Rural land prices in the Canterbury region have surpassed their pre GFC highs according to latest results reported by the Real Estate Institute of New Zealand (REINZ).
The REINZ sales data for the three months ending March 2015 shows the median sales price of rural land to have reached $31,826 per hectare surpassing the previous high of $31,126 per hectare registered in the opening quarter of 2009. While the median sales value can be volatile due to the relatively limited number of sales and the wide variety of different farm types, the latest figure continues the trend of increases in value prevalent since mid 2011, when land values reached their post GFC low.
As the above graph shows median values per hectare declined to approximately $15,500 in mid 2011 and have doubled between then and the opening period of this year.
While values have now surpassed pre GFC levels, sales activity has remained more subdued. Although still well ahead of the levels of activity experienced over the 2009 to 2011 period they remain behind those which were apparent leading up to the last cyclical peak reached in early 2008.
In mid 2014 the rolling annual sales volume reached just under 250 sales and remained at similar levels throughout the year. The opening quarter of 2015 has seen a reduction in sales, no doubt reflecting the impact of lower dairy prices and the drought which, at its peak, affected the entire region.
Recent rains have alleviated the conditions in Central Canterbury where pasture has recovered, although dry conditions persist in parts of North Canterbury, particularly along the east coast.
While total sales volumes have declined, agency reports confirm that competition for well located, productive land remains strong with multiple offers still common at the upper end of the quality scale. There is evidence however, that market interest in secondary quality units has waned in recent months.
The impact of the downturn in dairy prices, on the market, will clearly depend upon the period of time over which prices remain depressed. As discussed in further detail later in this report a vast majority of farmers are in a position to deal with this season’s low payout and therefore a rush of distressed sales is not anticipated.
It is likely however that those farmers carrying higher levels of debt may look to reposition their business by selling off surplus land or parts of farms.
As stated above high quality farms continue to attract strong levels of purchaser inquiry when introduced to market, indicating that the long term prospects for the rural sector are trumping concerns about volatile commodity markets.
Within the dairy sector the primary driver is access to a reliable water source, therefore land within irrigation zones is particularly attractive. Whilst local farmers continue to be the most prevalent buyers, they are having to compete with overseas interests. In the year to March 2015 Overseas Investment Office approval was granted for the purchase of approximately 4,882 hectares of dairy land within Canterbury. It should be noted however, that of that figure, consents obtained by institutional funds, accounted for approximately 3,088 hectares. While requiring OIO approval due to the fact that the funds have international investors many of their investors will be New Zealanders.
Increased overseas interest has also been noted within the sheep and beef sectors, particularly for larger scale operations of between 5,000 and 10,000 stock units.
Quality support blocks have also continued to attract high levels of purchaser inquiry.
Impact of dairy downturnFollowing a record dairy payout in the 2013/2014 season, dairy farmers have seen forecasts for the current season regularly reduced in line with retreating commodity prices. The current forecast sits at $4.50 per KgMS.
A final payout at this level would result in a reduction of approximately $7 billion in dairy farm income compared with last season.
Combined with a previously announced estimated dividend range of 20-30c a share, the forecast amounted to a cash payout of $4.70 to $4.80 for the current season – below DairyNZ’s estimate of break-even for most farmers of $5.40 a kg.
Given the above it is clear therefore that many dairy farmers will have to continue to exercise caution with on-farm budgets, particularly for those 10% of dairy farmers that hold 30% of the total debt within the sector.
Such downturns in commodity cycles lead to concerns that distressed sales will increase, signals from the banking industry at present, remain fairly positive. The head of ANZ New Zealand, David Hisco, has recently been reported as saying that “whilst the low dairy payout is not something anyone would like to see for a sustained period, I think farmers are in a better shape today to manage it than five years ago”.
In the short term, farmers will benefit from deferred payments from the strong 2013/14 season and low interest rates. Land holdings have in many cases also provided asset buffers which remain in play as, as stated earlier in this report, land values have, to date, held firm despite the downturn in commodity prices. This has been recognised by the Reserve Bank of New Zealand, which in its latest Financial Stability Report states that the fact that land values have not fallen “suggests that low interest rates and a reasonable longer term outlook are supporting demand for farmland despite the difficulties of the current season”.
Looking ahead, a majority of forecasters believe that dairy prices will begin to recover in the later part of 2015 and therefore payouts for the 2015 /16 season will lift from current levels.
Given current prices, the ASB expects production growth to slow to the point where demand can catch up, albeit that this point will come later than previously expected.
Latest forecasts from both the ASB and Westpac are picking a 2015/16 payout of $5.70 kg/MS.
Further evidence of a likely recovery in prices is provided by the NZX’s dairy futures market. As the graph below illustrates, the market is anticipating an upward bias in whole milk powder prices over the course of the rest of the year. Current contracts are being settled at approximately US$ 2,280 per tonne with December delivery prices being priced at US$2,700 an increase of 18%.
Sheep/dairy shift continues
Across New Zealand sheep numbers fell to 29.8 million as at June 2014 a fall of 3% over the June 2013 figure. The decline was led by the Canterbury region where sheep numbers fell by 255,000 from 5.22 million to 4.97 million. The latest figures continue the trend apparent since 2010 when the total number of sheep stood at 5.65 million.
Over the same period, dairy’s expansion has continued. In 2010 total dairy cow numbers stood at 938,000, the latest statistics show this number to have increased to 1,333,000 an increase of approximately 42% over four years.