Australian land prices to enter 18-month low-growth phase – Rabobank

The median price of Australian farmland is likely to grow at a low rate over the next 18 months, according to a new forecast by Rabobank.

In its annual Australian Agircultural Land Price Outlook, Rabobank said farmland prices were entering a new phase, with little to no growth likely after several years of strong performance.

Speaking to Agri Investor, Rabobank agricultural analyst and report author Wes Lefroy said the compound annual growth rate for Australian farmland prices in the last five years was 8.8 percent, with growth already dropping to around 5 percent in 2019.

Lefroy gave three primary reasons why land prices should cool or even contract in some regions.

First, most of the east coast is transitioning to a drought recovery phase, with any impact on land prices from a return to profitability usually slow to materialize. Second, the industry is coming off several high-profit years, especially in 2016 and 2017, and the purchasing power of farmers who benefited from those years is now beginning to subside.

“And the third reason is obviously covid-19 – in particular the impact of the economic crisis, but also the impact that it’s going to have on confidence to buy, particularly in the short term,” Lefroy said.

“But if we do see land prices hold the gains that they’ve made over the last five years during this crisis, that’s a great result considering what we’ve seen happen in other asset classes.”

While prices look set to cool for 18 months, Lefroy said demand for the high-quality properties that often attract institutional interest will remain strong.

“We have seen buyers move from the mainland into Tasmania, for example, where there is slightly more reliable rainfall and production. We think that trend will continue on a regional basis.”

Rabobank has teamed up with Digital Agriculture Services for the first time to analyze land prices relative to their productivity levels.

“We found that some regions are relatively cheap compared to others on a productivity basis – for example, western Victoria is cheaper than Tasmania,” Lefroy said.

The median price of land in some regions can be double or triple that of land in other regions with similar levels of productivity and variability, Rabobank’s outlook found.

DAS co-founder and CEO Anthony Willmott said: “We now have better indicators than just median price to find the best value, and we predict that productivity will play an increasingly important role in finding the right farm property at the right price.

“We have always believed that buying any farm should be determined by its ability to produce now and into the future, and now we have the science and data to prove not just the productivity of any property, but how it compares to any best-in-class property.”

As for the impact of the coronavirus, Lefroy said it probably hasn’t filtered through to farm revenues directly yet.

“The government stimuli that’s flowing through many economies at the moment is helping [support] incomes across the globe, but if we do see a gap between government stimulus cooling off and employment rising, there could be some impact on commodities which, via revenue, may impact land prices.

“Also, if farmers are feeling more bearish about the agricultural economy, they’re going to be less incentivized to invest and expand,” he said.

Despite this, the current market environment does contain some factors that support land price growth, Lefroy added.

“The ongoing [low] cost of funds obviously supports purchasing power and incentivizes some farmers to buy, rather than expand through agisting or leasing cattle. The relatively weak Australian dollar will also support the competitiveness of our products offshore, while making farmland cheaper in AUD terms for offshore buyers.”