While the recent boom in farm property prices isn't about to go bust, the market will cool over the next 18 months.
That's the major conclusion from Rabobank's annual Australian Agricultural Land Price Outlook report.
Report author, Rabobank agricultural analyst Wes Lefroy, said the era of aggressive growth in farm prices during the past five years was over for the time being.
While prices of agricultural land were at record highs in many regions, the market was entering a new phase of low to no growth.
"Ultimately, though, this will vary by quality, region and production type," Mr Lefroy said.
There would still be a number of marquee sales in some locations - especially for high-rainfall properties with scale - in other regions median rural property prices may even contract, he said.
However, macro-economic factors such as rock-bottom interest rates and a forecast weakening in the Australian dollar - along with the overall healthy state of farm balance sheets across the country - would prevent a major downward price correction, the report said.
If agricultural land prices could hold the significant gains made over the past five years in the year ahead through the worst economic crisis in decades due to coronavirus would be a great result for landholders, Mr Lefroy said.
A flood of new foreign investment into the rural property market also appears unlikely, given the global economic chaos caused by COVID-19.
The report said the area of land with foreign ownership declined slightly in 2019, driven by a 1.3 per cent drop in the livestock and horticulture sectors. This was offset partially by a lift in foreign ownership of cropping land, particularly in Western Australia.
The latest report from the Australian Taxation Office showed 52 million hectares were held by foreign interests in 2018-19, or 13.8pc of the total area. The area has been stable for the past four years.
Rabobank said national median rural land prices rose at 8.8pc per year compound annual growth rate (CAGR) over the five years to December 2019.
Most of this growth occurred in 2017 and 2018. In 2019 median national ag property prices rose 5pc year-on-year.
Tasmania experienced the highest growth in 2019 (9pc) along with South Australia (5pc).
NSW, Victoria and Queensland all recorded one per cent growth while Western Australian median prices remained stagnant.
"For Tasmania, corporate investment - both Australian and foreign - continued to flow into ag land," Mr Lefroy said.
"Reliable rainfall, the availability of irrigation water and a diverse range of production opportunities have all added to the attractiveness of investing in Tasmania."
While farm property price growth cooled in SA from the previous year, very limited supply and stable demand ensured prices remained hot by historical standards, he said.
"So far, ag land has largely avoided the economic fallout of COVID-19," Mr Lefroy said.
"This has highlighted the fact that the primary drivers of agricultural land value are different from any other asset classes and, in fact, aspects of a weak macro-economic environment will actually support investor demand for agricultural property."
For buyers of farmland, he said, "the story is a very complicated one", with different market segments in different locations moving at varying speeds - driven by factors other than just agricultural productivity - so that prices often did not reflect the productive potential of the land.
"The median price in some regions can be double, or even triple, that of other regions with similar productivity and seasonal variability," Mr Lefroy said.
With the support of rural intelligence company Digital Agriculture Services (DAS), the report included land productivity data in its findings.
"Factors such as lifestyle influences, the concentration of local farmer demand and access to infrastructure can all cause the price of land on a hectare basis to deviate from its productive value," Mr Lefroy said.
"We believe using productivity as a basis for identifying opportunities will help prospective buyers discover potential purchases."
DAS co-founder and CEO Anthony Willmott said science and technology was helping to take land analysis to the next level.
"We now have better indicators than just median price to find the best value and we predict that productivity will play an increasingly important role in finding the right farm property at the right price," he said.
The report says a number of factors are contributing to the slowing rate of growth in the agricultural land market.
Chief among these is the trailing effect of recent years of drought, with the impact on land prices often delayed - bringing periods of very low, if any, land price growth, even when rainfall returns.
"It may seem paradoxical but a key factor weighing on land price growth is the return to better seasonal conditions and drought recovery that is occurring particularly on the east coast," Mr Lefroy said.
"In drought-affected regions, there has been a shortage of properties on the market with many potential sellers choosing to hold off until conditions improved and this reduced supply had been supportive of price growth.
"However, as seasonal conditions have improved, we will see an increased stream of lower-quality properties come to the market, with sellers trying to take advantage of the high price environment.
"In addition, as part of the recovery from drought, we are likely to see farmers shift their focus to consolidation and direct their business investment towards building resilience in their operations rather than looking to expansion."
Overall, the report said, the commodity price outlook for the next 18 months was "unsupportive of land price" growth with prices of most agricultural commodities expected to decline over that period.