Farmers hit hard by falling land prices

Farmers hit hard by falling land prices

Farm prices are falling more quickly than house prices, with many farms losing a quarter of their value over the past six months.

Latest figures from the Real Estate Institute show the median farm selling price was $1.26 million in the three months to February, down 27.6 percent compared to the median of $1.74m for the three months to August last year when the market was at its peak.

Not surprisingly, dairy farms were one of the biggest contributors to the fall, with the dairy median declining by 24 percent ($1.125m) in the six months between August and February.

That makes sliding house prices, which according to Quotable Value dropped by 9.4 percent in the year to February, seem robust by comparison.

The rural property market has done an about-face over the past year, according to MyFarm director Andrew Watters, whose company buys farms and sells them to syndicates of investors such as retired farmers or city-dwelling "Queen St farmers".

"Over the last few years there's been a ready supply of investors, but it's been hard to find good value farm investment propositions," Watters said.

"Now there are good [buying] opportunities, with very good quality farms on the market at reduced prices and lower interest rates, so there are some good investment prospects for new farms. But generally people have lost a bit of wealth over the last six months, so there's less investor demand.

"So the market has dropped. The farms we are looking at buying are 20-25% down from their peak in terms of price."

A major driver of the farm price fall is the slide in Fonterra's forecast payout, down to $5.10 per kg of milk solids from $7 at the start of the season.

That doesn't just drive down the price of existing dairy farms, it also reduces prices for rural properties suitable for conversion to dairying and lesser quality farmland used as support grazing by dairy farmers.

Ironically, even with the reduced revenue which the lower dairy payout will provide, buying a dairy farm now is likely to be a better financial proposition than it was a year ago when milk prices were high.

According to Watters, the fall in revenue from the lower payout has been more than offset by the lower prices of the land and lower interest costs on the debt to buy it.

But even that is not enough to tempt many non-farming investors back into the market.

"They don't have access to the money," Watters said.

Yet in spite of the difficulties, the market is not dead.

MyFarm has completed three farm syndications in this country in the past four months and is close to completing two more in Australia, Watters said.

While lower farm prices might be good news for people looking to buy, they are not much help to existing farmers who may have owned their land for many years.

An insight into the effect lower milk prices and the general economic environment is having on the rural sector comes from the financial statements of corporate farmer Landcorp.

The company runs 1.6 million head of stock spread across its dairy, beef, sheep and deer farms. In the six months to December its dairying revenue declined by 15%, while its farm operating costs were up a staggering 56%.

They were the main factors behind the company posting a $3.1m operating loss for the six months, compared with a $15.6m profit for the same period a year earlier.

Landcorp chief executive Chris Kelly said one of the main components of the higher costs was expensive supplementary feeds for its dairy herds.

"When we started the year, we were told to expect a [milk solid] payout of about $7 and we increased our expenses in the form of supplementary feeds like maize silage and palm kernel," Kelly said.

Those feeds result in the cows producing more milk, but the increased production is marginal and the cost involved means it is only worthwhile when milk prices are high.

"Now we've had to completely reverse that [extra spending] and our second half working expenses will be...more in line with the new payout expectations."

While that will shore up Landcorp's operating performance, the next hit the company will take will be to its balance sheet, as falling farm prices flow through to the annual revaluations of its property holdings.

Kelly hopes the net effect of lower valuations will be neutral, because farms' values are linked to their productivity.

Landcorp is always working at increasing its farms' productivity, which would normally result in an increase in their valuations. But those gains are likely to be wiped out by the flow-through effect of falling sale prices when the company's portfolio is next revalued in June.

The farmers likely to be hardest hit are those who took on significant debt to buy high priced additional land when the market was booming, particularly if they are locked in to high interest, fixed term mortgages.

Hamish Midgley, executive manager of rural sector lender Rabobank, said many farms would run at a loss this year.

"There is pressure out there. We believe there will be a lot of deficit financial results this year on dairy farms. We are seeing a lot of farmers slashing a lot of costs," Midgley said.

"We are not overly concerned with [farmer clients] running one or two years of financial loss as long as we are satisfied the borrower is a good farmer, they know what they are doing and they're taking all the steps they can to minimise that loss.

"It's where we see limited long-term ability for that business to be viable that we start talking to the client about options to reduce debt.

"There are a number of dairy farmers with break-even levels at $5.30 - $5.35 [per kg milk solids], there may even be some with break-even levels above that.

"With a $5.10 payout they are going to be running a loss, but as long as we're confident about the medium to long term future of dairy farming, we'll help those farmers capitalise those losses onto their overall debt, on the basis that in the medium to long term, they'll pull through.

"There's a lot of doom and gloom from a global perspective, but fundamentally Rabobank is very optimistic about the medium to long term outlook for agriculture in New Zealand and we are working closely with our farmers to get through the next 12-18 months.

"We are not a fair-weather bank. We are there through thick and thin."

By GREG NINNESS and TIM HUNTER - Sunday Star Times