Wes Lefroy, Senior Agricultural Analyst, Rabobank, Media Release, 31 March 2021
Rabobank expects that 2020 would have been the sixth straight year for land price growth, which according to ABARES data, is an increase of 41% nationally over the six-year period.
While price growth has been sharp, and strong, we expect prices are sustainable at these levels, with a downward correction very unlikely.
In the short term, the fundamentals of the land market remain extremely strong. We have identified that there are three main drivers of land prices, being (1) interest rates, (2) productivity (output and costs) and (3) commodity prices.
The explanatory power of these variables varies by production type. For example, for cropping lands, these three variables achieved an r2=0.87 with land prices over the last 30 years. Over the past six years, nationally, these fundamentals have been the most supportive they have been over the last 30 years. The cost of funding remains at the lowest point on record, the Rabobank Commodity Price index remains at its highest point on record, and production levels in 2020 were well-above average.
With a medium-term lens, a key question remains. Have land prices over-shot productivity?
According to analysis we completed with Digital Agriculture Services (DAS), the price per unit of productivity (NPP) had nearly doubled in some regions, from 2012 to 2019, indicating that prices have been growing much faster than productivity.
Theoretically, if the price of land has outstripped productivity growth, it may imply land is over-valued. However, it is important to recognise that pure returns aren’t the only reason for buying. For example, in many regions, large farmers now border each other, and are willing to pay a premium (~20-40% higher than market) to unlock economies of scale. Similarly, buyers can place value on risk diversification, or make purchases for succession reasons, which can cause the price to deviate from the productivity of the land. These factors support the sustainability of higher prices in the medium term.
