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The Economic Consequences of Farmland Policy on Farmland Values in Saskatchewan - March 27th, 2018
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Brady Deaton: Welcome to FARE Talk where we set out to provide enduring discussions on contemporary topics relevant to our economy with particular emphasis on food, agriculture and the environment. My name is Brady Deaton Junior of the Department of Food, Agriculture and Resource Economics at the University of Guelph. I will be your host. [music ends]
Brady Deaton: Today is March 27th, 2018, and my guest is Chad Lawley. Chad is an associate professor in the department of agribusiness and agriculture economics at the University of Manitoba. Chad, welcome to FARE Talk.
Chad Lawley: Yeah, thanks for having me, Brady.
Brady Deaton: We're going to be talking about your paper that you recently published in the American Journal of Agricultural Economics entitled Ownership Restrictions and Farm Land Values, Evidence from the 2003 Saskatchewan Farm Security Act Amendment.
Brady Deaton: Now, that's a lot of long title. But let's just start breaking that down. So, what are ownership restrictions on farm land? How do we think about that?
Chad Lawley: Yeah, so I think there have typically been two different types. In some cases, states or provinces will restrict corporate ownership. That's the case in North Dakota. I think in the 1930s, in North Dakota, the state put in some anti-corporate ownership restrictions. There was a fear at that time. Some of their farms were going bankrupt, and institutions were taking over their land, and there was concern that they would have a large impact on the landscape, in terms of sort of non-farmer.
Brady Deaton: So they wanted farmers, farm families, farm individuals to be owning this farmland. They didn't want a corporation to be farming there.
Chad Lawley: That's exactly right. That's right.
Brady Deaton: Wow, so this is a historic issue.
Chad Lawley: It's in the 1930s and it's recently, I think 2016, this ban of corporate ownership was maintained in North Dakota. Another kind of common ownership restriction that took place in the 70s and 80s in North American are bans on quorum ownership. If you're a resident outside of the country, say it's out of the states or outside of Canada, you're prohibited from owning farmland. There's several states and provinces with that type of legislation and I think by the 1980s over half of the farmland in Canada and the US would have been under foreign ownership restriction.
Brady Deaton: I noticed in your paper ... By the way, for those listening, we'll put a link to Chad's journal article so that you can read that, but I think you mention in the paper that something like 30 US states by the 1980s had foreign ownership restrictions. Is that about right?
Chad Lawley: Yeah, it sounds right. There's a lot of talk about it. I think there was a 1978 GA report on concerns about farmland ownership. I think by the mid 80s, that sounds right. About more than half of the US states had foreign ownership restriction.
Brady Deaton: Canada as well, and many provinces do, and still do, right?
Chad Lawley: Yeah, that's right. Alberta, Saskatchewan, Manitoba, Quebec, Prince Edward Island all have restrictions on outside investors, outside owners.
Brady Deaton: For those listening in Ontario, Ontario really doesn't have similar restrictions to those provinces.
Chad Lawley: Yeah, that's right, and same with British Columbia, as I understand it.
Brady Deaton: Right. There are to get the tax break on farmland, which is generally 25% residential. You have to be a Canadian citizen.
Chad Lawley: Right.
Brady Deaton: There are disincentives, I suppose.
Chad Lawley: Yeah, that's right. Some of these foreign ownership restrictions are blunt instruments right there, a complete down on ownership if you're not a resident.
Brady Deaton: There's this foreign ownership restriction but in the case that you're looking at in Saskatchewan it's even more than that, right?
Chad Lawley: Yeah, that's right. Saskatchewan is unusual in that starting in 1974 with the Saskatchewan Foreign Ownership Act only Saskatchewan residents or agricultural corporation were allowed to own Saskatchewan farmland, so quite a bit more restrictive than restrictions we saw in other provinces and states.
Brady Deaton: The other provinces would have allowed citizens from any other province to invest in farmland but now Saskatchewan in 1973 disallows any other provincial government, somebody residing in another, any other Canadian citizen except someone residing in Saskatchewan. Is that right?
Chad Lawley: That's exactly right. Completely isolated the problems from outside investment.
Brady Deaton: I know you talk a little bit about the report that led up to this decision in 1973. What's the kind of ... Give us a general overview. What was going on? What were they concerned about? What was going ... What were the issues that they were debating at the time?
