Drought bites earnings, but can’t stop farmland demand

Farmland demand up despite drought pressure on ag investment earnings


Property
Rabobank analyst Wes Lefroy, says Australian median farmland prices hit $2278 a hectare early this year after compound annual growth of 2.5 per cent for the past decade.

Rabobank analyst Wes Lefroy, says Australian median farmland prices hit $2278 a hectare early this year after compound annual growth of 2.5 per cent for the past decade.

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The Australian Farmland Index shows permanent horticultural land rewards are rising as the big dry looks set to get drier

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Bullish farmland demand continues to defy the drought’s impact on primary producer incomes, with the value in owning permanent horticulture farms really starting to shine as the big dry threatens to get drier this summer.

Permanent cropping income returns assessed by the Australian Farmland Index’s monitor of leading farm investor earnings jumped 15.66 per cent for the year to June 30.

That compared with just 6.53pc growth for annual crop and livestock enterprises.

The index keeps tabs on the capital and income gains from a $1.3 billion portfolio of 67 properties managed or owned by eight corporate agribusiness players around Australia.

More than half (38) of the properties monitored are involved in permanent agricultural production (horticulture).

However, rural property market analysts say demand for a broad range of farms should stay revved up for at least another two years.

Inquiry continued to outstrip supply and was certainly not restricted to drought-proofed irrigated country.

Farm income needs to trend higher to maintain such strong capital appreciation rates - Laguna Bay Pastoral Company

The national median price for Australian farmland was now at a 10-year high according to Rabobank research, with particularly strong growth recorded since 2013.

It calculated a compound annual growth rate of 2.5pc during the past decade had pushed the median price to $2278 a hectare by early this year.

“Investors value that the capital return of ag land is not volatile and generally not correlated with a range of other investments,” said Rabobank research analyst, Wes Lefroy.

Expectations of solid demand continued even though broadacre earnings were set to be hit harder by the drought during 2018-19 and the likelihood of tighter bank finance arrangements for borrowers looking to buy land.

In the year to June 2018 the drought’s impact on overall earnings weighed down the Australian Farmland Index’s (AFI) returns on investment to 11.64pc.

Permanent horticulture enterprises have enjoyed rising farmland returns as drought bites.

Permanent horticulture enterprises have enjoyed rising farmland returns as drought bites.

The previous year’s returns had been an impressive 18.16pc.

While 2017-18’s overall result was still considered strong, farm index analysis by Laguna Bay Pastoral Company said the drought’s impact would become more notable in the second half of this calendar year.

The ongoing slide in farm income caused by dry conditions would subsequently erode the capital value of Australian farmland.

Laguna Bay is one of the eight farm sector investors providing earnings and capital return data to the AFI.

Between March and June capital appreciation rates contributed 68pc of total returns monitored by the index – well above the average 52pc capital appreciation contribution recorded since the AFI began its quarterly reports in March 2015.

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“It is hard to see how capital growth rates can continue to maintain a significantly higher rate than income returns over the long term,” the Laguna Bay commentary noted.

“Farm income needs to trend higher to maintain such strong capital appreciation rates or appreciation rates will start to revert to longer term levels below 7pc.”

Farm index co-ordinator, Frank Delahunty agreed income returns reported to date had not experienced the full effect of drought engulfing most of NSW southern Queensland and parts of northern Victoria this winter.

However, while deteriorating seasonal conditions were likely to be further reflected in lower income and capital value results during the second half of 2018, the land value story should be at partially offset by continuing strong buyer interest in farmland.

Domestic and offshore investors were continuing to be active and low interest rates were helping buyers.

Demand heavily outweighs the number of properties on the market in many agricultural areas – although this varies even within regions - Wes Lefroy, Rabobank

In fact, Rabobank’s research suggested agricultural land prices would keep rising in the next two years, propelled by generally strong commodity markets and healthy balance sheets built up during favourable seasons prior to the eastern states drought setting in.

Mr Lefroy said farmers of all sizes were also looking to increase their portfolio diversification.

Although city house prices may have come off the boil, he said there was no peak in sight for farmland values as demand in most regions was set to continue to far outstrip supply.

He tipped the overall rate of price growth would probably slow, but there was still considerable upside ahead for agricultural land.

Mr Lefroy said despite adverse seasonal conditions, trade uncertainty headwinds and a likely fall in farmers’ relative borrowing capacity as bank funding costs rose, property demand was projected to stay high largely as there were too few farms for sale.

South-eastern Australia had led the rising market so far, with Tasmanian and Victorian farm values enjoying compound annual growth of 4.9pc and 4.1pc respectively in the decade to 2018, while West Australian and Queensland growth was 0.7pc and 0.3pc.

“Demand heavily outweighs the number of properties on the market in many agricultural areas – although this varies even within regions because of the types and performance of commodities produced, their productive capacity and even localised competition bubbles,” Mr Lefroy said.

“On South Australia’s Yorke Peninsula, prices appreciated at 20pc compound annual growth rate in the past five years, with premiums for high-yielding lentil-producing land in central and northern parts.”

Corporate interest in agriculture has also increased, adding competition for farmland purchases - Wes Lefroy, Rabobank

Buyer demand had been fuelled by surging farm operational profit growth averaging almost seven times more between 2013 and 2017 than a decade earlier.

Broadacre crop and mixed livestock farms enjoyed best profits, courtesy of record beef, wool and sheepmeat prices which hit decade highs in 2016 and 2017.

A weaker Australian dollar since 2013 and record low finance costs also helped drive property markets.

“Corporate interest in agriculture has also increased, adding competition for farmland purchases,” he said.

“A rise in operational return for farms and growth in the capital appreciation of agricultural land has sparked an increase in local and global investor market entry.”

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