse of 2008 will be true in 2018 – this thesis is shored up to some degree by severe downturns, 1930 etc., normally taking a decade to recover from.

It seems a prudent time to build an inventory of agricultural land, the inventory of ranches for sale is high, there have been recent sales that have effected downward pressure on the market. Anecdotally, one is noticing a larger number of price reductions occurring on listed properties. So with a large inventory and market picture with positive characteristics; the question then remains, which properties  are best positioned to garner increased value.

It has been established quite clearly that agricultural actives, particularly cattle ranching, are a means by which to maintain lands functionality but offer little support to ownership. One then considers ancillary attributes in the selection criteria; proximity to urban centers, timber assets, tourism attributes, companion enterprise opportunities - attributes that can build returns on the land. There are many such properties available now, one needs only to develop operations that carry the land assets with respect to fair returns and the land appreciation is a clear capital gain.  If one observes the first graph for the period starting 2001 through to 2006 exceptional gains were made; there is every reason to believe that we are approaching a similar cycle – starting in and around 2018.

Real Estate - Agriculture Works

Sunday, March 9, 2014

Supply Management Reform – Dairy Industry - Conference Board of Canada

It is clear that in Canada the supply management system needs to be reformed, specific to dairy, the interests embedded in the present regulatory modality of conduct are retarding the industries growth. As an individual that wants to enter the industry at a scale and at a pace that are practical, as an individual that attempted to seek the support of the present industry complex to engage in business and was in effect rebuked for my efforts, there is no one more enthusiastic to see reform here. I have faith that there is a viable place on the WORLD stage for the Canadian Dairy industry, the question is “how to shed the baggage of the present supply management system”. This posting is in response to the Conference Board of Canada’s Report – REFORMING DAIRY SUPPLY MANAGEMENT, THE CASE FOR GROWTH. This is an outstanding piece of work and warrants study by anyone that wants to see the Canadian Dairy industry removed from the constraints of the past.

 The report does an excellent job of quantifying the industry and the cost of supply management. It understates or to some degree or neglects to stress the mass of capital that is sitting latent, at a market value of 23 Billion dollars, the cost of quota ownership zaps the industry of vital resources. The report shows the 600 million dollars or so each year that it costs farmers to finance quota, it fails to project where farmers would be if they had those resources deployed toward production rather than licensing.
 Also absent was a quantification of the regulatory overhead the industry now carries, other industries are absent Boards to management them, the market manages itself. The incremental increase in product of $260 per family per year would be more tolerable if farmers were getting it, but much of it flows to the administrative aspects of the regulatory process.

 The new industry vision is a welcome expression of a brave and viable way forward with strong argument to support it. There is no doubt the present state of the industry and the regulatory regime it is affected by is stunted, both domestically and internationally. I personally attempted to start a dairy related business that in no way diminished incumbents in the industry, was innovative and at scale and would eventually integrate with the present system – it was met with near violent opposition.
 The present industry quota value of $23 billion is massive, yet the report suggested that we buy the industry out at approximately $5 billion. One understands the rationale presented in the report, the vintage of the quota affects the cost or benefit of ownership; the fact remains however, that any dairy farmer now in possession of quota can sell it for fair market value – to institute a transition strategy that deviates from fair market value is going to meet resistance from the industry regardless of whether one can pencil out a justification. The challenge is that Quota in viewed as an, and is a, asset with a market value, producers if not reimbursed at FMV will be in a position of loss relative to the status quo. One can make the argument and demonstrate relative advantage to one producer over the other; however, you are saying to the industry with quota valued at 23 billion that the buyout is 5 billion - it is a hard sell.

 The quota system was developed by government and it generated quota that had value, at issuance as much as later, the presence of value is substantiated both by the rationale for creating quota and by the subsequent valuation that evolved via government sanctioned and created exchanges. The report states “And the policy can be justified because, as a matter of law, new entrants were required to buy quota as a condition of entry into the business whereas the initial quota allocation was issued at no cost. This approach takes the position that farmers should not need to realize a capital gain on their quota asset funded by taxpayers or consumers.” This is analogous to  the government asserting that because a family has had land since it was homesteaded, or granted by government, they it should be valued less upon expropriation than a family's land the was purchased shortly after. The key consideration here is the government defined and permitted the quota system to evolve and the value in quota was a product of government intervention in the market place. The government chose to effect a subsidy, the license to garner that subsidy had and has value. The transition needs to be equitable yes, the math does count, it must be just as well. It is unfair that consumers have subsidized approximately $260 / household / year – the government intervention in the market generated this unfairness. It would be unfair also to take from farmers an asset that has been held and sustained at the cost of opportunities for gone. 

Transition needs to be as rapid as possible and government will have to pay. The farmers should receive the FMV for the quota over ten years, said rights transferable by sale.  The government can finance this transition from debt, the increase in production and expansion of industrial activities via the export markets will likely go a long way to paying the bill over the buyout period – it surely will over time.