Tighter credit, reduced foreign capital and pending environmental change will all lead to softer dairy land prices in the short to medium term, Rabobank’s Afloat But Drifting Backwards – A Look at Dairy Land Values Over the Next Five Years report says.
And an erosion of farmgate milk prices could put more stress on dairy land prices, author and dairy analyst Emma Higgins said.
The bank forecasts an average farmgate milk price of $6.25/kg milksolids for the five years – above the 10-year average but below recent prices.
Fonterra’s last forecast in December has a mid-range milk price of $7.30/kg MS.
Operational and compliance costs are expected to rise and production slow down as genetic improvements and management are offset by reduced stocking rates and fertiliser use in some regions, she said.
“Based on this view, cash returns to dairy assets will fall and the price ratio of land relative to its revenue potential will rise – both of which will put downward pressure on the value of the asset itself.”
The decline in values means investors needed to do longer and costlier due diligence before buying dairy land. That slows the land-buying process and removes some of the drivers of market tension that have previously inflated land prices.
Reduced capital has been the key factor restricting land value growth over the last decade, she said.
But the big unknown variable is the Government’s freshwater proposals.
“The impacts have the potential to reverberate across the entire dairy land buying/selling process.”
The report comes days after Farmers Weekly columnist Keith Woodford pointed to changes in the lending policies by the banks, looming environmental regulations and the Government’s tightening of the rules for overseas investor buying dairy farms as reasons why dairy farm values had declined. In March last year the Dairy Farmer magazine also pointed to a change in attitude with young farmers basing offers on a farm’s earning potential and rather than overpaying like previous generations who banked on capital gains.
“The crunch will really come if dairy prices should ever decline below $6/kg MS,” Woodford said.
Federated Farmers dairy chairman Chris Lewis said farmers will make a loss if Rabobank’s milk price forecast proves correct because the actual break-even milk price including debt repayment is closer to $7/kg MS than DairyNZ’s break-even of $5.95/kg.
“The cost of tougher environmental regulations will not only increase the cost of production but will likely put a cap on or even reduce production so has implications for farm revenue, even if the milk price remains over $7/kg MS.
“Meanwhile, there will likely be a lot of capital expenditure required to meet the tougher regulations and if there is less scope to meet that investment from retained earnings then how will farmers get the money if banks are getting tougher on their lending?”
He said the report underpins what the group has told the Government for the past few years around the pace and amount of change occurring on farms.
“Normally, people can cope with one but we’ve got a perfect storm where they all want to chuck them into the same cake mix.
“It’s creating a lot of uncertainty and this report highlights that with all of the uncertainty out there and the policy changes … is dairy farming going to be affordable in the future?”
Lewis said it also brings into question whether dairy farm values should continue to underpin land values in some areas.
The latest data from the Real Estate Institute shows dairy farm values have declined 6% over the past year, with the median price a hectare now $38,152.
Institute rural spokesman Brian Peacocke said the decline was offset by big increases in values in horticulture and while drystock farm values are static they showed big increases a year ago.
Discussion of the decline in dairy values needs to be put into context with what is happening in other sectors.
“She is correct in that values have been sliding. The unknown is that will they continue to slide.
“She’s underpinning the reasons why they will continue to slide and I’m saying those reasons need to be challenged because I’m not sure they are correct.”
Peacocke said there is nothing new in Higgins’ assertion of increased due diligence before farm sales.
“That’s been a trend for the last three years. The land buying process has already reacted to that.”