Chad Lawley: The new democratic parties, or the left of center party was in the power in the province at the time. A committee was formed to look at farmland ownership and so they toured the US Midwest. They went to North Dakota. They went to Colorado to look at the types of restrictions on ownership there. They did a tour of Saskatchewan as well. The overriding concern at that time was rural depopulation. There was this concern that in general farmers were leaving agriculture and going to the city. Rural communities were being depopulated. It was reducing amenities and services within those rural areas, that this rural way of life was being threatened. There was also a concern that young farmers weren't getting into agriculture.
Brady Deaton: In 1973, they basically then disallowed, so only residents of Saskatchewan can purchase farmland. Take us through to ... Does it stay that way? I think you're looking at a change that occurs in 2003. Is that right?
Chad Lawley: That's correct. That's correct. Legislation comes in 1974. It's interesting so that special committee from the report recommended that ownership be restricted to Canadian residents but in fact, the legislation that was put into place was more onerous and more stringent and restricted ownership to just Saskatchewan residents.
Brady Deaton: Do you have any idea why they overstep that? It's interesting.
Chad Lawley: I don't. I couldn't find any documentation there. The special committee report is the last word that I see and then the legislation's in place.
Brady Deaton: The committee says, "Uh, restrict foreign purchases of farmland," and they say, "We'll go further than that."
Chad Lawley: Exactly.
Brady Deaton: "Nobody except unless they're a resident of Saskatchewan can purchase farmland.
Chad Lawley: That's right. It's very unusual. No other state or province did that.
Brady Deaton: At the start, the legislation was restricting ownership to Saskatchewan residents or someone residing within 20 miles of the Saskatchewan border so you could be 20 miles in Manitoba, into Alberta, or into the Unites States.
Chad Lawley: Post that additional legislation there are small changes put in place in the 1980s, the legislation, one of which is removing in that 20-mile buffer around Saskatchewan. In 2002, there's this legislation that's revisited and then in 2003, investment is opened up to Canadian residents and [inaudible 00:07:32] corporations.
Brady Deaton: Do you have any sense of ... This is interesting. In 1973, we have the subjectives for real unique farmland restrictions, unique in North America. Only people in the province could buy it. By 2003, and that's really the focus of your research paper, this changes is relaxed.
Chad Lawley: That's right.
Brady Deaton: Why? Why? What happened?
Chad Lawley: Right. I suppose it's always touch to know for sure.
Brady Deaton: Sure.
Chad Lawley: In 19, say the mid 1970s, it's a time of high agricultural land prices. There's a thought that this type of legislation is being imposed. It's to reduce local competition for farmland to keep out prospective buyers from outside of the province and allows local farmers to more competitively bid on that land. Asset values are high as well. People want to get in, right, and there can be this momentum politically for that type of restriction.
Chad Lawley: We're going to head to 2002. At least in Saskatchewan, this is a time of relatively low agricultural land prices. They're stagnant in real terms so there's not a lot of appreciation in land values. Some commentators were suggesting that there's this baby boom that entered agriculture in the 70s. [inaudible 00:09:02] baby boomers there was a lot partners entering in the 1970s. Then now those farmers are ready to retire and they'd like to sell their farmland into a liberalized market where there's more competition for the land. Now, it's politically feasible for the government to open up competition for the land.
Brady Deaton: Right. It's interesting. In times of high prices, it seems historically we've had these concerns about foreign ownership, corporate or nontraditional investments, investors in farmland. I guess they could use the word institutional investors for groups that are, corporations that are going out investing in farmland as an investment. These concerns seem to occur in times of high prices. I say that because we are in an escalating high land value in general but farmland in particular. Many of the concerns that you were talking about in 1973 are again emerging so I think your study's very interesting in that sense.
Chad Lawley: We're seeing it all over the world, too, so Australia is revisiting foreign investment in farmland. Just recently, Missouri's been revisiting this. Of course, North Dakota, Iowa, Wisconsin, I think it's come up. It's in the news again at this time of high prices.
Brady Deaton: Right, but in 2003, that legislation might not have occurred if we were in 2017, 2018.
Chad Lawley: Yeah, if that amendment ... Yeah, totally.
