We go into the new season with very positive numbers on meat and dairy pricing, and on farm profitability. Yet the rural property market has stayed sluggish through 2018. Frankly, purchasers and vendors need to look beyond headline distractions – and see the current strength in fundamentals across much of New Zealand pastoral agriculture.
The past year has definitely been a challenging one for the market in dairy properties. There have been plenty of negative headlines about Fonterra earnings downgrades, stronger environmental regulation, the supposedly looming threat of alternative proteins and the impacts of climatic volatility. Perhaps the biggest challenge to expansion in the sector has come from banks and their managing of prudential limits and exposure to dairying in general. They have been, in effect, rationing the credit available for large-scale property acquisitions and developments. This squeeze, along with the Government’s lid on overseas investment in rural land, has potential to impact on investment in New Zealand dairy farms in the $10 million-plus bracket this season.
That said, it’s very important to note the other, far more positive aspects of today’s market. Milk price and farm earnings fundamentals are certainly strong as we head into 2018-19 and beyond. This year’s forecast milk solids payout is the highest for five years and global market demand for dairy products is still growing. Recent analysis from ANZ’s ag economists shows that New Zealand dairy farmers continue to have a cost of production advantage over competitors. Our cost per litre is apparently a fifth lower than the average among 15 dairy exporting countries. Farmgate profitability is forecast at $1750/ha – significantly above a 10-year average of $950/ha.
We are starting to see more property sales between purchasers and vendors who do proper analysis of industry fundamentals and complete the due diligence needed for bankable dairy farm proposals. Last season was notable for the number of high-profile dairy sales that did not go through to completion because – as it seemed then and now – the parties could not quite summon the confidence needed to see past dairying’s negative headlines and negotiate the final hurdles in each transaction. In those cases, bank support was actually not the issue. This season we also expect to see more medium-sized family dairy properties selling as older farmers retire. Such sales have been a constant feature of the market over several years (even this past winter). Prices on typical family farms are actually still within the reach of many younger people keen to get onto the land. In some regions which were historically considered second tier, the opportunities now to buy your first dairy farm are probably the best they’ve been in a generation – regions like Tararua, the North Island Central Plateau and West Coast.
In some scenarios, farming families are seeing this as the right time to set up the next generation by expansion of their current operation or purchase of other properties further afield. Of course we do need to think about the negative headlines still facing the sector. M-bovis, for instance, is dreadful for farmers with infected herds. Taking the broad perspective, however, New Zealand does have an effective response in place and the disease will be contained (maybe even eliminated). Longer term, this outbreak could serve to strengthen our biosecurity system to the huge benefit of future farmers.
In truth, property market-wide statistics are not much use to valuation of the individual dairy farm these days. Purchasers and vendors need to focus on each property’s merits and earnings capability in a fundamentally sound industry. The cost of capital is no longer a constraining factor although, as said, credit availability is an issue for the larger-scale investor. Basically, those looking for value will find it in many different places if they look closely enough.
Sheep and Beef
In the sheep and beef property market, today’s product pricing just cannot be ignored. Lamb prices are at historically high levels, and Beef & Lamb estimates average livestock farm profitability this year to be at its highest level since 2011-12 (when it hit a 40-year high). That comes directly out of the strong demand being experienced for New Zealand product across various established export markets, combined with the cost, productivity and quality advantages of this country’s producers.
We are seeing very strong interest in traditional sheep and beef farms. This sector has historically been under leveraged as a hedge against market volatility and poor farm gate returns – and that means sheep and beef producers are today well placed for bank support. Annual gains in farmgate returns have definitely generated the confidence for livestock farmers to act, whether that is to exit their farm or expand operations.
While m-bovis has created new demand for grazing-run-offs, we have seen interest in sheep and beef farms across the board so far in 2018 – interest from institutional investors, city money, forestry owners and others who are often based outside the region of interest.
Overall, we go into spring with plenty of opportunities for purchasers who are prepared to see through negative headlines. The plain fact is that global markets continue to send this country’s primary producers great signals, and their production costs are still significantly better than others. Those who really want to get onto the land will also be seeing how new technologies and systems make farming more sustainable, productive and profitable if applied to best effect.
The future will definitely be different from the past, and potentially much better. But to get there, you need to be looking hard at fundamentals and at the strengths and weaknesses of each property – and to really have confidence in what the future can bring.
Property Brokers is very well placed to assist, with a proven team of rural specialists on the ground and a market-leading digital platform for your marketing programme.
Conrad Wilkshire,
GM Rural for Property Brokers Ltd
