Low growth forecast for farmland value

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A new phase of low growth is ahead for Australian agricultural land prices, according to the Australian Agricultural Land Price Outlook report.

Low growth forecast for farmland value
The highest farmland value growth last year was in Tasmania and South Australia.

While prices of Australian agricultural land are at record highs in many regions, the market is entering a new phase, with low growth in median prices forecast over the next 18 months.

In its annual Australian Agricultural Land Price Outlook (supported by Digital Agriculture Services), agribusiness banking specialist Rabobank says the robust growth in agricultural property prices witnessed over the past five years has slowed, with 2020 signalling the beginning of a new phase in land markets across the country.

Report author, Rabobank agricultural analyst Wes Lefroy says there has been lower agricultural land price growth in 2019 than in the previous two years.

"For the time being, the aggressive rise in land prices is behind us, and we are expecting a period of low, if any, growth in 2020. Ultimately though, this will vary by quality, region and production type," he says.

 While there will likely still be a number of ‘marquee’ sales in some locations – especially for high-rainfall properties with scale – median agricultural property prices in some regions may even see a contraction over the coming 18 months, according to the report. 

However, macro-economic factors, such as low interest rates and a forecast weakening in the Australian dollar – along with the overall healthy state of farm balance sheets across the country – will prevent a major downward correction.

"And if agricultural land prices can hold the significant gains they have made over the past five years in the year ahead, through the worst economic crisis we are facing in decades due to the coronavirus pandemic, this will be a great result for landholders," Lefroy says.

"The median price in some regions can be double, or even triple, that of other regions with similar productivity and seasonal variability."

Impact of drought

The report says a number of factors are contributing to the slowing rate of growth in the agricultural land market.

Chief among these is the trailing effect of recent years of drought, with the impact on land prices often delayed – bringing periods of very low, if any, land price growth, even when rainfall returns.

"It may seem paradoxical, but a key factor weighing on land price growth is the return to better seasonal conditions and drought recovery that is occurring particularly on the east coast."

"In drought-affected regions, there has been a shortage of properties on the market with many potential sellers choosing to hold off until conditions improved, and this reduced supply had been supportive of price growth.  However, as seasonal conditions have improved, we will see an increased stream of lower-quality properties come to the market, with sellers trying to take advantage of the high price environment.

"In addition, as part of the recovery from drought, we are likely to see farmers shift their focus to consolidation and direct their business investment towards building resilience in their operations rather than looking to expansion."

"Grain prices that were swollen by the drought have now softened, which will impact farmers’ profits, particularly in South and Western Australia".

Overall, the report says, the commodity price outlook for the next 18 months is "unsupportive of land price" growth, with prices of most agricultural commodities expected to decline over that period.

Pandemic likely to undermine confidence

Added to this, Lefroy says, the ongoing economic crisis triggered by the COVID-19 pandemic is also taking its toll on farmer revenues and confidence.

"The pandemic and related economic crisis are like a large, unpredictable storm that could cause damage.  It is possible at some point in the next six months, we will see agricultural commodity prices further exposed to the underlying economic crisis we are currently being shielded from by government stimuli - it will continue to undermine confidence at the very least."

The highest farmland value growth in 2019 occurred in Tasmania (nine per cent YOY) and South Australia (five per cent YOY), while New South Wales, Victoria and Queensland all recorded one per cent growth and Western Australian median prices for agricultural properties remained stagnant.

"For Tasmania, corporate investment – both Australian and foreign – continued to flow into ag land.  Reliable rainfall, the availability of irrigation water and a diverse range of production opportunities have all added to the attractiveness of investing in Tasmania."

The report found agricultural land had appreciated at a faster rate than most other asset classes over the past 10 years.

"So far, agricultural land has largely avoided the economic fallout of COVID-19."

"This has highlighted the fact that the primary drivers of agricultural land value are different from any other asset classes and, in fact, aspects of a weak macro-economic environment will actually support investor demand for agricultural property."

 

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