On March 27, 2024, Farm Credit Canada introduced its newest metric to provide insight into Canadian farmland prices, the Farmland Affordability Index (FAI).

Defining and Measuring Farmland Affordability Index (FAI)  

The FAI is a ratio of farmland purchase-related costs (annual payments on newly purchased farmland) to the income potential from the land. This ratio is indexed to 2020 as the base year, to compare the development before and after the pandemic. The higher the ratio, the less affordable it is to purchase farmland as a greater share of revenue is needed to service debt.

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Assuming a land purchase with a down payment of 25% and a loan amortized over 25 years, the annual repayment (principal and interest) will be based on the mortgage interest rate and principal loan amount. The denominator i.e., returns on each acre of land, is measured by using farm cash receipts divided by the number of seeded acres.  

An increase in the FAI (Farm Affordability Index) suggests that the cost of purchasing farmland is growing faster than the income it can generate. This implies that while existing farmers might benefit from an increase in asset equity, the comparative expense of farmland is becoming disproportionately high relative to the potential revenue it can yield.

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FAI Supports Past Trends

Figure 1. corroborates our brokerage's observations and experiences over the last two decades, notably the influx of Alberta farmers into Saskatchewan between 2004 and 2014. During this period, a substantial amount of farmland in Saskatchewan was purchased by Alberta farmers. The FAI indicates Saskatchewan was significantly more affordable than Alberta during that decade. However, as the FAI for both provinces converged post-2014, Saskatchewan's attractiveness lessened leading to a decrease in land purchases by Alberta farmers in Saskatchewan.

FAI Deterioration in Western Canada

Farm Credit Canada's analysis reveals that farmland affordability in Saskatchewan has reached its lowest point since the early 1990s, making it the least affordable among the prairie provinces. Although the Farmland Affordability Indexes (FAIs) for the prairie provinces have been closely aligned since around 2014, Saskatchewan's current FAI is slightly higher than those of Alberta and Manitoba, nearly matching British Columbia's levels.

Going Forward

Farmland values are a complex function of many factors, but the two most important are farm cash receipts (farm income) and interest rates. A forecasted drop in 2024 farm cash receipts attributed to decreasing commodity prices and total sales combined with the expectation of constant interest rates will exert pressure for farmland values to stabilize or, dare I even say, soften. It will largely depend on how much farmland becomes available for sale after the 2024 harvest. If the uptick in farmland for sale trend continues, more sellers will compete for fewer buyers. What is the old saying, “high prices take care of high prices”? Only time will tell.

Ag Expert Insight
Leveraging the Farmland Affordability Index information, we can guide both buyers and sellers in making strategic decisions. For sellers, understanding the FAI's upward trend signals a potentially lucrative time to list their farmland, capitalizing on increased asset equity. Buyers, on the other hand, can use the FAI to identify periods of relative affordability or strategize purchases based on projected income versus land costs. Our role is to offer tailored advice, helping clients navigate these dynamics to optimize their investments or expansion plans with the FAI as a crucial tool in their decision-making arsenal.