Lamb price drives land price

Where there hasn't been drought this spring has brought even stronger price rises.

In western Victoria and south east South Australia, some land values have doubled in the last five years.

Rising land prices are a function of rising profits.

Lamb enterprises have been the leader in profitability in recent years, but do the current margins justify land prices?

The average gross margin for lamb enterprises in south west Victoria in 2017-18 was $697/ha.

For the top 20 per cent, the gross margin was $943/ha.

Land has been changing hands recently for $11,100 to $12,350 per hectare.

The average gross margin of $697/ha returns 5.6pc to 6.3pc, while the top 20pc gross margin is an impressive 7.6pc to 8.5pc of land prices.

Using Mecardo's lamb price forecasts to estimate gross margins in the coming years, the higher prices are expected to add nearly $100 to gross margins and lift returns on land.

The EBIT numbers are obviously a lot lower than the gross margin.

In 2017-18 the average lamb enterprise EBIT was $304 for the average and $394 for the top 20pc.

At the land prices used above, the EBIT comes in at a return of 2.5pc to 3.5pc.

This return is still better than you can get at the bank but doesn't leave much fat if money is being borrowed.

This calculation hasn't accounted for stocking costs, which would obviously lower returns, with an interest cost on breeding stock.

You could say that the shift in land prices was a while coming.

High rainfall zone land prices are not terribly expensive given the returns than can be made from them.

In fact, those adding land to existing holdings could probably pay more and still turn a profit on land.

The risk of lower returns, higher interest rates and poor seasons are still on the radar and might stop land prices from rising further.

However, under current fundamentals, higher land prices are justified.