Rural Market Looks to Brighter Days Ahead
The combination of the global recession and a downturn in dairy-based commodity prices has resulted in a sharp correction in median farm values and a substantial decline in market activity this year. Ian Little, senior analyst Bayleys Research, overviews the rural property market.
The rural market was the last of the major property sectors to respond to the local and then global economic downturn with farm values surging upwards in 2007 and into 2008 on the back of a strong rural economy and a high level of sales activity.
Median farm values peaked in the March quarter of 2008 at $1,850,000, according to Real Estate Institute sales statistics, driven predominantly by burgeoning prices being paid for both existing dairy farms and other land suitable for conversion to dairy. The increased competition for dairy farm land was fuelled by the record dairy payout made in the 2007/08 season; a result of a spike in commodity prices which many commentators were forecasting would remain high given the increase in global demand which was apparent at the time.
However, property values and market activity responded quickly to the retreat in soft commodity prices led by the dairy sector. The fall in property values and activity has, not surprisingly, been most sharply felt in that sector. But the impact has been right across the rural property market despite the fact that red meat prices rose over the same period, with sheep farmers in particular seeing improved returns.
Future forecasts predict rebound
In its annual Situation and Outlook forecasts released in July, the Ministry of Agriculture and Forestry (MAF) points towards a more positive future once global economies return to growth. MAF is expecting dairy production and payouts to increase steadily beyond 2010 with a resultant increase in export earnings. Fonterra’s latest forecast is for a final payout for the current season of $4.55 per kilogram of milk solids, 45 cents below that forecast by MAF.
However, the most recent Fonterra statement preceded the results of its latest auction which saw milk powder prices increasing sharply for the second successive month. In August the average price of milk powder increased by 26% to US$2,301 per tonne. In September the price rose a further 24% to US$2,858. Should these price increases be sustained, it is possible that Fonterra will be able to increase the forecast payout between now and season end.
The outlook for the sheep farming sector is also a positive one. Recent years have seen returns from sheep falling, exacerbated by the drought experienced by much of the country in 2008. This led to the national flock being reduced to 34 million, its lowest level in 58 years. The reduction in stock, however, has supported prices with the average price paid for a 17.5kg lamb currently in the region of $104 compared with under $90 a year ago.
MAF expects farmers to begin restocking beyond 2009, encouraged by higher schedule prices. This will lead to higher export volumes becoming available to service growing demand from emerging economies, particularly China. Demand for New Zealand lamb is likely to be further bolstered by European nations reducing flock sizes. European Union production was 18% lower in 2008 than a decade previously, with further reductions forecast over the next 10 years.
Outlook for rural property
The rural economy is in a period of correction as it adjusts to the current economic environment. The reduction in dairy commodity prices, a stubbornly high New Zealand dollar and the after effects of the 2008 drought have put pressure on the sector. As a result there has been a corresponding downward pressure on farm and land values.
There has recently, however, been evidence of a modest increase in sales activity as the combined impact of lower interest rates and falling farm values over the past year has encouraged buyers back into the market. Interest rates have fallen sharply this year as the Reserve Bank of New Zealand has switched its emphasis from controlling inflation to stimulating the economy. This has seen the Official Cash Rate (OCR) being lowered from 8.25% to a record low of just 2.5%. In the latest monetary policy statement Reserve Bank chairman Alan Bollard indicated that the OCR is set to remain at this level until late 2010.
There is no doubt that prime rural property, ie, that which is well located, benefits from good aspect, topography, soil type and climate and can demonstrate a production history, will continue to attract good levels of purchaser interest. However, as has been experienced in the commercial property market over the past 12 months or so, we are likely to see a wider price differential continuing to open up between top quality farms and those of lesser value.
Looking to the longer term, a growing world population will continue to increase the demand for food. Fonterra, for example, is forecasting that demand for dairy produce between 2007 and 2017 will increase by 24%, the equivalent to needing to add a dairy industry the size of New Zealand’s to world production every year for 10 years. Such increases in demand will certainly benefit farming nations, particularly efficient ones such as New Zealand.
New Zealand farms are also proving attractive to overseas buyers with agency reports of continued inquiry from the UK, Europe, Asia and the USA. Proposed changes to the overseas investment regulations by the new National Government may result in further competition for property from overseas investors, particularly if the exchange rate falls.
In the short term, it seems likely that there will be further downward pressure on rural land prices although prime property and well run farming operations will continue to attract interest from both local and international buyers. However, secondary property will have to be appropriately priced in order to generate interest and competition.
In the longer term, New Zealand farming is well positioned to take advantage of many opportunities as world demand, particularly from the emerging Asian economies, places upward pressure on commodity prices. This is likely to continue to underpin the attraction of rural property as a sound investment.
