AUSTRALIAN farmland prices are expected to continue to rise in the current low interest rate-high commodity price environment, according to industry analysts.
And in reviewing the Rural Bank’s 2021 Australian Farmland Values report and market dynamics, Elders general manager real estate Tom Russo said now is the time of the neighbour.
“I reckon that this market is really playing into the hands of the established producers in regions and particularly the neighbour,” he said.
“It is really the year of the neighbour from the point of agricultural farmland transactions.”
Mr Russo said neighbours could achieve economies of scale, leveraging their existing capital and cost base to achieve higher yields.
“So they may not necessarily get a higher return on capital for the additional land that they are buying on a stand-a-alone basis, but on a productive unit basis across their whole holding, on a return on DSE (dry sheep equivalent) or return per acre, they are actually achieving an uplift overall,” he said.
“And this enhances the value of their overall holdings and so therefore the investment makes sense.
“They can afford to pay more than say someone looking to enter the market for the first time.”
He said he had also observed neighbours could take an “averaged out view” on the pricing across their portfolio.
“They might concede ‘Look I am paying more than I would like for this land, but I’ve got a multi-generational view, I’ve got succession issues I want to deal with, we are going to be here for a long time, so I can afford to buy this block at a price that might be a little bit higher than I’d like, but averaged out I am still way ahead and I’m doing well and achieving economies of scale’.”
Farmland values increasing at record rates
The Rural Bank this week released its 2021 Australian Farmland Values report which found that despite the impact of COVID-19, the median price per hectare of Australian farmland increased by 12.9 per cent in 2020.
Last year was the first time in 15 years that land has increased in value in every state of Australia. It was the seventh consecutive year of growth, bringing the 20-year compound annual growth rate (CAGR) to 7.6 per cent. Over the last five years the CAGR was 10.6pc, and over 10 years 6.3pc.
The bank said that keeping in line with the long-term trend, it expected farmland values would continue to rise in the short to medium term.
The 2021 report looked at more than 263,000 transactions over 26 years accounting for 315.9 million hectares of land with a combined value of $167.3 billion.
Rural Bank’s senior insights analyst Matt Ough said the current market growth phase in farmland transaction volume and value started in 2013.
“So from 2013 to 2020 Australiana farmland values have appreciated by 9.6 pc per year, a rate which according to the old rule of ’72 would see the median price per hectare double every 7.5 years.”
This has been driven by export market growth for beef and lamb, interest rates trending lower and generally improving seasonal conditions, although severe drought impacted transaction volume in 2018 and 2019 in most states.
However, Mr Ough said the transaction volume trend was inversely related to the median price per hectare.
“That transaction volume has been gradually tailing off and corresponds with a wider industry trend of a decreasing number of farm businesses.”
He said in 2020 farmland value growth had not wavered despite market shocks in other classes and in the context of its 20-year CAGR.
“Farmland as an asset class has not only grown at a rate comparable to other asset classes, but it has also shown a low level of volatility.”
Mr Ough said historically there had been strong correlation between commodity prices and median farmland values.
“But it has started to diverge and that first became apparent around 2016, but really widened from 2018 to 2020, driven primarily by declining interest rates and historically low transaction volumes.”
He said the key factors influencing the divergence included the fall in the official cash rates from 1.5pc in early 2017 to 0.1pc and the end of 2020.
“That does a lot for buying power.”
But other factors were a sharp decline in farmland listings resulting in low transaction volumes, rising beef and lamb prices in 2020.
“Looking ahead to 2021, buying power remains strong, driven by low interest rates and historically high livestock prices, suggesting that the median price per hectare could continue diverging away from commodity price.”
‘Red-hot’ sellers’ market and insatiable demand
Mr Russo said strong farmland values were an indication of the further of farming and confidence in the industry “whether you like it or not”.
He said investors in farmland were being rewarded and the market was “hot”.
“And at the risk of sounding like a dodgy real estate agent, I can certainly confirm that that’s the case – it really is a red-hot sellers’ market and it really is happening across most, if not all agricultural regions and different market segments.”
On whether the market has peaked, Mr Russo said the fundamental question was could anything be expected to shift the current supply-demand dynamics to “rebalance” the market.
The market was still seeing incredible “market sentiment” from buyers, underpinned by the global mega-trends creating insatiable demand and “forward-looking” confidence in agricultural commodities, which underpinned higher commodity prices, he said.
He said strong demand to invest in farmland was also being aided by rising productivity, seasonal conditions and industry innovation.
“So putting it simply, both productivity, but also profits are moving in the right direction.”
Mr Russo said finance was at a historically low cost and also “easy to get”, banks continued to see farmland as a safe haven and were “happy to back in the right people who are buying agricultural assets”.
“There is also no shortage of institutional capital looking for exposure into our growth story into our industry, and primarily that is through the very mature agricultural funds management industry that we have here.
“Reputable players with strong track records are continuing to attract new capital as a result of delivering good outcomes for investors.
