Low interest rates, high savings rates, easy access to finance and bumper conditions in a wide range of agricultural commodities have created a dream run for farmland sellers in the last year.
Nerida Conisbee is the Chief Economist at Ray White. She is a highly regarded economist and is currently the most quoted property commentator in Australia.
AuctionsPlus sat down with Nerida to ask what she perceives to be the defining factors behind rural land prices.
“Australian agricultural production hit a record in 2021, hitting an estimated value of $73.5 billion. Most commodity types saw increases, driven not just by increased demand globally, but also supply chain disruptions pushing up prices,” Nerida says.
“Great weather in Australia really helped, particularly at a time when many other places didn’t have such great conditions.”
She says strong commodity prices helped buoy the broader economy.
“The South Australian economy saw the strongest growth of all states in 2021 and it was agriculture that drove it there. In other states, we saw a similar trend - agriculture has been a driver of economic growth during the pandemic, at a time when many other sectors pulled back.”
“Strong growth in commodity prices for many agricultural products have flowed through to economic growth at a state level but has also pushed up residential prices in many towns that rely on these commodities. The West Australian wheat belt, which produces more wheat than anywhere else in Australia, saw the median house price jump 31 per cent since the start of the pandemic, driven significantly by wealth gains as a result of strong wheat prices.”
“Like wheat, beef prices have also done well and this flowed through to many beef producing regions. The Queensland outback, where around a quarter of beef cattle live, saw median house prices increase by 40 per cent.”
“Overall the outlook for commodity prices, as well as production, remains positive. Rural Bank, in their 2022 outlook across all agricultural commodities, outlined that the main challenge was going to be access to labour. With migration levels still very low, it’s expected to most significantly hit the horticulture sector.”
While high commodity prices have flowed through to house prices in many regional communities, it has of course also driven up farm prices.
“Rural Bank has been tracking median farm prices since 1995. Since then, farm prices have risen from $1,000 a hectare to $6,000 per hectare. Like with most property types, COVID-19 has driven a sharp acceleration. This is not just because farms have become more profitable over the past two years, but also because of similar things that drove the housing market - very low interest rates, much easier access to finance and very high savings rates.”
“The majority of demand has come from local buyers. Over the past five years, the proportion of foreign owned land has increased only slightly from 13.6 per cent to 13.8 per cent. Reopening of international borders may change this, particularly given the strong performance of agricultural commodities in Australia over the past two years.”
“The outlook for farm prices remains strong. Values are expected to continue to grow off the back of strong demand, increasing profitability, strong commodity prices and low interest rates. Fewer transactions are also taking place due to consolidation of parcels and longer holding times.”
The Global Supply Chain Pressure Index prepared by the New York Federal Reserve is currently showing the highest level of disruption ever recorded and Nerida says global supply chain disruptions will continue to pose challenges to agriculture, and other industries.
“Supply chains are stuck, impacted by capacity challenges driven by a world economy that is coming back to life after two years of relatively low levels of activity. This is making things more expensive and difficult to obtain. This is flowing onto prices, and may trigger an earlier than hoped interest rate increase.”
“For the agricultural sector, it’s particularly challenging at many stages of production. High freight costs are making inputs to production more expensive, as well as forcing up prices of agricultural products. Perishable items such as horticulture are not only getting hit by difficulties in finding labour but also by difficulties in delivering their products. Urea, a major input to fertiliser, is becoming very expensive not just because of supply chain problems but also because of a ban by China of exports to Australia.”
“At this point, it’s difficult to estimate when supply tangles will unwind. Unfortunately, most predictions are for continued challenges for most of 2022.”