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New Zealand dairy land values – “stuck in neutral since 2010” – are expected to come under downward pressure over the next five years, according to a new report by agribusiness banking specialist Rabobank.
In the recently-released report Afloat But Drifting Backwards – A Look at Dairy Land Values Over the Next Five Years, Rabobank says a host of macro-economic factors – including tighter credit availability, reduced flows of foreign capital and pending environmental change – will contribute towards softer dairy land prices across the country in the short to medium term.
Report author dairy analyst Emma Higgins said additional stress would be placed on dairy land prices by the anticipated erosion of cash returns for dairy producers.
“Over the next five years, we’re forecasting an average farmgate milk price of $6.25kg/MS, above the current 10-year average, but below recent price levels. During this period we also expect to see operational and compliance costs rise and production per hectare slow down with improvements in genetics and management offset by the need to reduce stocking rates and fertiliser in some regions,” she said.
“Based on this view, cash returns to dairy assets will fall, and the price ratio of land relative to its revenue potential will rise – both of which will put downward pressure on the value of the asset itself.”
Ms Higgins said a declining dairy land market will have implications for all industry participants.
“Investors will need a high level of competency to attract capital and succeed in a declining market, with increased regulatory complexity for all industry participants,” she said.
“Investors will also need to undertake long, and more expensive, due diligence before purchasing dairy land and this will slow down the land-buying process and remove some of the drivers of market tension that have previously inflated land price.”
Banking support
Rabobank New Zealand CEO Todd Charteris said despite an expected easing of dairy land values across all key dairy regions, the bank remained fully committed to New Zealand’s dairy sector and the wider agricultural industry.
“While Rabobank will need to closely monitor and adjust to changes in the banking and agricultural operating environment, our broader strategy and approach to the agrilending market will remain unchanged.” he said.
“As a specialist food and agribusiness lender, we are fully committed to New Zealand’s rural lending market and our objective is to sustainably grow our rural lending portfolio by supporting our clients and exploring new opportunities with leading food and agribusiness operations.”
Dairy land price history
The report says rising farmgate milk prices were a key driver of escalating dairy land values between 2000 and 2008 and the well-organised New Zealand dairy industry was able to tap into these rising prices, with the nation’s export receipts benefiting.
“Across this period, readily-available capital significantly underpinned the dairy land value boom,” Ms Higgins said.
“Fuelled by regular cashflow, along with certainty of milk collection via the establishment of Fonterra, industry confidence skyrocketed with this leading to farmers investing further in their own businesses and in the cooperative model.”
The report says land values softened during the financial crisis in 2008 and 2009 as the milk price slumped, capital dried up and sector confidence fell.
“Dairy land sales reduced dramatically following the GFC,” Ms Higgins said, “with the volumes halving compared to the 10-year average experienced between 2010 and 2019 as credit flows ground to a halt.”
Despite milk prices remaining relatively high since 2010, the report says land prices have shown only modest advancement across the past decade.
Ms Higgins said reduced capital has been the key factor restricting land value growth during this period.
“The regulatory impacts of the global financial crisis still linger today, setting the framework for a different banking era. Changes over recent years which have tightened capital availability across New Zealand banks include policy changes requiring banks to source more of their funding from retail deposits and long-term wholesale markets, tighter rules relating to foreign investment in agricultural land and capital constraints on the offshore parents of local banks,” she said.
“The RBNZ capital proposals review, which kicked off early last year and concluded with the announcement of finalised changes last December, is another factor which will impact capital availability.”
Three common themes
The report says that while some regions will deal with macro headwinds better than others over the next five years, prices across all regions will be impacted by three common themes.
One of these themes, Ms Higgins said, is demand for competing land uses.
“We anticipate 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,” she said. “This trend is currently most prominent in the Waikato, but the South Island will also see more of this over the next five years.”
Ms Higgins said the reduced availability of capital was a further key theme which would have implications for the dairy land market across the country.
“All regions will face credit constraints as a headwind over the next 5 years,” she said. “And over this period, Canterbury has the potential to see the largest land recalibration due to a lack of foreign capital underpinning large-scale property sales.”
The final key theme impacting dairy land prices, according to Ms Higgins, is local environmental regulation.
“Land prices will vary greatly depending on the location of the farm relative to the regional land and water plan, with specific reference to nutrient allocations and the availability of natural resources.”
Rabobank New Zealand is a part of the global Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has nearly 120 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 40 countries, servicing the needs of about 8.6 million clients worldwide through a network of close to 1000 offices and branches. Rabobank New Zealand is one of the country's leading agricultural lenders and a significant provider of business and corporate banking and financial services to the New Zealand food and agribusiness sector. The bank has 32 branches throughout New Zealand.
Media contacts:
David Johnston
Marketing & Media Relations Manager
Rabobank New Zealand
Phone: 04 819 2711 or 027 477 8153
Email: david.johnston@rabobank.com
Denise Shaw
Head of Media Relations
Rabobank Australia & New Zealand
Phone: +612 8115 2744 or +61 2 439 603 525
Email: denise.shaw@rabobank.com