“So as a result we still see a strong weight of capital looking to find a home in Australian ag, both by local producers, private operators, corporate operators and institutional investors.”
On the sell side of the dynamics, Mr Russo said there were not many forced or stressed asset sales in the marketplace.
“It’s the contrary, there are many owners who are actually grappling with the notion of ‘Do I sell now or hang out and continue to enjoy a lot of the strong operational returns?’.”
Mr Russo said in 2020 Elders had a 25pc growth in its farmland agency business in terms of transaction volume and turnover.
”Year-to-date this year we’ve seen 10pc growth relative to the same time last year.
“So I’m suggesting increased (buying) liquidity is still happening even as we move through this year and some prices are still going up.
“So I don’t think there is enough increased liquidity on the sell side to impact prices either.”
He said the ultimate question was whether the farm real estate industry was reaching a point where acceptable returns on investment would not allow people to continue to acquire property at ever increasing prices.
How willing will this market be to continue to pay these increasing prices?
“Last year I proffered a view that I said I think we would see only subdued growth because of this reason,” Mr Russo said.
“I’m happy to say I was wrong – I’m rarely wrong, just ask my wife.”
He wondered whether in years to come whether people stepped out of the market because they could not generate acceptable returns at current prices.
“Where that point is remains to be seen.”
So is farmland overpriced and are values unsustainable?
Mr Russo said generally corporates were not stepping out of the market, but there had been some isolated instances, including an agricultural fund management firm that could not see acceptable operating returns at current prices.
He said Elders agents were saying they could not get enough listings to satisfy the demand, but some corporates like Warrakirri were raising funds to invest in non-traditional areas such as horticulture or agricultural development opportunities, rather than broadacre cropping, to increase yield or improve productivity.
Rural Bank chief executive officer Alexandra Gartmann said she had conversations with younger farmers looking for non-farm investment “because they just can’t justify some of the dollars required for that neighbouring property”.
Ms Gartmann said buying power was being driven by lower interest rates, historically high livestock prices and generally solid commodity prices, “suggesting that that median price per hectare could continue diverging away from commodity prices”.
She said the positive trend in commodity prices is underpinned by really strong export demand and a growing domestic market.
“If I reflect on it and think about interest rates …. they would really need to rise a lot to see much impact in cooling the market.
“They are so low it will take numerous increases to achieve a significant quantum of overall increase, and that’s really likely to be over an extended period of time, so a couple of years.”
Ms Gartmann said the bank was testing lending against higher interest rates, and at how principal and interest repayments respond over a 15-20 year period.
“And we are comfortable, we are comfortable with the industry and where it is at.”
She said new technology and knowledge meant the risks to production and returns from bad years can be better managed, but the bank was being cautious, factoring in seasonal and climate change risks and “sensitising performance and production on a year-in year-out basis to make sure that we don’t get caught up in hype and we are really looking at facts and data and numbers.”
“We are seeing at the moment some of the best risk rates across clients in our book, for many many years, and it is reflective of the equity values that those higher asset values deliver, because farmers are in the land business as much as in the production business,” she said.
“Land appreciation over the last five, 10, 20 years has added a large amount of equity to balance sheets at a time when the supply of property is very tight.
“So this means we’ve got high buying power and lots of farmers ready to buy, but we’ve got such a small pool of sellers resulting that strong competition for anything that lists and I think that trend has longer to run.”
Mr Russo said there had been examples where people were getting frustrated that they had been unable to acquire farmland they wanted, and threw “everything at it” to buy.
“I just don’t think though it is accurate to draw from that observation a conclusion that the market is overheated or unsustainable.”
He said the market was being driven by productivity and profit, meaning more people were able to invest in the “underlying asset” and still achieve an acceptable return for operational yield and capital growth.
“Farm incomes are rising and commodity prices have largely been tracking in line with farm values, though Matt makes a valid point that there is a gap opening up there, but I would probably argue in response to that low interest rates and higher productivity levels will offset that.”
Considering farm management deposits, debt to equity ratios not being near dangerous levels and farm profitability, Mr Russo argued that the market was not overpriced, and Australia’s farm balance sheet “still has a lot more firepower in it”.
Mr Ough said growth in farmland values wasn’t confined to climate zones.
“You can get capital growth anywhere.”
He said the risks in zones differed and was reflected in prices, but not necessarily how much it would appreciate in value over time.
“We know investment into farmland is a long-term game … the view on future returns differs from individual to individual, but perhaps a better way to phrase that question is ‘what are the implications of not buying today’?
“You’ve got strong underlying demand for commodities, proven capital appreciation over time and continuous improvement in an industry, it makes a really strong case.”
He said the fact that the market continued to rise suggested that a return on capital was “very much achievable and it’s underpinned by things like strong demand for Australian food and fibre. And that’s evidenced by the commodity price index trending up over time”.
“The continuous improvement in risk, in cost management, low interest rate environment, all contributes to achieving a return on investment.”
Click here to read the full 2021 Australian Farmland Values Report.