Agricultural land prices to defy COVID-19 economic downturn

Australian agricultural land prices are expected to hold firm through 2020, defying the effects of a severe COVID-19-led global recession, according to a new report from agribusiness specialist Rabobank.

In the just-released report, Port in a Storm – Australian ag land prices will remain afloat in rough COVID-19 swell, the bank says while much of the global and local economy is being severely buffeted, Australian agricultural land is expected to remain “largely unscathed” – due primarily to overall farm profitability, a tight sales market and support from low interest rates and a weak Australian dollar.

However, the report cautions, the outlook for Australian agricultural property is not without risk in the current especially-uncertain environment – most particularly the threat of a deeper-than-expected global recession, a significant interruption to Australia’s access to major agricultural export markets or a credit crisis.

Farm profitability
Report author, Rabobank agricultural analyst, Wes Lefroy, said positive production prospects, off the back of improved seasonal conditions – along with commodity prices supported by a weaker Australian dollar – should underpin a profitable season for most Australian farmers in 2020/21. And this augurs well for agricultural land prices.

“Farmer operating profit, in our view, is the primary driver of Australian land prices. In particular, sustained periods of profitability provide farmers with the financial capacity to buy more land,” he said. “And despite the drought that has gripped much of the east coast over the past three years, reported three-year average farm operating profits are at their highest point since at least 1990 in Western Australia, South Australia, Tasmania and Victoria. Further, they are above the 10-year average in all states, except New South Wales.

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

Low supply
Lefroy said an historically-low supply of available properties for purchase will also be a key factor supporting agricultural land prices.

“We see the number of properties on the market staying at, or near, historical lows in 2020 for a number of reasons,” he said. “We expect there will only be a very small number of sales which are due to financial circumstances, with improved production supporting cash-flow generation in drought-affected regions. On top of this, record-low borrowing costs have increased farmers’ capacity to service existing debt and interest rates are set to
remain historically low for at least the next three years.”

Added to this, Lefroy said COVID-19-related restrictions have been a challenge for
property inspections and auctions.

“Sellers who have flexible time frames may hold back on listing properties, which will also keep the market tight,” he said.

Supportive fundamentals
The report says while many economic fundamentals had been “severely negatively” impacted by COVID-19, in some instances this would provide support for investment in
agricultural land.

“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,” 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 US dollar and
the euro, effectively decreasing the price of Australian farmland for investors in those
currencies.

“In addition, the purchasing power of local farmers will be maintained in the medium-term
by historically-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.”

Risks
While Australian agricultural land is in a strong position to withstand the economic impacts
of COVID-19, there are risks to this outlook, the report said.”

“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,” Lefroy said.

“In the event of a credit crisis, this would essentially put a pause of 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.”