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Drought conditions bring ‘double-edged sword’ to farm price values

Tags: Canterbury Rural

Drought conditions across Canterbury are having both a positive and negative impact on farm values and sales volumes, according to data out from one of the province’ s leading real estate agencies.


Bayleys Canterbury director Bill Whalan said that the official declaration of a drought in the region last week confirmed what the real estate sector had been seeing for the past six weeks.

“Sales volumes of dairying properties, anecdotally, feel down - with most dairy farmers now reluctant to sell into a market where not only are we suffering from a drought, but the milk solids payout is also declining,” Mr Whalan said.

The drought declaration by Primary Industries Minister Nathan Guy comes just weeks after Fonterra announced a farm gate milk price of $4.70 per kilogramme for the next season.

“No one really wants to either set a new lower market pricing level or appear to be selling at a less than favourable time unless they absolutely have to. The general rural business reaction to this drought as it has worsened, has been to hunker down and wait until the price signals in the market for dairy product are stronger again and vendors feel that it is again ‘safe’ to put their property on the market.

“In other words – they will want to see some physical evidence that the market has regained previous levels before acting – no one wants to be first. Price levels and expectations appear to be down approximately five percent judging from discussions we have had over the past six weeks with valuers active in the dairy industry.”

On the other side of the coin, Bayleys Canterbury rural sales specialist Dean Pugh said that while values had slipped for dairy farms, the converse had been noted for cropping and dairying support blocks which had come into their own because of the drought.

“With a drought, surplus feed supplies either grown by dairy farmers or by cropping specialists, become shorter in supply. As such, the price for feed rises. For those dairy farmers who have their own support blocks growing feed crops, and who can move their cows to winter on, they are in a far better position than farming peers who are at the mercy of the market in terms of both feed availability and the price for that winter feed,” Mr Pugh said.

“Support land means that a dairy farmer can have more control over the cost of the feed, have exclusive access to that feed, and not have to compete on price in the market to secure it.

“With so many more dairy conversions in the last few years of land that had previously been used as dairy support, there is even less of that land available now to support even larger demands for winter feed.

“Several farmers I have spoken to who have to pay a premium for winter feed in a drought year are now seriously looking at purchasing their own support blocks,” added Mr Pugh.

“Consequently, they are keen to pay just a little more to buy that support land going forward, as it may be just as important to the overall financial success of the operation as the milking platform itself.

“With vendors perceiving there is a lift in demand for those support properties we are now seeing some of them more seriously considering taking them to the market for sale. “Obviously the bigger the scale of the milking operation, the greater the cost and risk imposed on the operation by a drought… so perhaps the motivation to cap this risk is greater.“

Mr Whalan said the drought conditions had openly highlighted the value of water irrigation access for Canterbury’s rural productive properties.

“Quite simply, irrigation infrastructure on a property – whether dairy or support block - is highly valued. Modern irrigation technology is even more favoured by buyers as it’s the key to water efficiency,” he said.

“Water availability which remains unrestricted in a drought is even more highly-valued and in dry times like we have now, that ability to continue irrigation systems will be brought out – as is land which does not benefit from water rights. Again, it’s that dual-edge sword effect which will have an impact on both land value and sales volumes.

“Dairy production is slowing with irrigation restrictions and pastures not growing so fast due to heat or water stress. Daily per-cow milk production will be affected unless considerable amounts of supplement are used now.”

Mr Whalan said that fortunately, a high percentage of Canterbury’s dairy operators had recorded bumper winter and spring growing conditions - enabling many dairy farmers to be in a stronger financial position than in many previous droughts.

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“At the start of the year, many of the farmers we speak regularly with said their balance sheets were ahead of last year’s production forecasts. However that positivity is fast reversing,” he said.

“One of the other major impacts of this drought is that cull dairy cows being sent to the meat processing industry for killing, due to dry conditions or for cost-cutting are creating a log-jam of incoming stock, which is in turn putting pressure on the availability of killing space in the freezing works.

“Consequently that ripples through to the sheep and beef sector which is also wanting to kill stock at this time of the year. They are now being forced to feed stock for longer as the killing queues are processed.”

Mr Whalan said that while the drought was now at the forefront of most conversations with both vendors and purchasers, experienced dairy farm buyers the agency was working with were looking through this low payout year as a ‘one off trough’.

“Just like last season’s payout was a ‘one off high’,” he said.

“Prudent dairy farmers are not basing their investment decisions on the highs or the lows, but rather using a long term average figure to budget on. This is in line with the attitude of the major rural lenders as well who will use a long-term budgeting payout level when assessing credit.

“So while Fonterra is budgeting for a farm gate milk price of $4.70 per kilogramme for the next season, the banks actually take a longer-term view of pricing more around $6.30,” Mr Whalan said.

“There’s nothing new about the cyclicality of the rural market. Banks and farmers take a more flat-line approach to their revenue forecasts, working instead on long-term rolling averages rather than historical high and low positions which can fluctuate quite markedly over relatively short time frames.“

For further comment, contact Bayleys Canterbury director Bill Whalan. Telephone 275 90 90 95

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