Strong commodity markets, low stock levels and sustained low interest rates are combining to create the strongest underlying conditions in 30 years and will push prices of agricultural land higher over the next five years, Rabobank’s latest Agricultural Land Price Outlook report shows.
Land prices will jump 10 per cent this calendar year, easing to 8 per cent next year and 5 per cent in 2023 under the agricultural lender’s base scenario of prices underpinned by above-median rainfall, lending rates that remain low at least until 2024 and global demand that remains unchanged.
The predictions are the result of a surprisingly strong rebound in Australian agriculture from years of drought in the eastern states that has agricultural forecaster ABARES expecting farm production to jump 8 per cent in the current financial year to $73 billion from last year, putting it 17 per cent over the five-year average.
“We’ve had a phenomenal year,” report author, Rabobank senior analyst Wes Lefroy, told The Australian Financial Review.
“Most states have been reasonably aligned in terms of having a reasonably positive year as well.”
Australia’s disparate agricultural regions are subject to their own – often varying – conditions, and it was unusual to have all of them booming at the same time.
It was clear they all were, however, as optimism levels – seen in farmers’ intentions to acquire land – were uniformly high, Mr Lefroy said.
Fear of missing out
As many as 9 per cent of farmers nationally, a five-year high, intend to buy land over the next 12 months, with the figure as high as 11 per cent in Western Australia and 10 per cent in NSW, the report shows.
“We have observed the ‘fear of missing out’ factor prompting buyers to enter the market earlier than they had planned,” he said
“In some cases, FOMO was prompting buyers to enter an expression of interest for a purchase at much higher than the productive value in order
to secure the property, not knowing when another opportunity may arise.”
The recovery from drought continued last year, with double-digit price growth in median prices in four of six states.
Tasmania’s agricultural land prices surged 28.3 per cent between 2019 and 2020, in Victoria by 15.8 per cent, Queensland by 15 per cent and WA by 14.1 per cent.
Growth in NSW and South Australia was lower, recording year-on-year median price growth of 6.1 per cent and 1 per cent respectively. Nationally, the median price for agricultural land grew by 6 per cent in the year to 2020.
Tight supply is one factor underpinning prices. The number of sales last year was almost half (down by 45 per cent) from 2019.
As the regional price forecasts showed, not all markets were equally tight, Mr Lefroy said.
“Not all regions have seen prices rise at the same pace and while demand continues to outweigh the number of properties on the market, the demand-supply balance is not the same in all regions,” he said.
Under Rabobank’s more bullish scenario – which could be realised if global demand for Australian commodities increased or drier-than-expected conditions occurred in rival producer North America or if foreign investment rules were relaxed, boosting inward investment – price growth could accelerate to 15 per cent in 2022.
While the base scenario envisages no change in the relationship with China and Australian farmers continuing to diversify into other markets, deteriorating seasonal and other conditions – including a worse trade relationship with China – could also lead to a weaker-than-expected scenario.
Price growth could drop to 2 per cent next year and contract 3 per cent by 2024, but this would require a combination of several factors to happen, Mr Lefroy said.
“For land price growth to reduce, or even for a downward correction to occur, we would need to see a multi-year interruption to a combination of commodity prices, production or interest rates,” he said.