20 Jul 2021
There are signs in Australian agriculture that not only is winter finishing and spring is upon us but the end of the year and summer are all not too far away. Across all agri landscapes, perhaps the most noticeable sign of spring is the early flowering of the shining gold canola crops. On other farms, new and growing lambs are joining the flock, looking healthy in fields of green.
This is With the industry as a whole continuing to perform strongly - good seasonal conditions, another strong production year and global prices for major commodities remaining strong - land prices have been a major topic of conversion.
“What else is factoring into higher rural land values? And is the growth as considerable as we’re led to believe? In short, yes but there are other factors at play.”
The stand out implication for the industry’s strong performance has been the demand for rural land and booming rural land values. While rural land values have been growing strongly for a number of years now, including throughout recent drought years, there is some growing nervousness in the industry over their sustained, stellar growth.
The question preoccupying industry players is how high is too high? Are the current increases justified? There are many factors in play which are well recognised, including strong commodity prices, low number of farms on the market and low interest rates. The value of rural land as a standalone asset, however, is less often discussed and when rural land is considered next to commercial and residential property, it appears rural land is in a ‘catch-up’ phase compared with growth in alternative property-based assets.
While booming property prices are a boon for farmers, there are other implications for the industry as growing rural property prices make it harder for new farmers to enter the industry or for farmers to expand. It is also clear the drive for the industry to reach $A100 billion in output by 2030 will also continue to have an impact on property prices.
Recent, strong price rises
According to the Australian Bureau of Statistics (ABS), the value of Australia’s rural land has appreciated by over 30 per cent in the three years to June 2020. These data are based on the information put together by each state Valuer- General for government uses such as local council rates. But this can’t be right, surely?
There have been many headlines of large rural property sales and the ever increasing value of national agricultural land; we’ve seen local properties sell at significantly higher sums than expected – with many reports of localised growth over 20 per cent per hectare in a single year.
The FOMO factor
So what else is factoring into higher rural land values? And is the growth as considerable as we’re led to believe? In short, yes but there are other factors at play.
There’s no doubt land value growth has been incredibly strong but the ABS figures are inherently conservative and not necessarily done on the state of the land market at the time. Rather they are based on the calculated ‘underlying value’ which market sentiment feeds into.
The perception land values are ‘out of control’ are being fed not only by strong demand but also by a reduction in supply.
With commodity prices at very strong levels and good seasonal conditions over the past 12 months, not many farmers are selling – leading many in the industry to surmise land values are being boosted by a lack of properties being offered. At a time when medium and large farmers are looking to grow their footprint and farm consolidation is driving change across the industry, the relatively small number of properties going to market is driving buying seen by many as ‘over-priced’.
Changing view of rural land as an asset?
There is, of course, more to the story than just the fear of missing out. Historically, rural land values have tracked commodity prices fairly closely, with drought years or commodity price slumps translating across to lower property values.
Since around 2016 however, land prices have continued to rise strongly despite drought years or stumbles in a commodity price such as the milk price drop. Clearly rural land values – and land values across all sectors - are strongly connected with historically low interest rates, providing a significant impetus for purchasers to buy now.
If this was the only real factor driving rural land prices then we would expect to see rural land perform on par with both residential and commercial property. However, this has not been the case in recent years, with rural land value growth outperforming national residential property value growth by an average of 3 per cent each year (albeit from a low base) in the past five years – including drought years. Until the mid- 2000s, residential, commercial and rural property had all shown relatively similar growth rates.
However, during the 2010s, both residential and commercial property values grew significantly stronger than rural properties. The more recent growth in rural land may also be put down to investors seeking alternative property-based investments and playing catch-up to the residential and commercial sectors.
Looking forward to $A100 billion
With every boom comes the inevitable impact on asset prices. As Australian agricultural land values have climbed sharply in recent years it has left many in the industry asking whether those prices can be justified based on the productive capacity and profitability.
Rural land prices began to appreciate even before the end of the most recent drought and before commodity prices had appreciated, raising the likelihood the run on rural demand was more about consolidation - with medium-to-large farms buying and expanding their operations - than it was about pure profitability.
Rural debt levels were sitting at just over 26 per cent of rural land value in 2019-20 which has remained relatively stable in recent years despite drought. Since 1995, rural debt levels have fluctuated between just under 23 per cent and more than 28 per cent. If this ratio is maintained to 2030 and $A100 billion in output, then rural bank debt levels could be expected to rise to between $A110 and $A139 billion at the same time.
Demand for rural land isn’t only coming from traditional farming. There are more investors seeing value in Australian property prices, international buyers continue to look for significant purchases, city dwellers are looking to purchase their piece of regional lifestyle to escape lockdowns and even the recent trend of carbon farming and investors looking for offset opportunities is playing into the market. And while the strong demand for rural land must be considered a good thing for the industry overall, we must be aware of those ramifications for many - from new farmers looking to enter the industry and generational farmers looking to take advantage of high prices by expanding.
Looking ahead, it is vital to consider what 2022 might look like – for farm values, commodity prices, season and community. It’s hard to have confidence in planning ahead these days, there are risks, and the potential for challenges next year that might be different again.
Despite the uncertainty, most farmers are looking forward with confidence to an industry and season that, to date, have weathered the COVID-19 storm.
Mark Bennett is Head of Agribusiness at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
20 Jul 2021
21 Nov 2019