100 Years of Saskatchewan Farmland Values: Is a Market Correction Coming?

Saskatchewan farmland values have reached all-time highs, sparking questions about what comes next. Agricultural real estate expert Tim Hammond and market analyst Trent Klarenbach dive into over a century of inflation-adjusted farmland data. They use technical analysis tools like RSI, trendlines, and Elliott Wave theory to figure out what the charts are saying now and what that might mean for the future of farmland values.

The Human Element in Market Trends

Trent Klarenbach, a grain marketing analyst, has spent years applying technical analysis to various markets, from red lentils to Durham wheat. He believes that while market conditions change, human behavior—driven by fear and greed—remains constant. This consistency allows technical analysis, a study of market psychology, to be applied even to less liquid assets like farmland. He started looking into farmland values after a friend pointed out patterns resembling Elliott Wave theory, which suggests markets move in predictable waves.

Unpacking the Data: A Century of Farmland Values

To analyze Saskatchewan farmland values, Trent gathered data from StatsCan going back to 1921. The challenge was normalizing this data, as nominal values have soared from around $29 per acre to over $2,000. To make sense of it, he converted all values to 2023 dollars using the Bank of Canada's inflation rate calculator. This approach allows for an "apples-to-apples" comparison, showing the real purchasing power of farmland over time. It also helps assess if farmland truly acts as a store of value and a hedge against inflation.

Tools of the Trade: Technical Analysis Indicators

Trent uses several key technical analysis tools to understand farmland trends:

• Trend Analysis: Identifying where a trend begins and ends to follow its direction.
• Support and Resistance Levels: Price points where buying or selling interest is strong, often causing prices to pause or reverse.
• Relative Strength Index (RSI): An indicator that shows if an asset is "overbought" (above 70) or "oversold" (below 30). High RSI values often signal a potential market top.
• Fibonacci Retracements: Ratios derived from the Fibonacci sequence used to identify potential support and resistance levels.
• Elliott Wave Theory: A theory suggesting that markets move in predictable wave patterns, with five impulse waves in the direction of the main trend and three corrective waves.

Trent notes that while farmland is not very liquid, its price movements often mirror those of more liquid assets like the S&P 500 or gold, showing similar chart patterns across different timeframes.

What the Charts Say About Saskatchewan Farmland

Trent's chart, which plots real Saskatchewan farmland values in 2023 dollars on a logarithmic scale, reveals some interesting patterns:

• Upward Channel: The price has generally moved within an upward channel, indicating a strong long-term uptrend. Currently, the price is testing the top of this channel.
• RSI Signals: The RSI for Saskatchewan farmland is currently around 96, a very high "overbought" level. Historically, similar extreme RSI readings (like 85 in 1981 and 91 in the late 1960s) have preceded significant market corrections.
• Historical Retracements:
  • From 1922 to 1941, real farmland prices dropped by about 54% over 19 years.
  • From 1968 to 1973, there was a 21% drop.
  • The 1980s saw a 12-year decline from 1981 to 1993, with a 63% drop. This decline hit a 61.8% Fibonacci retracement level, a significant point in technical analysis.

Key Takeaways

Is a Market Correction Coming?

• High RSI: The current RSI of 96 suggests farmland is significantly overbought, similar to past periods before major corrections.
• Testing the Channel Peak: Prices are at the top of their long-term upward channel, a point of interest for potential reversals.
• Two-Year Exponential Moving Average (EMA): A 5% drop in values would push prices below the 2-year EMA, historically a signal for further downside. Past breaks below this EMA led to significant, multi-year declines.
• Historical Support Levels: If a correction occurs, technical analysis suggests a potential pullback to the previous high of 1981, which would represent a 50% retracement. An 80% drop, while hard to imagine, is also a possibility based on historical support levels.

Market Dynamics and Affordability

• Inventory: Since 2010, farmland inventory for sale has been low, driving prices up due to high demand. Recently, inventory has started to increase, though demand remains strong.
• Affordability Index: Saskatchewan farmland, despite being perceived as cheaper, now has the highest land affordability index in Western Canada. This means it's the most expensive to buy based on the income it generates, making it harder for the land to cash flow on its own.
• Rental Rates: Rising rental rates suggest that farmers are opting to rent rather than buy, indicating a shift in strategy due to high purchase prices.

Final Thoughts

While no one can predict the future with certainty, the technical indicators suggest caution for buyers and an opportunity for sellers. The market is at a critical juncture, and understanding these historical patterns and technical signals can help landowners, buyers, and sellers make informed decisions. The human element, with its consistent patterns of fear and greed, continues to shape market movements, making technical analysis a valuable lens through which to view the future of Saskatchewan farmland values.