There’s a question that haunts me when I’m lying in bed pondering what The Hands that Feed Us is really about: Are we at risk of reverting to feudalism?

My fear is that we will end up in a situation where land is owned by large, absent land-holders who demand a tax from the farmers who actually live and work on the land. Roughly speaking, this feels like feudalism, where land was divided into fiefdoms owned by lords who were supported by their vassals — the people who actually worked the land.

That’s a fairly simplified picture, and it encompasses lots of assumptions about who owns land, who farms land, and who should own land. In this day and age, we imagine that private individuals own land, farmers farm it, and ideally those two people should be one and the same. Reality is messier. While there’s plenty of farmers who own their land, lots more farmers rent or lease — and the most common situation is probably a combination of both.

But, we are shifting from a world where ownership was the norm to one where renting or leasing is the norm. Renting is a step towards feudalism: it creates a landlord, who is paid rent from the farmer who is using the land. The shift towards rented land is driven by land values. Buying farmland is cost prohibitive from a pure business perspective; it could take decades for a piece of land to pay for itself. Sometimes, the time scale is longer than the expected career of the farmer!

The cost of renting or leasing land is reasonable by comparison. No sensible farmer is willing to pay more for land than the value of the crops that will grow there, which means farmland rents are not disconnected from the cost of growing food the way farmland prices are. In short: Renting or leasing is cheaper than buying.

Some concrete numbers might be illustrative: Farmland on Vancouver Island averaged $57,500/acre in 2019. In central Alberta, it was $4,327/acre. Rents are harder to estimate, but I know of a farmer on Vancouver Island who was renting land for $250/acre per year. In central Alberta, it’s more like $70/acre per year. That means on Vancouver Island, you could lease the land for 230 years before you paid as much rent as the purchase price. In central Alberta, the land could be yours in 70 years. No wonder leasing is becoming the norm!

That’s not the whole picture, because you can get a mortgage to purchase land. At our historically low interest rates, 3% is a plausible interest rate, which means you could finance land on Vancouver Island for about $1,725/acre per year or in central Alberta for $130/acre per year. Of course, that’s if you’re paying the interest alone, without ever putting any money towards the actual purchase price. Even at these low, interest-only rates, it’s shocking how much more expensive it is to pay interest than rent. That amount is easily enough to be the difference between a farm making a living and not.

What’s crazy is that in some parts of the world (UK, US, New Zealand), this is a realistic scenario. You can legitimately get an “interest-only” mortgage where you are not expected to pay down the loan as long as you keep making interest payments.

It’s at this point where I start worrying about feudalism. To me, an interest-only mortgage looks like the bank saying this: We know that land is too expensive for you to buy, but don’t worry! We have a solution. We (the bank) will buy the land for you. All you have to do is pay us rent (interest), and we’ll let you farm the land.

Admittedly, a 35- or 40-year mortgage, which approaches the career length of a farmer, is already a bit like this, but at least there’s the pretense that you’ll own the land once the mortgage is paid off. An interest-only mortgage is a step away from that pretense: There’s no longer even the expectation that you’ll pay down the principal. That looks a lot like the scenario I was worried about: A large, absent land-holder (the bank) that demands a tax (interest) from the person actually using the land (the farmer).

Interest-only mortgages are the bank’s solution for high land prices. Land prices have gotten so high that it’s fantasy to think that farmers could afford to buy land on the basis of what they earn from the land. If the banks don’t provide interest-only mortgages, it won’t be long before their market of borrowers — farmers — dries up. Farmers who can’t afford land don’t buy mortgages, so it’s in the bank’s interest to find ways to help farmers afford them. If farmers don’t buy keep buying land, the market crashes, the bank’s existing mortgages go underwater, and the bank loses a bundle of money. So the bank has considerable incentive to keep land prices high and mortgage money flowing.

Luckily for banks, not only do interest-only mortgages make it possible for farmers to afford mortgages, they also cause land prices to rise. How? They make it especially easy to speculate on land. If you can borrow money at 3%, and buy farmland that is rising at 5.2% (the lowest increase in the past decade), you can take home 2.2% of the value of the land every year, without making an up-front investment. As long as you can afford the interest payments — and as long as farmland prices keep increasing more than 3% per year — it’s free money.

