AUSTRALIA’S agricultural land prices are expected to hold firm through 2020, defying the effects of a severe COVID-19-led global recession, according to a new report from agribusiness specialist Rabobank.
Entitled ‘Port in a storm – Australian ag land prices will remain afloat in rough COVID-19 swell’, the report said while much of the global and local economy was being severely buffeted, Australian agricultural land was expected to remain “largely unscathed”.
Rabobank said this was due primarily to overall farm profitability, a tight sales market, and support from low interest rates and a weak Australian dollar.
However, the report cautions the outlook for Australian agricultural property is not without risk in the current uncertain environment.
This has come via the threat of a deeper-than-expected global recession, a significant interruption to Australia’s access to major agricultural export markets, or a credit crisis.
Rabobank agricultural analyst and report author, Wes Lefroy, said positive production prospects off the back of improved seasonal conditions, along with commodity prices supported by a weaker Australian dollar, should underpin a profitable season for most Australian farmers in 2020/21.
He said this augured well for agricultural land prices with farmer operating profit, in our view, is the primary driver of Australian land prices.
“Sustained periods of profitability provide farmers with the financial capacity to buy more land,” Mr Lefroy said.
“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.
“Further, they are above the 10-year average in all states except New South Wales.
“For farmers with expansion intentions, many will have the capacity to buy land.”
Mr Lefroy said an historically low supply of available properties for purchase would also be a key factor supporting agricultural land prices.
“We see the number of properties on the market staying at, or near, historical lows in 2020 for a number of reasons.
“We expect there will only be a very small number of sales which are due to financial circumstances, with improved production supporting cash-flow generation in drought-affected regions.
“On top of this, record-low borrowing costs have increased farmers’ capacity to service existing debt and interest rates are set to remain historically low for at least the next three years.”
Added to this, Mr Lefroy said COVID-19-related restrictions had been a challenge for property inspections and auctions.
“Sellers who have flexible timeframes may hold back on listing properties, which will also keep the market tight.”
The report says while many economic fundamentals had been severely impacted by COVID-19, in some instances this would provide support for investment in agricultural land.
“Relatively low returns for other asset classes such as equities, commercial property, and bonds will increase the attractiveness of agricultural land for both local and foreign investors.
“Secondly, a weak and depreciating Australian dollar will support demand from foreign investors. “
So far this year, the Australian dollar has depreciated against the US dollar and the euro, effectively decreasing the price of Australian farmland for investors in those currencies.
“In addition, the purchasing power of local farmers will be maintained in the medium-term by historically low borrowing costs.”
Mr Lefroy said the volatility and impact that COVID-19 had caused in other asset classes has highlighted the stable and counter-cyclical nature of agricultural land, reinforcing its attractiveness as an investment.
While Australian agricultural land is in a strong position to withstand the economic impacts of COVID-19, the reports says there are risks to the market’s healthy outlook.
“A deeper and longer-than-expected recession would both reduce investment appetite and impact demand for Australia’s agricultural products offshore, impacting farm gate prices and farm profitability.
“In the event of a credit crisis, this would essentially put a pause of 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.”
Limited forced sales
The report said the number of vendors selling for financial reasons is expect to remain low, with record low borrowing costs having increased the capacity of farmers to service existing debts.
“We expect that borrowing costs will remain historically low for at least the next three years.
“For those in sectors or circumstances that are less profitable in 2020, banks will likely support their clients through this crisis.”
The report said relative to the number of farm sales each year, foreclosures were rare.
“The latest data shows that there were only 27 farm foreclosures in Australia in the 12 months prior to June 2018.
“These were concentrated in drought-affected states. In circumstances of financial stress, all banks will work with their clients to ensure the best outcome is achieved.”