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2ND HALF 07 CANTERBURY RURAL REPORT

CANTERBURY RURAL

Escalating commodity prices, a burgeoning demand for protein from Asia and the requirement of the USA to reduce its dependency on fossil fuels have combined to create the most positive economic climate enjoyed by the Canterbury rural sector for over fifty years.

After a period of nearly three years, from the six month period to June 2004, when median farm values have increased only moderately, indications are that the market has shown a resurgence, not experienced for some time, as a result of the increased dairy payouts by the dairy Co-operatives.

As at the six month period ending June 2007 median farm values in Canterbury stood at $1,000,000, according to sales statistics released by the Real Estate Institute of New Zealand (REINZ). The latest figure is still below the peak average sales value of $1,200,000 reached in the six month period ending December 2004.

 

 

The above figures, however, according to market reports, are not fully reflective of the current market position. Indications are that properties which have recently been brought to market are attracting higher levels of market inquiry than has been the case over the last few years as confidence in the farming sector increases.

The improving sentiment surrounding both the regional and national farming industry is being driven by spiralling dairy and grain values which are in turn increasing farm gate incomes.

World commodity prices have risen by 36% over the last year according to the ANZ’s August commodity price index. The upward surge in values has been predominantly driven by dairy prices which have increased by 120% over the same period.

 

 

While commodity prices have been rising for some time, the benefit to New Zealand farmers has been somewhat subdued by the strength of the New Zealand dollar, which in July reached post float highs of around 80 cents against the US dollar. As a result of the latter point, commodity prices in NZ dollar terms increased by only 20% in the year to August. Between July and August, however the local currency gave up approximately 7% of its value resulting in the commodity price surging by nearly 11% when measured in the local currency. It is likely, given the current volatility within the currency markets that locally denominated returns will continue to fluctuate on a monthly basis. In the longer term, however, the New Zealand dollar is forecast by most analysts to trend downwards from its current highs.

The increase in farm gate incomes is, as outlined above, most clear in the dairy sector where Fonterra have increased their forecast payout for the 2007/2008 season to $6.40. Should this payout transpire then the average dairy farm income of its near 11,000 shareholders will be increased by approximately $207,000 compared with the previous season. Many analysts believe that the end of season payout could infact, as dairy commodities appreciate in value and the NZ dollar depreciates, be over $7.00 which will further boost incomes.

While the increase in dairy prices cannot continue at recent levels the long term outlook for the sector is good when some of the drivers of the market and other global considerations are taken into account. The surge in the value of dairy produce is being driven by sharply increased levels of demand for protein from Asia, particularly China and India, where rapidly growing economies means that protein is affordable for greater proportions of the population. Fonterra forecast that in the next ten years growth in global milk consumption will increase by 24% which equates to a requirement to add a dairy industry the size of New Zealand’s to world production every year for the next decade. Given the strong dairy base now in Canterbury, this is likely to ensure further growth in the regional market.

Over the next few years the ability of traditional suppliers to expand production to meet the increased levels of demand will be restricted by a number of factors. In the United States the desire to reduce dependence on oil has resulted in an increase in the production of bio fuels which are derived from America’s vast grain belt. The diversion of corn from animal feed to ethanol production however, means that stock levels have had to be reduced.

In Australia extended periods of drought have also led to stock levels being reduced and even given a more favourable climate in the short term it will take some time for numbers to recover. In Europe milk production has plateaued in recent years and the incentive to increase production is somewhat diminished by the fact that higher commodity prices have led to decreased subsidies through the Common Agricultural Policy.

Although the focus has recently been on the dairy industry, the increasing confidence in farming as a whole is likely to result in market prices for farms in other sectors of the industry also rising. Recent sales evidence in the Methven area has seen dry land farms now reaching new benchmark levels of around $27,000 per hectare.

The success of the dairy sector has led to an increased interest in farm conversions. It is understood that 120 dairy conversions are planned in the South Island for the 2008 season. This is likely to place considerable strain on cow numbers, contractors and labour. Those sheep and beef farms, for example, which could support dairy processes are attracting strong levels of demand from both individual farmers and corporate farming organisations such as Dairy Holdings Limited, Synlait and other major farming interests and syndicates.

The competition for sheep and beef farms has a dual effect. Firstly the average value of the farms is increased and secondly, as a result of conversion, the stock levels of sheep and beef cows is reduced meaning less can be brought to market which in turn, if demand remains static, increases the value of stock.

Recent market reports from NZX Argrifax indicate that demand for lamb from traditional markets such as Europe is increasing and that this combined with the weakening dollar has led to an improvement in prices. The short to mid-term effect is likely to be a renewed interest in the sector providing a further boost to farm prices.