Agricultural Land Values Defy Market Disruptions

Agricultural land values appear to have been increasing for a long time. And in many cases, that's true. Rural Bank's Farmland Values Report 2021 summarises the value trends over the last 25 years:

Source: Australian Farmland Values 2021, Rural Bank

And, since Rural Bank published its report, the growth rate has likely been steeper still; we're looking at nearly ten years of straight value growth. 

There's been no shortage of commentary behind this trend in the media of late. Factors include historically low interest rates, favourable seasonal conditions, the counter-cyclical nature of agricultural investment, and relatively healthy commodity prices. Will these factors continue as they have been? Or change and disrupt the status quo? Alternatively, will other drivers come to the fore and shift our notion of agricultural land value?

Difficulties In Forecasting Value

Analysis requires data. Unlike residential or commercial real estate, relatively fewer agricultural transactions make forecasting difficult, particularly on a dynamic basis. Further, industry participation (i.e., banks, insurers, and investment funds) is significantly lower in agriculture than in other sectors, resulting in fewer resources applied to trend analysis. Because of the limitations in forecasting, commentary tends to rely on anecdotal evidence from industry participants and somewhat dated data – which poses a challenge in a fast-moving market.

Had you conducted a survey five years ago on the predicted movement of farmland values, it is unlikely that anyone would have forecast the significant surge we have seen recently. 

Unprecedented Value Growth – Is There A Foreseeable End?

Recent media reports highlight no signs of a slowdown in the short term. Commentary such as "Farmland prices are soaring at quadruple the rates of median growth in Australia's capital cities" and "NSW rural land values soared 26% during the height of the pandemic" have been common in recent months. 

At CBRE, we have identified a noticeable decline in market activity in recent months. Whilst this could potentially indicate a market slowdown, further investigation shows this to be a result of limited supply rather than lack of demand. Discussions with selling agents around the country suggest there remains significant pent-up demand for broadacre land, particularly from local landholders looking to capitalise on increased equity levels. 

Many have missed out on previous opportunities and still have funds ready to invest. However, existing landholders appear reticent to offer properties for sale in many locations, preferring to capitalise on healthy commodity prices and trust that the recent run of good seasons will continue. As a result, the pent-up demand seems likely to remain for the foreseeable future.

Demand Likely To Remain Resilient

Whilst there is now some forecasting of increased interest rates in the short-medium term, it is improbable that the increase will be of such a scale as to impact the latent demand levels materially. There is also nothing on the horizon to suggest that commodity prices will decline significantly in the short-term, certainly in those sectors that utilise broadacre country.

Of the fundamental drivers identified earlier, seasonal conditions are possibly the only disruptor to current market dynamics. Whilst difficult to forecast, particularly beyond the next six months, recent experience suggests that even significantly adverse seasonal conditions are unlikely to impact demand significantly. 

In recent years, the drought conditions through NSW and southern QLD didn't dampen appetite for farmland, with potential investors taking a longer-term view of the agricultural sector. This 'longer term' view is also likely to offset any short-term volatility in commodity prices (due to global seasonal conditions and production levels, for example).

Given the above, 'black swans' – a highly negative and impossible to predict event – are the only potential disruptor of market dynamics in the short-medium term. Even then, COVID-19 could be viewed as such an event and has done nothing to slow value growth in the agricultural sector. 

COVID-19 has probably assisted in value growth, which may well be the case with other 'black swan' events. There may be greater emphasis on food security and the spreading of investment risk (from further investment opportunities).

Stabilised But Consistent Growth Ahead

Whilst there are potential headwinds for the economy and the agricultural sector more specifically (including increased input costs), it appears unlikely that there will be a material shift in market dynamics for broadacre farmland in the short-medium term. Given the rapidly increasing prices over the last 12-18 months, it's unlikely to see this growth rate continuing for an extended period. However, it is more likely than not that farmland values will continue to increase, albeit at a slower pace than recently experienced. Only time will tell, of course.