What’s driving agricultural land values
Editorial written by Mark Barber, Head of Agribusiness Investment Services, Elders for the Summer 2020/2021 Seasons Magazine.
Last edition, Tom Russo discussed the supply and demand of Australian agricultural land, explaining that demand outstripping supply had underpinned strong property prices in most regions. This edition, we look at the key factors driving demand and how these are likely to support property prices.
Demand for agricultural land is primarily driven by two factors: the value of agricultural products able to be produced by the land over time, and the cost of funding the acquisition of the asset. Local factors also influence prices, such as regional scarcity, short-term climate conditions, and competition between neighbours. But these local factors tend to be ad hoc and create variations around the primary drivers.
The value of Australia’s agricultural output grew by 2.9 per cent per annum over the last decade compared to 1.7 per cent pa over the previous decade as producers respond to an increase in prices following the food price inflation spike during the global financial crisis. This rate of output growth fell sharply over the last two years due to the drought but is expected to respond quickly as seasonal conditions improve.
The increase in agricultural output caused a steady rise in farm cash incomes and profit (see Chart 1, which have accelerated since 2007/08.
Chart 1: ABARES Farm Surveys Report All Australian Broadacre Industries 1990 – 2019 Source: ABARES Agsurf http://apps.agriculture.gov.au/agsurf/ accessed 19 Oct 2020
Those improvements have seen Farm Management Deposits (FMDs) increase 12.6pc per annum since their introduction (see Chart 1).
Chart 2: Farm Management Deposits x State and Nationally June 1998 – June 2020 Source: ABARES Farm Management Deposit Statistics
At the same time, total farm debt has risen 3.7pc per annum since 1998, increasing liquidity in the sector. Foreign investment in Australian agriculture also increases liquidity but has remained relatively stable over recent years at 13.8pc (an increase of 0.2pc from 2015/16) of total agricultural land in Australia*. Most of the recent growth in foreign investment occurred between 2007/08 and 2012/13 following the GFC.
Even so, the way such funds are deployed is changing. Limited data is available but anecdotal evidence suggests new investors have a stronger interest in leasing and finding high-performing incumbent operators to jointly acquire and operate farms. Structures such as Real Estate Investment Trusts (REITS), which allow large numbers of wholesale and retail investors to gain exposure to agriculture, are also likely to become more common.
Climbing farmgate output growth and the increase in liquidity that brings to the sector is occurring at a time of very low interest rates. Interest rates are unlikely to increase in the medium term as economies struggle to recover. Unlike most other sectors of the world economy, agriculture is supported by strong fundamentals because people still must clothe themselves and eat. This means agricultural returns are outperforming other long-duration, capital-secure assets generating cash returns.
What is the immediate future for farm values? Consumption for most agricultural commodities is likely to remain strong, although there may be some medium-term softening of demand for higher-value niche products. Interest rates are also likely to remain low until economic growth starts to pick up after the pandemic, however it is likely that low interest rates are fully priced into agricultural land values, so continued low rates will remain supportive of current values. International and domestic funds will increasingly view agriculture as a secure, income-generating asset class and look for innovative ways to structure investments.Agriculture and agribusiness have been nominated by most Australian governments as key sectors in the economic recovery. This, combined with the widely-accepted NFF target of increasing the value of farm gate output from $62 billion to $100b by 2030, means there will be considerable government policy support and investment.
However, the biggest factor likely to drive farmland value will be the performance of incumbent operators looking to expand their enterprises. Recovery from drought and increasing productivity growth will be the main drivers of enterprise performance in the medium term. How productivity drives land values will be the topic for the next Seasons article on farmland markets.
* Hectares of Australian agricultural land, part or fully foreign owned.
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