Rural land prices in the Taranaki region have reached a post Global Financial Crisis (GFC) high according to latest results reported by the Real Estate Institute of New Zealand (REINZ).
The REINZ sales data for the three months ending May 2015 shows the median sales price of rural land to have reached $42,617 per hectare. While the September quarter of 2012 generated a higher median the figure was based on only four sales and was skewed by the sale of a small arable unit and can therefore be disregarded. 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 adjacent graph shows median values per hectare declined to below $10,000 in the third quarter of 2011 and have recovered strongly since then.
While values have reached post GFC lows, sales activity has remained more subdued. Although still well ahead of the levels of activity experienced over the 2010 to 2013 period they remain behind those which were apparent leading up to the last cyclical peak reached in late 2008.
In early 2014 the rolling annual sales volume reached 125 sales and remained at similar levels until the latter part of 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 large parts of the region.
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.
Dairy Sector Faces Cash CrunchFollowing 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.
The impact of the sharp downturn in dairy prices will be brought into sharp focus in July, when for the first time since Fonterra was formed dairy farmers will receive no payments and the August payout will be minimal.
At present however there is no evidence that there will be a sharp rise in distressed sales. Banks will obviously monitor the situation, however, as discussed above, land values have risen sharply in recent years increasing the underlying asset value of farms against which loans are secured. While therefore farmers face a short term cash crunch, a majority of Taranaki dairy farmers will be well placed to manage their way through it. Clearly an extended period of low payouts will change the situation with farmers and their bankers having to review debt against the value of the farm.
Taranaki farmers, as will be discussed in detail later in this report, are amongst the most efficient in the Country, with the cost of production, for a large proportion of farmers, being in the region of $3.50 per kg of milk solids excluding debt loading again supporting the premise that the region’s farmers are amongst the best placed to manage their way through the current downturn.
A majority of commentators continue to forecast a pick up in milk prices during the latter part of this year. Further evidence of a likely recovery in prices is provided by the NZX’s dairy futures market. As the graph adjacent illustrates, the market is anticipating an upward bias in whole milk powder prices over the course of the latter part of 2015 and opening quarter of 2016. Current contracts, for whole milk powder, are being settled at approximately US$2,200 per tonne with March 2016 delivery prices being priced at US$2,650 an increase of 20%.
C0untry Case Study
163 Oapui Road Rarata, Inglewood – Sold – $7,800,000 by Negotiation
Oapui is 625ha situated in the Tarata district operating a diverse and integrated farming enterprise spread over 11 titles. Supplying Fonterra and producing in excess of 200,000 kgMS the farm also supports beef cattle, a high performing ewe flock and deer. Infrastructure includes a modern (2008) 50 bail rotary cowshed with in-shed feeding, deer complex, two woolsheds, three well located houses, numerous haysheds and farm buildings. A number of native stands of mature trees and the predominantly rolling contour provide an attractive backdrop to everyday working on a farm that offers opportunities.
Taranaki Farmers Amongst Nation’s Most EfficientA number of key indicators from the most recent NZ Dairy Economic Survey for the 2013/14 year from Dairy NZ show Taranaki dairy farmers to be amongst the most efficient in the Country. Compared to other major dairy producing regions Taranaki farmers generate some of the highest operating profit margins and overall returns.
A key performance measure is the return on assets (ROA) which provides guidance on how efficient farmers are at using their farm assets to generate earnings. For Taranaki it shows that having sat below national averages over the 2009-2011 period Taranaki has subsequently substantially outperformed the national averages. This has seen returns increasing from 3.5% in the 2009/2010 season to 12.3% in 2013/14.
Better Year for Sheep and Beef SectorsWhile the commodity price index has declined sharply over the last year this has been primarily driven by the performance of the dairy sector.
The meat, skins and wool component index however has been far less volatile. Although down on the peak levels reached in September of 2014 it has remained at elevated levels since early 2011.
Sheep and beef farmers are also benefitting from the recent fall in the value of the New Zealand dollar ($NZ) on the foreign exchanges. When priced in the local currency the meat, skin and wool component index sits just 9% below the peak level reached in October of 2014.
Lamb prices have hovered at just under $100 per head which, while down on the peak price of approx. $120 per head achieved in the latter part of 2011 and early part of 2012, remains ahead of the average prices generated over the rest of the last 10 years.
Farming has become more efficient over recent years with lambing numbers up significantly, however it will require an extended period of high prices before it becomes cost effective to increase the size of flocks and reverse the trend of falling stock numbers which has been prevalent since the 1970’s
The beef sector has been, by far, the strongest performing over the last year. Prices peaked in the early part of 2015 with farmers reporting that local product was commanding prices of up to $6.40 /kg which compares with a long run average of $3 – $4 /kg. While again prices have eased over recent weeks, prices in the region of $5.40/kg continue to be paid remaining, therefore, well ahead of the long term averages.
As with the dairy sector the Taranaki’s sheep and beef farmers are amongst the most efficient in the country. As the table below illustrates, farm surpluses ($/ha) generated by hill farmers in the Taranaki / Manawatu region have outperformed the national average every season, with the exception of 2007-2008, since 2005-2006.