Rural Bank: WA farmland values stagnate but future is bright

West Australian (WA) farmland values increased by just 0.5 percent between 2006 and 2014, according to data from Rural Bank, the commercial bank for the sector formerly Elders Rural Bank and now a subsidiary of Bendigo and Adelaide Bank Group.

But the bank’s general manager of agribusiness believes this stagnation along with beef prices and the sector’s ability to improve productivity, underpin a “lot of opportunity for growth and future prosperity”.

According to Rural Bank’s Western Australian Farmland Values Index 2014, the median value increase of farmland slowed to only 1.1 percent last year, compared to 4.1 percent in 2013 and an average of 4.9 percent over the past 15 years.

The index reveals a 7 percent increase in grazing land median value between 2006 and 2014, after a slump last year. There was a 2.7 percent increase in crop land value overall between 2006-2014, but a 29.4 percent jump in 2013 on the previous year. This is because 2013 was a record wheat production year.

“As with any market the main drivers of value are supply and demand. There is an abundance of relatively cheap land available in WA and little demand from investors,” said Matthew Sheldon, an associate at London-based real estate agency Savills, who follows the Australian farmland market. “WA has suffered a sustained period of drought which has limited returns in previous years; this coupled with the falling Australian dollar has meant diminishing returns for foreign investors.”

Sheldon said WA farmland is related to commodity prices, as it is a market which exports over 90 percent of its agricultural output. “With grain prices compressed since 2012, farmland has been unable to really capitalise from the international market.” He told Agri Investor that over 92 percent of WA farmland is wholly Australian-owned.

Rural Bank’s general manager of agribusiness, Will Rayner, told the Australian Broadcasting Corporation: “What you’ve seen probably since 2006, but definitely since the global financial crisis, is effectively a period of stagnation where farmland prices have on average increased by about half a per cent per year and that’s effectively a period of consolidation, effectively allowing the sector to catch up to that huge appreciation you saw in property prices up until that period.”

The falling Australian dollar, historically low interest rates, soft commodity prices, which are particularly strong for beef, and a sector that continues to innovate and improve its productivity, are strong indications for the future of farmland prices in Western Australia, argued Rayner.

Sheldon also sees some potential in WA farmland for investors, particularly the low farmland values the region offers.

“For those who are looking to diversify into agricultural production and land investment, the falling dollar certainly limits the income returns associated with farmland, which certainly has detrimental effects as to the perception of a yielding investment,” he said. “However, for investors who are more interested in food security and their own production, it starts to become appealing as they can acquire larger tracts of high quality land for less.”

Regarding soft commodity prices, Sheldon said investors in agriculture tend to understand the highly cyclical nature of agriculture. They perceive that through capital investment they can increase productivity on an asset by asset basis although “productivity improvements in grain production are growing at a slower rate than the increase in demand for grains”.