Brady Deaton: Then in 2003, it's relaxed, and that's really where your study comes in. Is that right?
Chad Lawley: That's exactly right so I'm looking at the impact of that 2003 amendment that opened ownership of Saskatchewan farmland to non-Saskatchewan residents, so to Cana dial residents and agricultural corporations.
Brady Deaton: You open it up. What's the expectation? Before you do any analysis, what would one expect? You're opening up a market for investment for this demand. You'd expect demand to shift out, prices go up. Is that a reasonable ...
Chad Lawley: Yeah, that's basically what we're looking at. There's this increase in number of buyers, an increase in demand for Saskatchewan farmland and we think of supply of farmland as being fairly [pricing elastic 00:07:32]. Even a small change in demand might cause a pretty big increase, a pretty big change in price.
Brady Deaton: All right. This is one of the really unique things that the listeners should know about your study, is it's a really careful detailed study to try to get at the magnitude of this price change over time. Obviously, we can't into that much detail over the podcast, but give us an idea of what the experiment is, what you controlled for, who you set it up with the data.
Chad Lawley: Sure. I'm looking at Saskatchewan farmland transactions and I use a similar farmland transactions in Manitoba as a control. I'm using 1995 to 2010 transactions so I've got a window before this 2003 amendment just for looking at farmland values in that period. Then I'm also looking at farmland transactions in a window just after the amendment, or for seven to eight years.
Brady Deaton: Some of the listeners maybe are not in North American, aren't that familiar with Canadian geography but the provinces of Manitoba and Saskatchewan abut each other. You're looking at a particular area of comparison between two provinces that is uniquely seated to comparison. Right?
Chad Lawley: That's a good point. Yes. I'm looking at transactions in southeast Saskatchewan and then southwest Manitoba. I grew up in Saskatoon. I'm living in Winnipeg now. I drive across that region every summer and I can attest that the landscape is very similar on both sides of the border and so we've got very similar sectors and very similar land uses in those two regions, so we think of them as good comparator provinces. Basically, what I'm exploiting is that in the 1980s Manitoba introduced farmland ownership legislation but like most or North America is just restricting ownership of Manitoba farmland to Canadian residents and corporations. Whereas of course, Saskatchewan starts off with a more stringent legislation.
Chad Lawley: Move ahead to 2003. Now Saskatchewan amends its farmland ownership laws and makes them very similar to Manitoba's. I'm exploiting that amendment in Saskatchewan 2003 and then using trends in Manitoba farmland prices to estimate the effect of this amendment.
Brady Deaton: What do you find?
Chad Lawley: I find prior to the amendment, that Saskatchewan farmland prices are losing ground to Manitoba farmland prices. After the amendment, it looks like Saskatchewan farmland prices and Manitoba farmland prices are on the same trajectory so they're increasing at the same rate. The difference between those two trends, the pre-amendment trend and then the trend after the amendment is interpreted as the effect as ten farmland ownership amendments in Saskatchewan. I find that it looks like opening up to outside investment increases farmland values by between 2% and 3% per year. It's a substantial increase, especially if you take that 2% or 3% out for eight years. It adds up to a 20-something increase in farmland prices.
Brady Deaton: Right. In a sense, as you might expect, that the shift in ... As more people have entered into the market, there's been an appreciation in land values. With respect to ... Let's just go through that. Land values increase. Some farmers, certainly from a landlord or a land owner perspective, they must benefit from that presumably.
Chad Lawley: Yes, certainly. If you owned farmland in Saskatchewan in 2002, so just before that amendment, my study suggests that you would've seen, on averages, a pretty substantially increase in farmland values just due to the amendment itself. This has been a period of increase in prices just due to improvements in the Ag sector, the Ag sector in general.
Chad Lawley: I suppose I should take a step back now and just talk about the analysis a little bit more. I'm using [inaudible 00:16:45] prices as a control for Saskatchewan prices but I'm also controlling for, or counting for changes in farm returns in the two provinces. There was significant improvement in farmland values across Canada over this time period.
Brady Deaton: Yeah, because you're trying to disentangle all of the effects that might be attributed to other things so that you can really isolate the effect of the essentially new demand that's moving into Saskatchewan due to the relaxing of the restrictions, disallowing investors from other provinces.
