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NOT ALL BAD DOWN ON THE FARM

NOT ALL BAD NEWS DOWN ON THE FARM

The commodity boom which drove farm sales prices up in 2007 and 2008 has ended resulting in a reduction in property sales activity and a correction in values. The commodity price story, however, has been predominantly based upon the dairy industry and has to an extent hidden the fact that for many other sectors there continues to be positive developments.

Prices for red meat are forecast to continue to rise in $NZ terms as supply declines, the New Zealand dollar has depreciated significantly in recent months thereby supporting NZ farm gate prices, the cost of inputs particularly fuel and fertiliser have fallen from recent highs while interest rates have declined sharply. Even in the dairy sector the latest Fonterra reduced forecast to $5.10 would, should it eventuate, result in a payment that is still above the long-term average

Farm sales values surged throughout 2007 and early 2008 driven principally by the positive outlook for the dairy sector, with not only dairy farms but also farms capable of conversion to dairy commanding record sales values. This resulted in average values peaking at $2.691 million in the March quarter of 2008, a level which held fairly steady for the next six months.

The latter part of the year witnessed a profound change in the economic environment with the global economic slowdown and financial upheaval sharply reducing consumer consumption of expensive dairy products, accompanied by a sharp decline in dairy commodity prices.

The effect on the local rural real estate market was initially a sharp downturn in levels of market activity with sales in the September quarter falling to 430, down from 718 in the preceding three month period. It was not until the December 2008 quarter however, that the impact on average transaction values became apparent, with the median sale price recorded by the Real Estate Institute of New Zealand declining by nine percent to $1,525,000 The median price for all farms sold in the three months to January 2009 level was exactly the same down 15% on the median price of $1,790,000 in January 2008. The turnover of properties in the three months to January 2009 was just 305 compared with 346 in the three months to December 2008 and 732 in the three months to January 2008.

There is no doubt therefore that the dairy commodity price has been the most significant factor influencing rural land values over the last year. However, the underlying fundamental strength within the rural sector has been somewhat lost in the frenzy over the downturn in dairy fortunes. A number of New Zealand’s farming export products are at or close to decade long highs, according to statistics released by NZX Agrifax.

Lamb prices, having been depressed for a number of years, have recovered significantly over recent months with 17.5 kg lambs commanding in excess of $85 in January 2009, an increase of over $23 per head on the January 2008 figure and well above any prices achieved in the last 10 years.

Similarly, beef prices are at their highest level since 2002 with sales values of just over 340 cents per kilo being achieved for meat from steer. The January 2009 figure is up approximately 7.75% on the January 2008 price.

Returns from venison have been increasing steadily over recent years and again this trend has continued in the early part of 2009 with prices topping $8 per kilo for the first time in the past decade.

Returns from the dairy sector will be down significantly this season compared with the 2007/2008 year, however, when viewed in an historical context the payout from Fonterra, if the current forecast of $5.10 per kilo of milk solids eventuates, will be the third highest recorded. This level is still well above the $4.46 per kilo paid by the co-operative at the end of the 2006/2007 season.

Moving forward while there is some market scepticism about whether Fonterra will be able to hold its payout at over $5 a kilo in the face of continuing uncertainty over dairy prices, the outlook for other main sectors is more positive

In its mid-season update,released in mid January, Meat & Wool New Zealand’s Economic Service predicted strong increases for both lamb and beef prices for 2008-09. Lamb prices at the farmgate are expected to be up 38 per cent on last year and beef prices are forecast to increase 11 per cent. Total sheep and beef farm earnings are estimated to increase by $500 million to $4.4 billion.

Meat & Wool’s EconomicService expects lamb prices at the farm-gate to average $80 per head in 2008-09 compared with an average of $58 per head last year.  Although thisrepresents a 38% increase, lamb production is down over 20% as a flow on from drought, and to a lesser extent, the expansion of the dairy industry onto sheep and beef land.  There has also been an increase in cropping and sheep and beef farms providing pasture for dairy support.

The increase in lamb price is due to tighter global supplies of lamb from New Zealand, Australia and the EU and the depreciation of the New Zealand dollar, particularly against the Euro and the US dollar.”

Meat & Wool’s Economic Service also says beef prices could firm further into 2010 underpinned by the depreciation of the New Zealand dollar and strong United States demand for manufacturing beef as consumers trade-down to lower value market segments such as hamburgers.”

Farmers are also benefitting from a fall in the cost of some of the major farm input items such as fuel and the biggest of all fertiliser. In mid 2008, the cost of “Superten” phosphate fertiliser exceeded $550 per tonne, but by early February this had fallen to approximately $430 per tonne, a decrease of nearly 22%.

Over the same period the price of fuel has also fallen as the value of oil, which peaked at approximately 147 USD per barrel, is now trading at in the region of 40 USD per barrel. There have also been some falls in stock feed prices.