Australian interest rate rises yet to severely affect farmland values

An April report from Rabobank predicted that, once again, Australian agricultural land is on track to keep increasing in value throughout 2023.

Supported by data from Digital Agricultural Services, Rabobank found that three consecutive seasons of strong performance Down Under, driven by a combination of high commodity prices and favorable weather conditions, mean that double-digit percentage growth in farmland prices is likely again this year.

Growth is set to fall below the record levels seen in 2022 and 2021 but this will still be welcome news to investors that hold farmland portfolios, as they are set to continue benefiting from a steady run of capital gains.

A major contributor to the record levels of growth seen in recent years has been the prevalence of ultra-low interest rates – a phenomenon that has started to come to an end in Australia just as it has in most other developed countries.

The Reserve Bank of Australia yesterday (May 2) surprised markets by back-tracking on its previously dovish stance to raise rates by 0.25 percentage points, taking the cash rate to 3.85 percent. Most were forecasting that rates would be held in place for the second successive month after signs that Australian households were beginning to cut back on spending. But RBA governor Philip Lowe said Tuesday that inflation was still too high, so a further increase was needed to bring it down to 3 percent by mid-2025 and within the two-to-three percent target range.

While even a downturn in seasonal conditions this year is unlikely to depress farmland values too much in 2023 thanks to farmers and investors both having plenty of capacity to make moves following several good years, rapidly rising rates obviously make it harder to access debt financing.

But even at 3.85 percent, rates are at relatively low levels compared to historical averages – and the simple fact that Australian farmland is a limited resource that remains in high demand ensures that values are unlikely to fall significantly soon.

This is, in any case, what Rabobank is predicting, as it forecasts no decline in Australian farmland values out to 2028, even if growth in values continues to ease over that period.

The other interesting point of note from the Rabobank report for institutional LPs is that agricultural land deal sizes are increasing, especially in New South Wales and Queensland. Rabobank said that 22 percent of sales in Queensland and 14 percent of sales in NSW exceeded A$10 million ($6.7 million; €6.1 million), while 11 percent of cropping and 13 percent of grazing land sales across Australia exceeded A$10 million.

Many in the market cite low interest rates as the prime sustaining force behind the run-up in prices the market has seen. With many economists now predicting a further rate rise at either of the RBA’s next board meetings in June and July, any dampening effect on demand for farmland acquisitions will be keenly watched.