Pressures weaken dairy land values

Emma Higgins
Emma Higgins
Dairy land values are being undermined by three factors that are unlikely to disappear within the next five years, a new Rabobank report says.

The report’s author, Rabobank dairy analyst Emma Higgins, said tighter credit availability, reduced flows of foreign capital and environmental concerns would contribute to softer dairy land prices across the country in the short to medium term.

The bank is forecasting an average farm-gate milk price of $6.25 per kg of milk solids over the next five years, which while above the present 10-year average, is below recent price levels.

"During this period we also expect to see operational and compliance costs rise and production per hectare slow with improvements in genetics offset by the need to reduce stocking rates and fertiliser in some regions."

Based on this, she expected cash returns to dairy assets to fall, and the price ratio of land relative to its revenue potential to rise.

"Both of which will put downward pressure on the value of the asset itself,” she said.

Investors would also have to undertake long and more expensive due diligence before buying dairy land and this would slow the land-buying process and remove some of the drivers of "market tension" that had previously inflated land prices.

The latest data from the Real Estate Institute of New Zealand supports the bank’s analysis, showing dairy sales are down 41.6% for the year to December compared with the previous year.

Institute rural spokesman Brian Peacocke said while there were optimistic forecasts emerging for the milk payout, there was "little evidence" of change in the market-suppressing stance from the majority of the trading banks.

While results were generally solid and prices steady for finishing and grazing properties throughout Otago, only one dairy unit sold at a good price in the Waitaki district over the final quarter of the year.

For that period, the average price per hectare was $38,152 across the sale of 35 dairy properties, compared with $40,580 across 58 properties for the final quarter of 2018.

On a basis of price per kilo of milk solids the median sales price was $41.40 per kg of milk solids for the three months ended December 2019, compared with $51.18 per kg of milk solids for the three months ended November 2019 (-19.1%) and $40.56 per kg of milk solids for the three months ended December 2018 (+2.1%).

Ms Higgins said competing land use would continue to influence pricing.

"Dairy land will increasingly be in demand for other land uses such as sheep and beef, dairy support, horticulture and the potential for subdivision as well as specialised uses, such as broiler chicken and dairy goats," Ms Higgins said.

The report noted that while the trend was most prominent in the Waikato at present, the South Island would also see more of this over the next five years.

“Canterbury has the potential to see the largest land recalibration due to a lack of foreign capital underpinning large-scale property sales.”

Land prices would also vary depending on the location of farms and the subsequent regional land and water plan governing their operation, specifically nutrient allocations and the availability of natural resources, she said.

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