Free money is a pretty good way to create demand for mortgages — and farmland. And if farmland is in demand, land prices go up, and the scheme works. From a bank’s perspective, they are just growing the market by making sure more people want to buy land and helping them afford to buy it. That they are crowding farmers out of the market doesn’t factor into the equation. After all, farmers can be speculators too!

The lynch-pin here is low interest rates. The moment interest rates go above the rate that land prices are increasing, the investment starts to lose money, speculators start to sell, and the bubble pops. In our example, this happens when mortgage rates go above 5.2% or farmland values increase less than 3% in a year.

What this means is that the government, via The Bank of Canada, is ultimately responsible for pricing farmers out of the market for farmland. As a matter of public policy, The Bank of Canada (along with nearly every other central bank) has maintained historically low interest rates for a generation. This has been especially true since the 2008 recession — more than a decade ago now. That in turn has spiked farmland prices (along with real estate everywhere). The relationship between low interest rates and rising land prices is hardly a secret, so while the rise may not have been the goal of the policy, it’s hard to argue it wasn’t deliberate.

Insofar as a policy of low interest rates low pushes banks towards interest-only loans (by making it harder and harder to imagine ever paying for a piece of land with the food that can be grown on it), that policy is also pushing us towards the feudalism that keeps me up at night. The more dependent we are on banks to finance the purchase of land, the more the banks become the true owners of the land, with the ability to demand rent from those who want to use it. In the end, the banks come to resemble lords that have the power to say what is or isn’t done with land, and who can do it.

Below the banks, the people who hold the mortgages become a second rank of lords. With speculation more profitable than farming, speculators will out-bid the farmers to own the land (and some farmers will join the ranks of the speculators), and they will lease the land back to the farmers who actually want to grow food. We’ll then be in a situation out of a Jane Austin novel, where a gentleman of good standing might see a yearly income of 500 pounds from his modest estate — with inflation, perhaps more like $100,000.

That is the nightmare. We are not there yet. Interest-only loans are not yet common in Canada if they exist at all, and plenty of farmers still own their land (albeit, often heavily mortgaged). But I worry that we are on that road. Interest-only loans are a sign we are getting there, but we have gone a long way down this road already with conventional mortgages. The true driver has been low interest rates that have disconnected the value of the land from what it can produce. The banks may be the primary beneficiaries, but the overlord pulling the strings is The Bank of Canada.

Having described the nightmare, can we prevent it? An obvious solution presents itself: Higher interest rates. Specifically, change The Bank of Canada’s policy to ensure that that the cost of borrowing money is higher than the inflation rate of land. That at least eliminates the incentive to speculate with borrowed money. But, the truth is, I don’t really know what the outcome would be. Interest rates touch so many aspects of our economy that it would take a trained economist just to guess at all the ramifications of that change. I’m not an economist, but I can imagine the debate quickly descending into ideology and partisanship.

I do think a crash in the price of farmland would be a likely result. Without borrowed money to sustain the demand for land, I don’t see how prices would continue to rise. Without an incentive to speculate, who would pay a price that they could not recoup by putting the land to use? A crash seems like it would be very healthy if the goal is to reconnect the price of land to its value as farmland.

I have my doubts whether, as a nation, we are capable of making that our goal. Because a crash would be devastating to anyone who owns land, and especially to anyone who has borrowed to own land. And we have an entire generation of land owners in that situation. An entire generation of farmers has scraped by making very little off the farming itself, but they have been able to retire on the basis of how much the farmland they own has gone up in value. They have earned more from owning the land than they have from farming it. Their solvency depends on the value of their farmland being higher than the mortgages they used to pay for it. A crash would put those mortgages underwater and bankrupt a great many of the farmers that own land right now.

In a sense, we may already be too far down the road towards feudalism to turn back. The generation that owns farmland right now are effectively (though not intentionally) lords-in-waiting. They are the last generation that could realistically buy land out of the proceeds of their labour, but they have also built their businesses on the rising market value of their land. Healthy as a crash might be, it would be a betrayal of a generation that was encouraged to view their land as an investment as well as a place to farm.

So, we have a choice to make. We continue treating land as an investment, and we give up on the idea that the person who uses the land should also be the person who owns it. That is my nightmare, and it leads to a feudal world where ownership of land determines social class. Or, we find a way to recouple the price of land with its underlying economic value, and somehow compensate all the existing land-owners who lose out when the bubble pops.