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Farmland to provide ‘port in a storm’ in coronavirus downturn – Rabobank

Rural lender Rabobank finds that farm profitability is the prime driver of Australian land prices with profits set to remain strong despite the prospect of a global recession.

Australian farmland prices are expected to remain “largely unscathed” by the coronavirus and related economic declines, a new report from Rabobank has found.

The report, titled Port in a storm, found land prices will be underpinned by what is set to be a profitable season for Australian farmers in 2020-21, thanks to a significant improvement in seasonal conditions following an extended drought in the eastern states, as well as commodity prices supported by a weak Australian dollar.

“Farm operating profit is, in our view, the primary driver of Australian land prices,” said Rabobank agricultural analyst Wes Lefroy, author of the report.

“In particular, sustained periods of profitability provide farmers with the financial capacity to buy more land. And despite the drought that has gripped much of the east coast over the past three years, reported three-year average farm operating profits are at their highest point since at least 1990 in Western Australia, South Australia, Tasmania and Victoria.”

Average farm operating profits were above the 10-year average in all states except drought-affected New South Wales, Lefroy said.

As well as farm profits remaining strong, the report found that a “historically low” supply of properties for sale in future would also help keep prices strong.

Lefroy said that he expects to see very few sales made due to financial circumstances as improved conditions will support an increase in production and cashflow, meaning that the likelihood of a wave of distressed assets hitting the market in the near term in Australia is low.

Continuing low interest rates would also support farmers’ ability to service debt, while coronavirus-related restrictions around property viewings might cause some sellers to delay listing their properties for a year or two.

Finally, Lefroy said that the widespread downturn seen in economies worldwide, with a corresponding fall in the value of many different types of non-agricultural assets, would help make the case that agricultural land was a relatively safe investment.

“Relatively low returns for asset classes – such as equities, commercial property and bonds – will increase the attractiveness of agricultural land for both local and foreign investors,” he said.

“The volatility and impact that covid-19 has caused in other asset classes has also highlighted the stable and countercyclical nature of agricultural land, reinforcing its attractiveness as an investment.”

This view has been shared by Australian ag fund managers, who told Agri Investor at the outset of the crisis that agricultural assets had been largely unaffected. They also said they believed the crisis would help reinforce the arguments for investing in a diversified portfolio of agricultural assets.

Lefroy sounded a note of caution, though, saying that a “deeper and longer-than-expected recession” would both reduce investment appetite for land and demand for agricultural products offshore, impacting profitability. An ongoing trade dispute with China would also pose a risk if it escalated beyond the current tariffs on barley to other commodities.

“In the event of a credit crisis, this would effectively put a pause on debt-funded property purchases. And loss of access to a key market for Australian agriculture would also significantly impact farmer profits, and therefore capacity to purchase land.”