Farmax 2015 Dairy Consultant of the Year Phil Journeaux recently completed a study that showed reducing farming’s environmental footprint in New Zealand would likely hinder land values in the future.
Buyers taking environmental constraints into account would likely evolve over the next five to 10 years as councils brought in new regulations, he said.
“I couldn’t be definitive and say the value of farms is going to go down by X per cent. I’m saying there are fundamentals there that will probably drive the price down.”
The estimated national impact because of environmental constraints was a $16.8 billion loss in the value of dairy land.
If that occurred the credit risk of farming and to banks would be significantly increased and current landowners would bear the brunt of this impact, Journeaux said.
“NZ farmers, particularly dairy farmers, are carrying high levels of debt and factors that have the potential to reduce land prices are generally regarded with concern.”
The Waikato AgFirst consultant won the Farmax 2015 Dairy Consultant of the Year title and was paid for 40 hours’ study that could benefit NZ’s agriculture sector.
Studying the impact of environmental constraints on land value was of particular interest to him.
“As part of my work on agri-environmental issues, I was aware that a negative impact was acknowledged but that there was little work to quantify it.”
Consumptive aspects, such as a farm’s location to recreational facilities and scenery, a good community and school had shown a stronger relationship to land value than the profitability of the potential farm business.
But now the perk of farming close to a lake, river or coastal water body could have a negative impact on farm profitability and consequently land value in the future.
Dairying had advanced in NZ over the last few decades without much regard for environmental impact, Journeaux said.
“Society is now turning around saying the industry has to take the environment cost into account and the cost has to come back out of the system.”
The National Policy Statement on Freshwater requires regional councils to set constraints on nitrogen, phosphorus, microbes and sediment discharges. The limits councils set could increase costs onfarm and decrease farm profitability, he said.
Farm profitability had only a moderate relationship to land value for dairy farms, which surprised Journeaux.
The correlation between economic farm surplus and land value was 74%, whereas the correlation between milk price and land value was 87%.
The correlation with return on capital was low and not a good indicator of future land value. NZ farmers seemed to be satisfied with low cash returns in return for the assumption they would be compensated with good capital gain in land value – which historically had happened with land values continuing to increase over time.
Farmers were already investing more capital onfarm to meet environmental regulations, including improved effluent systems, building feedpads or wintering barns, fencing off streams and developing riparian margins and wetlands.
Farmers were also looking to reduce fertiliser, using alternative grazing management practices, changing supplementary feeds or reducing stocking rates as ways to reduce nitrogen leaching.
These practices imposed a cost of some degree to the farm business and reduced potential profit, therefore it was logical for them to become a bigger part of the equation when buying a farm.
“If I’m buying a farm and I know I’d need to spend in some cases $300,000 to $400,000 to upgrade the effluent system, put in more fencing and riparian strips, then mentally I will deduct that from the price I’m going to offer.”
The new limits would also impact land use in the regions, potentially reducing the ability to intensify or convert land to dairy which would have an effect on the value of dairy farms.
“The increased cost for farmers to mitigate the discharges and the reduced flexibility of future land use change both have the potential to impact the price of land significantly.”
The restriction on land use would also affect land value for other sectors including forestry and sheep and beef, which were likely to be hit proportionally harder because of the restriction to convert that land to dairy, he said.
The value of that land at the moment was partly because of the expectation of potential to convert it into a higher-value use such as dairying.
Journeaux found there was almost no relationship between land value and profitability on sheep and beef farms, but there was a moderate relationship between sheep and beef land value and dairy profitability.
“So in other words that conversion expectation is very real.”
Nitrogen rules bring lakeside caution
Lake Rotorua and Lake Taupo catchments had already showed the future reality of environmental constraints impacting on land values.
Telfer Young valuer Martyn Craven’s report ‘Impact on land values from nitrogen rules’ showed a negative value impact of 15-20% on dairy farms within the Lake Rotorua catchment.
There had been hardly any farms sold in the catchment in recent years and those that had sold were at a lower value.
The lack of certainty around incoming nutrient restrictions was the biggest downfall to land value, Craven said.
Farmers looking to buy in the catchment were particularly wary of buying an asset where they didn’t know whether their farming intentions could be continued in the future.
It had been extremely difficult to put a value on the farms in the catchments because of the uncertainty, he said.
“Until you have certainly you would be silly to acquire without being very cautious in your offers.
“From a valuer’s perspective, or a purchaser, it’s very difficult to value anything if you don’t know what the rules of the game are.”
The level of skill set and knowledge from buyers was increasing and they were looking closely at regulatory challenges and the profitability of the land.
“Without doubt, over time purchasers are showing far more due diligence than historically.”
The property market always had people that were either less informed or took a different view to the majority and would pay more for an asset than its estimated value.
Emotion had always played a part in land value, especially in farming where land could be a generational asset with the farm valued over a long term, he said.
The Lake Rotorua and Lake Taupo catchment restrictions had come earlier and were more aggressive in terms of nutrient reductions required, but nutrient limits were coming nationwide, Craven said.
“Regulatory controls are having a huge impact on the majority of purchase decisions.”
Buyers in other regions were starting to be more wary and take farm profitability and regulatory impact into account, Journeaux said.
Buyers were being more cautious and looking at restrictions on farms close to sensitive water bodies or soil types that had higher leaching losses.
It was probably only a matter of time before the Emissions Trading Scheme covered agriculture, meaning carbon charges in the future were going to be inevitable and costly for farmers, he said.
The impact of carbon charges on farm profitability could be significant, which would feed through to reduced land values.
The alternative argument was dairy farms could become more valuable because of the inability to convert more land to dairy – making them rarer.
Something not covered in his report was the degree of technological change in the industry and the improvements that could be made, Journeaux said.
If the industry came up with the means of dairy farming which significantly reduced its environmental footprint, without significant impacts on profitability, the impacts on land value would change again.
