Double digit rises expected in farm land prices  

  • By Zilla Efrat

The price of Australian farmland is set to record another year of double-digit growth in 2022 thanks to favourable macro forces, according to Rabobank.

This follows growth of 27 per cent (median price per hectare), with double-digit annual growth recorded across all states.

In its annual Australian Agricultural Land Price Outlook, Rabobank says almost most similarly strong year-on-year growth has occurred so far in 2022 across its available data set, which currently covers about 30 per cent of the estimated full-year 2022 Australian farm sales

The bank’s analysis is based on genuine rural sales, with its data supplied by Digital Agricultural Services.

The preliminary results indicate a jump of above 25 per cent in Australian agricultural land prices so far for 2022, suggesting full-year 2022 sales will easily yield double-digit growth. The size of land deals also continues to increase.

International comparison shows Australia has also outpaced many other countries in recent years when it comes to growth in agricultural land values.

Report author and RaboResearch general manager Australia and New Zealand, Stefan Vogel, says this growth has been driven by a very positive constellation of factors, including strong agricultural commodity prices and good production volumes enjoyed by many in the nation’s farm sector.

This has bolstered farmers’ cash reserves and driven demand for land purchases.

“For multiple years in a row, the macro settings have been exceptionally favourable for land purchases,” says Vogel.

“Prices of most major agricultural commodities hit or moved close to record highs, widespread rainfall has supported Australian production and interest rates have been at record lows.”

But Vogel adds: “Our base case forecast is that farmland price growth will continue, but we expect a significant slowdown in the rate of growth of prices in 2023 and the years beyond to 2027 from the unprecedented strong growth seen recently.”

This view is driven by a deteriorating economic outlook, with higher farm operating costs and lower farm incomes expected in comparison with recent buoyant conditions.

“The tide is turning slightly as the land market needs to take a breather after the staggering growth over the past 18 months and also given the increased cost of finance and farm inputs like energy and fertiliser,” says Vogel.

He says it’s also likely that agricultural commodity prices and production volumes in coming years will fall short of the exceptionally high or even record levels enjoyed in 2021 and the first half of 2022.

Vogel says agricultural commodity prices are likely to stay well above the five-year average for the next one to two years. Costs, including for farm inputs such as fertiliser, are also expected to exceed their five-year average, and interest rates are rising.

“However, in our view, a more severe slowing than our base case forecast or a decline in agricultural land prices would require a significant worsening in conditions, like a substantial drought forcing herd liquidation, a multi-year loss of major export markets or the unlikely case of interest rates climbing to the levels last seen in the early 2000s,” he says.

So, what about rising interest rates?

Vogel says: “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.”

Rather, he says it is the longer-term recessionary impacts on the broader economy that often follow interest rate hikes that are found to exert downward pressure on farmland values and this is generally with a delay of several years.

He adds that past periods of downturn in farmland values had generally also coincided with changes to farm policy or a combination of lower farm production volumes, lower commodity prices and elevated input costs.

While demand for agricultural land in Australia is strong, supply remains tight.

“Our research shows that while demand for purchasing more land has come off recent highs, there is still a solid appetite for farm expansion, driven by healthy farm balance sheets following good seasons and also a fear of missing out on the few opportunities that come up to purchase land,” says Vogel.

“Competition has been fierce for land purchases and we observed a FOMO (fear of missing out) factor, which has sometimes prompted buyers to enter the market earlier than they had planned not knowing when an opportunity may arise again, and, in some cases, entering expressions of interest for a property that were much higher than the productive value might justify securing the purchase.”

Recent Rabobank research shows that overall, six per cent of Australian farmers have intentions to buy land within the next 12 months.

According to the report, interest from local and foreign investors is also expected to continue to add depth to farmland demand.

“Investors will continue to be attracted to agriculture, not only for competitive returns but also because returns are often less volatile and not necessarily correlated to other asset classes,” says Vogel.

Increased restrictions from the Foreign Investment Review Board have extended turnaround times and made some purchases more difficult for foreign investors, but this hasn’t lowered demand for Australian agricultural land.