Dairy land prices expected to stabilise

The price of Southland dairy farms has increased 40% in the past eight months and land suitable for converting to dairying has almost doubled in the past year, but experts expect prices to stabilise for a while.

Southern Wide Real Estate director Dallas Lucas doubted last Friday's record $7.90 a kg of milk solids payout from Fonterra for this season would encourage further land price appreciation, saying the market already had momentum from previous milk price rises.

He said the market jumped when Fonterra increased the forecast payout from $4.46 in the 2006-07 season, initially to $6.90, then $7.30 a kg of milk solids (kg m/s) this season.

Last Friday's forecast of a final payout for this season of $7.90 a kg m/s along with a forecast opening price of $7 a kg m/s for next season was likely to lock in those higher land prices than increase them further, he said.

Eight months ago, dairy farms in Southland were selling for $30 to $31 for every kg m/s they produced.

Now, the price was $41 to $42 a kg m/s due to this season's payout.

When the former listed corporate dairy company Tasman Agriculture divested itself of 67 South Island dairy farms in 2000 and 2001, it averaged between $17 and $18 kg m/s.

Better quality sheep and beef land suitable for converting to dairying has increased from $8000 a ha to between $15,000 and $16,000 a ha in the past year.

Mr Lucas said normally his company would have 30 dairy farms for sale at this time of the year, but it has just eight.

"They are still moving. There is no buyer resistance," he said.

Buyer interest and price momentum had already started before last Friday's announcement, but Mr Lucas said the key was the $7 kg m/s forecast for next season.

"It certainly was a substantial increase, but I think the big one is knowing where we are headed."

There were already 100 farms converting to dairying in Southland in time for next season, with a similar number expected for the 2009-10 season.

Mr Lucas said this allowed older sheep farmers the opportunity to sell and retire while those with smaller sheep farms were selling and buying larger sheep and beef farms, a trend he said would continue.

"I think it'll settle down. Everybody is expecting the sheep industry to improve. The question is whether it will improve enough to be viable."

Dairy cow prices, considered the first sign of a booming industry, had stayed steady, due in part to tight winter feed supplies but also a large number of retained heifers that would calve in spring 2009.

PGG Wrightson Otago dairy stock agent Paul Thomson said the price of main-line herd cows, 2 to 8 years of age, had stabilised at between $2400 and $2600 and second cut cows $600 to $1200.

Mr Thomson said few cows were available, but the main limiting factor was the lack of winter feed.

Farmers wanting another 30 to 50 cows could not get winter grazing, he said.

It was costing farmers about $24 a cow a week for winter grazing and baleage was selling for between $100 and $120 a bale.

The price fell to $80 a bale after late summer rain but had increased again.

Mr Thomson said supplies of supplements were tight but baleage could be found.