Australian Farmland Values Report 2021
Australian Farmland Values 2021 report
Understanding the value of farmland is important to everyone in agribusiness, especially farmers. The Australian Farmland Values report tells the story of national and regional farmland performance.
Despite the impact of COVID-19, Australian farmland values showed their resilience. The median price per hectare of Australian farmland increased by 12.9 per cent in 2020. This marks the seventh consecutive year of growth, bringing the 20-year compound annual growth rate (CAGR) to 7.6 per cent. Keeping in line with the long-term trend, we expect farmland values will continue to rise.
The 2021 report takes a closer look at more than 263,000 transactions over 26 years. Transactions that account for 315.9 million hectares of land and a combined value of $167.3 billion. Understanding the significance of local data, we've also looked at trends across 27 regions nation-wide. And in a new addition to this year's report, we've compared farmland values with commodity prices.
Australian Farmland Values 2021 launch video
Farmland Values Launch Event Questions and Answers
1. What is the level of output productivity (not just commodity prices) vs cost of land (prices) - will this be a limiting factor at some point, along with interest rates?
Firstly, commodity price and production are not limiting factors on their own as the question hints at. Farmland values growth over time is limited by a combination of many things. We chose commodity price as it has been a key driver of growth over the past 26 years. Output or level of production is very dependent on a 12-month period and closely linked to seasonal conditions. We looked at production levels in the same way as commodity price however, it’s difficult to achieve a correlation between production and farmland values growth due to the level of variability in any one year. Farmland values growth is more likely to be limited by the combination of high interest rates, declining or flat commodity prices and long-term drought.
2. Given grain prices are not rising to the same degree (%'s) as land values, how do you see the long-term viability of these continual high land prices? And given farmland returns have performed greater over long-term periods, how do you see some of these high land prices being sustainable over the long-term?
It’s possible to improve economies of scale using a range of metrics without relying on commodity price, something which is evident in cropping regions. It’s important to note that commodity price isn’t the only driver of farmland values growth over time.
Grain prices have experienced a flatter growth curve compared to other commodities over the past decade and states with a high proportion of grain, such as WA, have returned a lower level of growth over time. However, low interest rates and improvements to production are having a positive impact on farmland values growth in cropping regions.
We know that farmland values operate in cycles and are subject to interest rates, commodity prices and seasonal conditions. We are currently in an environment which is conducive to farmland appreciation however high interest rates, declining or flat commodity prices and long-term drought all have the potential to curtail growth and have done in the past. The unique aspect with farmland, which the data tells us, is that farmland appreciation can slow for extended periods, however when this occurs, transaction volume dries up essentially protecting the growth of the previous period until necessary conditions to encourage vendors to sell return.
4. Does this mean for new starters/investors in ag land that this is further out of reach than other neighbours, etc that have existing leverage?
Sadly, a negative impact of the strength and optimism around the agricultural sector is that for new entrants, it is undoubtedly more difficult to get into the current market. This is something Rural Bank is very cognisant of. Australia needs to continually find ways to attract new entrants, more capable farmers and new pools of investment. We also know there are no easy solutions to this challenge. All of industry needs to work together to help address this issue. New ownership structures, investment models and leasing arrangements will need to become more common. This also means exploring models that do not just rely on bank debt (despite current low interest rates) or ownership structures that allow greater flexibility and partnership options. We need an open mind to all manner of solutions. That’s why Rural Bank is supporting groups like Cultivate Farms. This group is drawing on technology to match the next generation of aspiring farmers with retiring farmers and investors to own and operate a farm together. It’s a new way of thinking and operating. These are the initiatives industry should get behind. Rural Bank would like to be part of that conversation.
5. Australian Farmland is a potentially significant resource from a carbon sequestration perspective. Is the climatic and economic benefit of this opportunity being reflected in land values?
As highlighted by Alexandra in her closing remarks, the system for capturing economic benefits from carbon sequestration is in its infancy. However, it could play a role in land appreciation in the future.
6. The modelling of the climate change implications that Alex mentioned - is that a publication available?
No, the results of the modelling on our portfolio are not public. We are working with science partners to test known and scientifically robust scenarios of climate change on our portfolio – those potential climate scenarios are publicly available reflecting regulator and industry discussions. Our approach to scenario analysis will be shared in our Sustainability Report later this calendar year.
7. I note use of the median price, but how skewed is the price distribution? Are there differences in skewness between regions?
There is definitely a wide range of values within each geographic area. The skewness of price distribution has not been calculated, however the report includes charts showing the distribution of transactions by six price ranges for every state and region in Australia. Prices can be influenced by several factors including soil type, average annual rainfall or access to reliable water.
8. Can anyone comment on the likelihood of higher inflation rates and the effect that would have on future property prices?
Inflation will likely trend higher as the economy grows over the next 2-3 years. Interest rates tend to follow inflation rates higher if the trend is sustained and unemployment rates fall at the same time. Rising interest rates can curb buying power however there would likely be other factors combining to influence future land prices. If a period of higher interest rates corresponds with flat or declining commodity prices, farmland values could plateau.
9. Large scale property portfolios are attracting extremely high valuations in the market such as the bidding war for Vitalharvest’s berry and citrus assets and the Lawson Grains portfolio. Do the earnings profile of these assets justify the valuations?
The first point to make here is really to go back to basics around economies of scale. If you can leverage a cost base to achieve a higher return per DSE or per hectare, then you have a more profitable business. More profitable businesses are more valuable businesses.
Whether the earnings profile justifies the valuations really lies in the eye of the beholder. Having said that, with money so cheap and yield hard to find, these assets are very attractive, especially relative to other asset classes that don’t enjoy the positive outlook that agriculture does. They are long term, capital secure and capable of producing a mix of operational returns and reliable capital appreciation.