Chad Lawley: Yes, that's exactly right. We account for changes in the farm returns over time. We account for changes in the local populations over time, so the number of people, and then also changes in oil and gas employment over time. There is the oil boom in southeastern Saskatchewan around that time as well. It's important to account for those types of regional factors that might've put Saskatchewan prices on a different trajectory independent of this farmland ownership amendment. Once we account for all those factors, it looks like there's this 2% to 3% increase in farmland prices just due to the amendment itself.
Brady Deaton: There's just one more question on the method because it's really interesting but where do you get data to do this kind of ...
Chad Lawley: Right. Good question. The Manitoba data I've obtained from the municipal services. The individuals are doing assessments so historically they've also retained the farmland transaction data, in that data from the Manitoba provincial government. And then in Saskatchewan the, I believe its name is the farmland security board, makes this data available on a license, so you pay a license fee and then get access to land transaction data. It's nice having these actual transactions that are taking place in the marketplace as opposed to say survey responses that are being collected by the government where it's possible that a farmer incorporates impassive policy into their farmland evaluations. That might be with the marketplace.
Brady Deaton: I do some survey work and you're always hope that you get respondents revealing everything accurately, that they're not having a bad day or don't make a mistake. The great thing about a transactions involving oftentimes millions of dollars, you can be pretty sure that all of the actors involved have taken care in revealing their value for the asset and recording it.
Chad Lawley: Yes, certainly. They're in the position to collect, have the best information and they make good choices.
Brady Deaton: We have this change in prices, between 2% to 3% from annum from the 2003 period to where ... I remember you mentioned this once to me, that you were confident over the data period that you were able to analyze, not extending it too far.
Chad Lawley: That's exactly right. From 2003 to 2010, so for the first eight years of the policy. The way the study is designed, I don't feel comfortable extrapolating out that 2% to 3%. I wouldn't extrapolate that out of the south one until later periods.
Brady Deaton: Currently, we've had this change. The initial rule in 1973 was to disallow this investment, presumably to keep prices lower.
Chad Lawley: Right.
Brady Deaton: In 1973, I think I said that. Then in 2003, it's relaxed and prices rise.
Chad Lawley: That's right.
Brady Deaton: How are people feeling about this? Is there any discussion about this farmland?
Chad Lawley: Certainly. The data that I've seen on the research, that I've seen suggests that outside investment really started flowing into the province starting in 2006 or 2007. As far as media reports go, it's under the radar until maybe 2008, 2009, then start seeing news articles about the institution of investors buying up Saskatchewan farmland.
Chad Lawley: Moving ahead to about 2015, there's this controversial purchase so there's a farmland investment fund that we based out of Regina. It sells some land to the Canadian pension plan investment board. That generates some controversy so there's concern that pension plans are going to be buying up a lot of Saskatchewan farmland. In response, the Saskatchewan government held public consultations in 2015.
Chad Lawley: On the theme of high land prices, we notice again that his an era of high land prices so there are concerns about outside investment. The public consultations are interesting to read so that verbatim comments in one document spanning about 1000 pages. A lot of the comments are concerns about institutional investors, increasing competition for local farms, especially young farmers, and driving up land prices. My research suggests that there's something to that notion that the institutional investors are increasing the prices.
Brady Deaton: Are the institutional investors necessarily the investors from outside the province? I don't know if you know a farmer in [inaudible 00:22:56] actually, I think owns some land in Manitoba. It wouldn't necessarily have to be an institutional investor, would it?
Chad Lawley: No, that's right. That's right. I think they're getting more media attention.
Brady Deaton: They get that attention, it seems.
Chad Lawley: Yes.
Brady Deaton: It's kind of an interesting thing to me. How do we ... Normally, first of all, prices have been going up everywhere, both in Saskatchewan and in Ontario, and in the United States, probably [inaudible 00:23:30] factor of, they've been going up a certain amount as a result of below interest rate environment. They're relatively going back a couple of years with a very favorable spike in committee prices in 2012, 2013. Generally, I would think agriculture land values going up as being an indicator that farmland is a profitable enterprise and therefore it's not surprising that farmers and non-farmers outside of Saskatchewan would want to invest in Saskatchewan farmland. Clearly there are many who are concerned about that. Would you mind just explaining what their arguments are?
