Rabobank forecasts ‘substantial slowdown’ in Australian farmland price growth

Rabobank has forecast that growth in Australian farmland values will continue in 2022 with  a double-digit uptick this year, but is predicting a substantial slowdown in the following five-year period to 2027.

In its Australian Agricultural Land Price Outlook 2022, released this week and supported by farmland sales data from Digital Agriculture Services, the bank said: “Commodity prices are likely to stay well above the five-year average for the next one to two years, but costs will also likely exceed their five-year average, driven by elevated prices for farm inputs like fertilizers as well as interest rates.”

This will see growth slow significantly but favorable macro tailwinds such as above-median rainfall across most of Australia, increased productivity and strong global demand for Australian-produced commodities will see the sector avoid any substantial decline in prices.

Rabobank said in the report: “A downward trend in land prices, or at least an even slower price increase than in our base case, would require a significant deterioration in conditions – such as a substantial drought forcing herd liquidations, a massive disease outbreak (like foot-and-mouth disease) with a multi-year loss of export markets, and/or the unlikely case of substantially higher interest rates to the level seen last in the early 2000s.”

The bank’s analysis found that the median price per hectare across Australia rose by 27 percent in 2021, with growth sitting at more than 25 percent so far in 2022.

RaboResearch general manager Australia and New Zealand Stefan Vogel, who is the report author, said that a “constellation of factors” had driven recent growth trends, but that this could not be sustained forever.

“The tide is turning slightly as the land market needs to take a breather after the staggering growth over the past 12 months, and also given the increased cost of finance and of farm inputs like energy and fertilizer. And there is also the likelihood of agricultural commodity prices and production volumes in coming years falling short of the exceptionally high or even record levels seen in 2021 and the first half of 2022,” he said in a statement.

Interest from both Australian and overseas investors remains strong, the report said, thanks to less volatile returns that are uncorrelated to other asset classes. Increased restrictions from the Foreign Investment Review Board have extended assessment turnaround times but this “has not slowed appetite for Australian ag land”.

Vogel said interest rate rises were also unlikely to lead to an immediate downturn in farmland values, based on analysis of past data.

“Australian data on land values reaching back to the early 1990s does not show an immediate negative impact on farmland values from moderate interest rate increases, while the correlation is also weak between land prices in other regions of the world declining and interest rates increases.”