Farm land prices expected to defy economic downturn

If external factors don’t worsen, Australian farm land prices look likely to stay high thanks to good on-farm profitability and low finance rates.

Rabobank is reporting Australian agricultural land prices are expected to hold firm through 2020, defying the effects of a severe COVID-19-led global recession.

In its report Rabobank is picking that while much of the global and local economy is being severely buffeted, Australian agricultural land is expected to remain “largely unscathed” – due primarily to overall farm profitability, a tight sales market and support from low interest rates and a weak Australian dollar.

There are, however, some risks that could turn that prediction on its head. The threat of a deeper-than-expected global recession, a significant interruption to Australia’s access to major agricultural export markets – such as China’s effective closure to Australian barley – or a credit crisis could all impact negatively on farm prices.

Farm profitability

Report author, Rabobank agricultural analyst Wes Lefroy.

Report author, Rabobank agricultural analyst Wes Lefroy says positive production prospects, off the back of significantly-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.  And this augurs well for agricultural land prices.

“Farmer operating profit, in our view, is the primary driver of Australian land prices. In particular, sustained periods of profitability provide farmers with the financial capacity to buy more land,” he said.  “And 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.”

Low supply

Mr Lefroy says an historically low supply of available properties for purchase will 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,” he said. “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 says COVID-19-related restrictions have been a challenge for property inspections and auctions. “Sellers who have flexible time frames may hold back on listing properties, which will also keep the market tight,” he said.

Supportive fundamentals

The report says while many economic fundamentals had been “severely negatively” 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,” Mr Lefroy said.

“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.

“And overall, the volatility and impact that COVID-19 has caused in other asset classes has also highlighted the stable and countercyclical nature of agricultural land, reinforcing its attractiveness as an investment.”

Risks

While Australian agricultural land is in a strong position to withstand the economic impacts of COVID-19, there are risks to this outlook, the report says.

“A deeper and longer-than-expected recession would both reduce investment appetite and impact demand for Australia’s agricultural products offshore, impacting farmgate prices and farm profitability,” Mr Lefroy said.

“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.”

 

 

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