Ag land prices to ride the COVID-19 waves

0
46

IN the midst of a severe global recession brought on by COVID-19, Australian farmland prices will remain “largely unscathed”, according to a recent report from Rabobank.

Report author and agricultural analyst Wes Lefroy outlined three reasons the market would likely be resilient to the pandemic: farmers will remain profitable during 2020, there are limited properties for sale and other fundamentals such as low cost of funds and a weak Australian dollar.

“Farmer operating profit, in our view, is the primary driver of Australian land prices,” Mr Lefroy said.

“In particular, sustained periods of profitability provide farmers with the financial capacity to buy more land.”

Despite the drought that has burdened the east coast, Mr Lefroy reported that three-year farm operating profits were at their highest point since at least 1990 in WA, South Australia, Tasmania and Victoria.

In addition, operational profits were also above the 10-year average in all States except for New South Wales.

Rabobank agricultural analyst Wes Lefroy.

“For farmers with expansion intentions, many will have the capacity to buy more land,” Mr Lefroy said.

However, on the flip side sustained profitability has also reduced the number of people exiting farming and wanting to sell their property.

“We see the number of properties on the market staying at near or historical lows in 2020 for a number of reasons,” Mr Lefroy said.

He reported that record-low borrowing costs have increased farmers’ capacity to service existing debt and interest rates are expected to remain historically low for at least the next three years, which will aid in the market’s outlook during the pandemic.

For those in the industry who are less profitable throughout 2020, Rabobank said banks will most likely support their clients through the economic crisis, reporting that farm foreclosures are relatively rare compared to farm sales with there being 27 foreclosures in Australia from the 12 months prior to June 30, 2018, which were concentrated in drought-affected areas.

Conducting property inspections and auctions has been a challenge for the sector since the pandemic, although it has adapted with virtual auctions and by implementing social distancing during inspections.

Mr Lefroy said that sellers with flexible time-frames may withdraw from placing their properties on the market, “which will also keep the market tight”.

This enables sellers to react quickly to changes in demand and make use of restrictions being eased to allow for more inspections and in-person auctions.

While numerous economic fundamentals have been “severely impacted” by COVID-19, the report said in some cases this would provide support for farmland investment.

“Relatively low returns for other asset classes – such as equities, commercial property and bonds – will increase the attractiveness of agricultural land for both local and foreign investors,” Mr Lefroy said.

“Secondly, a weak and depreciating Australian dollar will support demand from foreign investors.

“So far this year the Australian dollar has depreciated against the United States dollar and the euro, effectively decreasing the price of Australian farmland for investors in those currencies.”

The borrowing power of local farmers will also be maintained in the medium-term by low borrowing costs.

“And overall, the volatility and impact that COVID-19 has caused in other asset classes has also highlighted the stable and countercyclical nature of agricultural land, reinforcing its attractiveness as an investment,” he said.

Mr Lefroy likened this economic crisis to 1990, which was the last recession Australia experienced.

He said Rabobank was forecasting economic growth to fall by 3.2 per cent in 2020, “which is significant”.

– Risks during COVID-19 crisis:

Despite the outlook seeming relatively positive for the rural property sector, Rabobank cautioned that it is not without its risks, especially considering the uncertain nature of COVID-19.

Mr Lefroy said the forecast is more uncertain than usual due to the difficult nature of the coronavirus and identified three areas of risk.

“A deeper and longer-than-expected recession would both reduce investment appetite and impact demand for Australia’s agricultural products offshore, impacting farmgate prices and farm profitability,” he said.

“In the event of a credit crisis, this would essentially put a pause on debt-funded property purchases.

“And loss of access to a key market for Australian agriculture would also significantly impact farmer profits and therefore, capacity to purchase land.

– Spotlight on WA:

Given that much of WA has experienced a row of good seasons, particularly a bumper year in 2018, Mr Lefroy expected the State’s land values to hold particularly strong during COVID-19.

“WA’s most valuable crop of 2018 definitely supported operating profits which we in turn see strongly supporting Australian ag land prices and a string of positive years in WA has put those farmers in a position where if they have expansion intentions then they have the capacity to expand,” he said.

The WA market has also remained very tight in recent years, which Mr Lefroy said is likely to continue.

“We don’t expect there to be a large number of vendors selling for financial reasons – we expect the number of properties coming to the market for those reasons will remain very low, which will help to keep the WA property market tight,” he said.

With the three key factors which were outlined in the report – farm profitability, a tight sales market and low interest rates and a weak Australian dollar, Mr Lefroy said WA was particularly well positioned to weather the COVID-19 storm.

However, he said the three main risks mentioned in the report were still applicable to WA.

Loss of markets for offshore prices has posed a risk in recent weeks with the Al Kuwait live export vessel carrying COVID-19 infected crew.

While the barley tariffs imposed by China is not directly correlated to the pandemic, it’s possible COVID-19 uncertainty and the Federal government’s support to investigate the origin of the virus have escalated tensions with China, which could potentially lead to the loss of a key market.

“Primarily land prices are linked to the capacity of farmers to turn a profit from that land, so the loss of access to a key market is a key risk that we see,” he said.

Mr Lefroy said this could then lead to diminished demand for farmland if there was a major impact on farm profits.

!function(f,b,e,v,n,t,s)
{if(f.fbq)return;n=f.fbq=function(){n.callMethod?
n.callMethod.apply(n,arguments):n.queue.push(arguments)};
if(!f._fbq)f._fbq=n;n.push=n;n.loaded=!0;n.version='2.0';
n.queue=[];t=b.createElement(e);t.async=!0;
t.src=v;s=b.getElementsByTagName(e)[0];
s.parentNode.insertBefore(t,s)}(window, document,'script',
'https://connect.facebook.net/en_US/fbevents.js');

    fbq('init', '212556246621990');
    fbq('track', 'PageView');

(function(d, s, id) {
var js, fjs = d.getElementsByTagName(s)[0];
if (d.getElementById(id)) return;
js = d.createElement(s); js.id = id;
js.src = “https://connect.facebook.net/en_US/sdk.js#xfbml=1&version=v2.3”;
fjs.parentNode.insertBefore(js, fjs);
}(document, ‘script’, ‘facebook-jssdk’));
Source link

Leave a Reply