Is Now A Good Time To Invest In Agricultural Land?

Farmland values showed themselves again to be resilient in 2018 against a backdrop of adverse seasonal conditions, following the trend that was observed from 2001 through to 2010. Despite challenging seasonal conditions, the long-term outlook continues to point to growth for Australian agricultural productivity and profitability, and we expect this will continue to support the value of Australian farmland.

Seasonal conditions are driving rural real estate market across Australia according to independent research from Herron Todd White.

There has also been a slowing of corporate interest in properties with local buyers dominating activity

The general view is that many regions are towards the market peak in values and other than A-grade properties, we may start to see a flattening of the growth rates for a period of time. There is an element of fatigue also emerging in operators and another failed winter crop season with a poor spring break may see a shift in the supply side of the rural market if pressures, including financial ones, start to build.

This assessment of the agricultural land real estate market comes on the back of the release of the Rural Bank Australian farmland values report for 2018. The report showed very strong appreciation in values for farmland across much of Australia in the face of drought.

Figure 1: Annual change in farmland values for 2018, source https://www.ruralbank.com.au/for-farmers/ag-answers/farm-land-values

Does this raise some important questions for investors looking to get into the agriculture investment space and capitalise on the Asian century? Have values run too hard across the past few years? And can they keep increasing?

Returns from investing in agricultural land have always in my opinion been driven by a convergence of factors.

Land use options

It is the oldest and easiest way to invest in agriculture, find a property with potential to increase the value of produce through a change in land use class (cropping to horticulture). This value play has seen many acres in the Murray basin change from broadacre farming to permanent horticulture in the last few years, leading to good returns for investors with a medium turn outlook.

Technology pipeline

Efficiency factors drive the profitability of agricultural businesses like any other, in my lifetime no-till, improved herbicides and fungicides and improvements in fertiliser placement and utilisation have all driven efficiency and improved profitability of farm businesses which have in turn improved the value of the underlying land asset. Find agricultural land that has businesses with the ability to capitalise on emerging technologies and as the returns increase so will the land value.

Market forces & seasonal conditions

In my experience market forces and seasonal conditions are short term factors that may upset the values of land over a year or two but don’t fundamentally shift the market too much in isolation from the bigger factors like land use change or efficiency gains from technology. We can see the lack of impact last years drought had on values across NSW and QLD where land prices across the board increased 15.7% and 9.6% respectively.

Figure 2: The cycle of land appreciation in Australian agriculture, years of sideways movement followed by sharp increases around technology shifts, land use changes or efficiency gains.

So has the market peaked?

Yes and no.

Grain prices are good, and the grazing/wool industries are at or near all-time highs for the value of products. This has led to an extended period of good fortune across some areas of Australia’s agricultural industries which have driven the land values hard, these areas will need some time to cool off and represent poor value buying at the moment in my opinion.

There are other areas that still represent good value as they haven’t enjoyed the run-up or have excess capacity to generate more income of the area through injection of capital, or in some cases, the market is yet to realise the real underlying value of the properties in our opinion.

We are also yet to see the potential implications of new technologies coming through the pipeline. Automated robotic farming equipment like DOT, are starting to become commercially available, add to this the convergence of other technologies like genetic engineering, precision agriculture and artificial intelligence and we could see some reasonable gains in production in the next 10-15 years that have tapered off in the last 10 years after the no-till revolution.

Not to mention technologies like virtual fencing in animal agriculture which are looking to revolutionize our ability to effectively graze pastures which we know leads to increases in productivity and profits.

So what does all this mean for investing in farmland in Australia for 2019?

It is more important now to take a strategic approach when purchasing agricultural land in Australia. There are still a lot of good value properties out there with the ability to generate good returns, but the days of randomly going out and buying land and generating reasonable returns are long gone.

Australia is poised to be the food bowl for Asia in the upcoming century and we are in a great position to capitalize on the opportunity this presents. This doesn’t mean we won’t have some hiccups on the way and that we can just go and print money in agriculture, people who don’t think strategically will likely see some short-term pain before the long-term gains kick in.