Growth in Australian farmland values is not done yet

Farmland values are higher than ever and some investors think there is still further room for growth thanks to the role additional revenue from carbon sequestration will have to play.

The latest set of figures presented by Rural Bank in its Australian Farmland Values 2022 report showed, to the surprise of no one involved in agriculture Down Under, that the median price per hectare of farmland rose to another record in 2021: an increase of 20 percent to break the A$7,000 ($4,904; €4,667) per ha mark.

Strikingly, the report also noted that the median price per hectare has increased by 123 percent over the last eight years alone – representing a very decent return indeed if you happen to be a private equity investor owning farmland in a traditional 10-year closed-end fund.

This is all music to the ears of investors in Australian farmland, with Rural Bank general manager sales, partnerships and marketing Simon Dundon noting that the financial institution expects farmland values to rise again in 2022 (even if not necessarily by as much), thanks to the strong fundamentals that underpin the sector.

But there are some storm clouds beginning to gather on the horizon.

The Reserve Bank of Australia finally moved to raise interest rates this month – better late than never, some might say, lagging as it has behind central banks in other countries. Interest rates are still at historically low levels, of course, but the RBA has signaled that rates will continue to rise later this year, which may start to have a knock-on effect on purchasing power eventually.

Farm input costs are also rising thanks to inflation, which when combined with higher interest rates could serve to dampen the enthusiasm we have seen from smaller farmers to compete with corporates on property purchases.

This could give more breathing room to deep-pocketed institutional investors, though, who will still be on the lookout for high-quality Australian farmland, especially after the sector proved how effective its non-correlated, defensive attributes are during the coronavirus pandemic.

Many investors still believe that Australian farmland is undervalued, especially when compared with American farmland, and there are other changes afoot that could also push land values even higher than they already are.

To give one example, last week Packhorse Pastoral Company chair Tim Samway told us that he believes buyers and sellers of Australian farms are still not factoring in the future potential revenues that will come from carbon sequestration, when assessing the value of properties.

Samway told the Australian Financial Review in a separate interview that he expects the price of one Australian Carbon Credit Unit (equivalent to one ton of carbon sequestered) to be worth almost A$150 – a bullish prediction when the most recent spot price at time of writing was A$27.95.

If he is right, there may well prove to be huge currently unidentified or underestimated alternative revenue streams to be found from owning vast swathes of farmland.

Institutional investors aren’t planning for 20 percent increases in the value of their land each year, of course. But owners of Australian farmland will be happy to hear that the value of their assets may still not have peaked.