‘More smoke, less fire’ ahead for Australian agricultural land prices – new industry report

‘More smoke, less fire’ ahead for Australian agricultural land prices – new industry report

The heat is set to come out of Australia’s “on-fire” agricultural land market – with increased property availability and decreasing farm operating profits forecast to slow price growth in the coming 18 months – according to a newly-released industry report.

In its annual Australian Agricultural Land Price Outlook, titled More Smoke, Less Fire, the agribusiness banking specialist says after a run of many years of strong increases, agricultural land price growth is set to slow in the next 18 months, especially in the eastern states, as the effects of drought impact the market.

Agricultural land prices in Australia have been “on fire”, the report says, increasing by a compound annual growth rate of seven per cent over the past five years, with growth especially accelerating over the past two years.

This was largely driven by a string of favourable seasons, which elevated farm business operating profits to 20-year highs across many regions and commodities.

However, the past 12 months have seen a divergence in the primary drivers of ag land prices across the nation, according to report author, Rabobank agricultural analyst Wes Lefroy, with a distinct difference emerging between the drought-affected eastern states and the west and south of the country, which have experienced better rainfall.

“While ongoing strong demand for agricultural land has continued to accelerate price growth in Western and South Australia, in the drought-affected eastern states, a shortage of properties on the market has primarily been supporting price growth,” he said. “Many would-be sellers in these areas have chosen to hold on to land until conditions improve and this has effectively created a ‘liquidity squeeze’ in the agricultural land market in those regions.”

This run of many years of strongly rising land prices will likely come to an end on the east coast, however, Mr Lefroy says, as some potential vendors start to lose patience with riding out the drought and the number of properties on the market increase.

“This will leave the market exposed to the underlying reduced demand for property, particularly where the run of profitability is now coming to an end in many regions due to drought,” he said.

That said, across the board, a fall in agricultural land prices is considered unlikely, the report says, with farmers’ balance sheets remaining generally strong across most sectors and regions, and with support from a number of macro-economic factors. These include a low and falling cost of funds, a weak and falling currency and a favourable price outlook for most commodities.

Rabobank Farmland Index

For the first time this year, the Rabobank report tracks Australian agricultural land prices using a new method, the Rabobank Farmland Index, which provides greater accuracy than traditional measures (such as median price per hectare).

Mr Lefroy says while traditional methods of analysing land price data assume all sales have the same characteristics from year to year, “in reality, within a region and state, the weighting of sales by locality and production type can vary significantly from previous years, skewing the overall figures”.

“The Rabobank Farmland Index (RFI) weights agricultural property sales based on production value at a state and at a national level, to ensure these variations are properly accounted for,” he said.

Nationally, the RFI found agricultural land prices increased 15 per cent in the year to December 2018.

Eastern ‘liquidity squeeze’

Mr Lefroy says while the run of strong farm profits is now coming to an end in many of Australia’s drought-affected regions in the east (dampening the appetite for property purchases), land prices had been held up by a ‘liquidity squeeze’ in the market, with a low number of properties available for sale.

“This is typical of what happens in drought years,” he said. “And we have seen land sales down by more than 50 per cent over the last five years in drought-affected states,” he said.

The RFI showed in 2018 agricultural land prices increased by 14 per cent in both New South Wales and Queensland, while Victorian agricultural land prices increased by six per cent.

“Looking ahead, regardless of whether the drought breaks in the next 18 months or not, we expect liquidity in agricultural land will increase – as some farmers grow tired of waiting out the ongoing drought conditions and begin placing properties on the market,” he said. “This will release the squeeze that has been driving up prices up on the east coast during 2018.”

Strong outlook for west and south

For the west and south of the country however – where good seasonal conditions continue to fuel strong farm balance sheets – it’s a somewhat different story. Here, the report says, continued strong demand for rural property will maintain robust price growth, albeit on slightly softer trajectory.

The report found that during 2018, the strongest price growth in agricultural land occurred in South Australia (up 29 per cent) and Western Australia (28 per cent).

Demand continued to outstrip available supply in land markets across both states during 2018, driving prices higher, Mr Lefroy said.

“For WA, 2018 was the latest in a string of high-production years, which, alongside record grain prices, fuelled farmer operating profits and confidence. This resulted in strong demand for agricultural land and saw a sustained increase in prices,” he said.

“Looking ahead, land price growth will slow, albeit from a record high in WA and South Australia. We expect liquidity to remain historically low across all regions in these states, irrespective of weather conditions, over the next 18 months. Limited listings of prime farm land will continue to support demand for mid- and low-tier properties, as farmers continue to adjust their focus in search of the best value.”

Tasmania was the only state to record a decline in agricultural land prices in the year to December 31, 2018 (down by two per cent), according to the RFI. However, Mr Lefroy said, this reflected the low availability of top-tier properties in the Tasmanian market.

“That said, growth prospects for Tasmanian agricultural land prices are very firm. We see demand from both large family farms and corporates remaining strong for well-developed, high-quality farms and this will drive prices of land higher at a steady pace, though we expect the number of properties on the market will remain tight for the foreseeable future.”

Foreign investment

A special feature in the report on foreign investment found that focussing on land area alone overstates the extent of foreign ownership of ag land.

The report found while 13 per cent of Australian agricultural land by area has some level of foreign ownership interest, that figure reduces to an estimated seven per cent of agricultural land by value.

Foreign investment is heavily weighted towards livestock production, Mr Lefroy said, with the majority of foreign interest in Australian agriculture by area found in that sector. “Pastoral grazing land is however of less value compared with other production types such as cropping and horticulture,” he said.

By commodity type, the report says, foreign investment has the greatest share in Australia’s horticultural industries than other sectors, with foreign interests in this sector at 36 per cent by area and 23 per cent by value. “Foreign and corporate investment, rather than family farms, have tended to be more focused on horticultural production, underpinned by positive outlook in permanent crops and the scale and high capital costs involved in some of the new developments,” Mr Lefroy said.

By state, Tasmania had the highest proportion of land with foreign interest, by both area and value, the report said.

Ag land versus other asset classes

Agricultural land has appreciated at a faster rate than most other asset classes over the past five years, the Rabobank report says.

“The five-year compound annual rate of return for Australian agricultural land is ahead of most other asset classes, including residential housing prices, the S&P 500 Index and the ASX All Ordinaries,” Mr Lefroy said.

And agricultural land is expected to remain attractive to investors in the medium term.

“Returns aside, investors value the fact the capital return of ag land is not volatile and is generally not correlated with a range of other investments,” he said.

“Looking into the medium term, we also see a number of factors that will support the attractiveness of agricultural land for corporate investors. Larger parcel sizes, which are resulting from ongoing consolidation, will make it simpler for investors to purchase the land they need to meet investment parameters, while technological research and development will make it simpler for investors to replicate management systems across regions.

“In addition, we see the attractiveness of other asset classes to be decreasing relative to ag land, with global and local economic growth slowing and no long-term conclusion to the trade war in sight. While most notably, we don’t expect ag land prices to be impacted by forces pulling local house prices lower.”