Chad Lawley: There's a concern about absentee landlords, so institutional investors or corporations are going to buy large tracts. The farmers that are on the land in Saskatchewan are going to be working for them, maybe in a world like the initial settlers into Saskatchewan and Canada were escaping in Europe at the time. I think there's a concern about being under the control of absentee land owners. I've seen a lot of concern, at least in media reports and farm groups about absentee landlords not caring so much about farmland stewardship. At least that's an argument that they're making is that these outside investors are mostly concerned about charging profits, and not even thinking about the long term stewardship of the land, whereas family farmers are looking to pass land onto the next generation, and so they've always got that long term perspective.
Chad Lawley: You know, there's also just the concern that if you have more absentee owners. There's fewer people in the countryside. Absentee owners are taking the land rents they're generating for the land and spending it on some other province that's not contributing lower goal economic development. I think those are the three, those are primary concerns.
Brady Deaton: Right. I'm hesitant to embrace whether the, for example, the 1973 act. I can see, it's clear to me that it had the effect maybe depressing land values relative to Manitoba but did you see populations persist more in a countryside? Did you see some of the arguments that are being put forward? Did that ... Because ultimately, it changed the legislation.
Chad Lawley: That's right. Yeah. I've seen no really strong evidence that the 1973 restriction prevented rural depopulation. It's persistent in Saskatchewan much like it has in neighboring provinces and states. A lot of the discussion in 2002 when the amendment was taking place was to bringing up those 1973 arguments with depopulation and young farmers, those pushing for an amendment, so loosening the ownership restrictions, where making arguments that there's a lock of investment capital in Saskatchewan. It's like you open up to it, it's an investment. Capital flows in and it allows young farmers to get into farming because instead of having to purchase all this land, they can achieve a [inaudible 00:27:10] scale through rental. They're not tying up all the capital and land.
Chad Lawley: Renter markets are big. We talked about this before but I'm thinking Ontario, it's roughly 30% and Canada roughly 40% of the farmland is in the rental market. I'm not exactly sure what those figures are in Saskatchewan and Manitoba but ...
Brady Deaton: Yeah, it's double digits.
Chad Lawley: That's right. Yeah, it's significant, and ...
Brady Deaton: For some time. This is not a new thing.
Chad Lawley: Yeah, that's exactly right. One thing the legislation didn't do in the initial farmland ownership restriction is that in Saskatchewan is that there were no restrictions on whether or not the landlord had to be an actual farmer. Probably lots of cases of urban residents in the Saskatchewan or Regina owing farmland. They're very separated from the farm but renting out to farmers so that there's no restriction on whether I've got to be a farmer or not-farmer where the rental income is being spent. It's a blunt instrument in that sense.
Brady Deaton: I guess the 1973 guaranteed that the person renting your land was residing. If you're a farmer, you're renting from a person. Let me get straight. Prior to 2003 if you were a farmer you would be renting for sure from a person that resided in Saskatchewan.
Chad Lawley: That's exactly right, but they're not necessarily farmers.
Brady Deaton: They're not necessarily a farmer.
Chad Lawley: They're not necessarily local so that if there's a spot that they want to retain land grants within the province. That's being accomplished but it's not necessarily in this local community. It's where table, the farmers might want the money grants to stay.
Brady Deaton: Chad, your paper leaves clear empirical findings. From a public policy perspective, for someone listening out there in the government, what is the key takeaway from your study?
Chad Lawley: Yes, I think two governments over time have been responding to signals they're getting from say the agricultural community and what was seen is the signals that government's responding to are concerns about depopulation, about farmers getting into agriculture. This blunt instrument was put in place and it looks like it has [inaudible 00:29:36] land values. It looks like it has the intended or expected impact. The 1974 legislation would've depressed Saskatchewan farmland prices. Then the 2003 amendment would've, it looks like it increased Saskatchewan farmland prices. These government policies can matter. It's really important to farming assets, farmland.
Brady Deaton: They can change the price of farmland but whether they can change longstanding trends in agriculture and rural populations, I guess that remains to be studied.
Chad Lawley: Yes, that's exactly right.
Brady Deaton: All right. Well, Chad, thanks very much for speaking to us on FARE Talk today. Thanks for your research.
Chad Lawley: Yeah, thank you for having me.
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