Rural property prices surge: Can farmers make enough money to pay off a loan?

As rural land prices surge, the question arises whether farmers can even make enough money off the land to pay off a loan.

Young farmers are being priced out of a booming property market.

A sharp jump in Australia’s agricultural land prices — a 40 per cent rise nationally in six years — has industry leaders fearing for prospective young farmers’ ability buy their own property.

And there is also concern for current farmers, with the surging price of farms outstripping the earning capability of agricultural land in some regions.

National Farmers’ Federation vice president and Wimmera farmer David Jochinke said the property boom was undoubtedly positive for agriculture, and showed people were “willing to take on debt at these levels, not only for the current time but the future”.

“There are positives for the industry but we’ve got to understand there are consequences for how assets and debt is handled and the serviceability of debt over time,” he said.

“The unfortunate part (is that) these prices does put land ownership out of reach for many of the people who would take traditional pathways into land in previous generations.

“This is one consequences of expensive land, and something the industry is grappling with — it is redefining the model for farming.”

He said the current boom was due to high commodity prices, good seasons and low interest rates, boosting the financial position of many farmers.

Yet for those aspiring to get a foot in the door or grow from a small base, the story was one of frustration.

Many recent record prices were due to a bidding battle between neighbours over small parcels of land to complement larger operations.

Some sales this year have hit levels double what would have been expected 12 months ago; grazing land near Ararat recently made $23,544 a hectare while Marnoo cropping land fetched $15,445/ha.

To put that in perspective, Agriculture Victoria’s livestock farms monitor project put average earnings before tax and interest for high rainfall land in the state’s west at about $455/ha last year. The top 20 per cent of farmers in the benchmark study achieved EBIT of $823/ha.

Rabobank analyst Wes Lefroy said while some prices appeared to be overvalued, many farmers were still be keen to build scale.

“ABARES reports that it has been seven years straight of price rises,” he said. Such rises had not been seen consecutively since the 1990s, he said.

“We’ve seen many larger farmers looking to consolidate fast, and they can afford to pay over the market (price) but they can then spread that (cost) over their existing hectares and have the economies of scale,” he said.

“In many regions, large farmers now border each other, and are willing to pay a premium 20 to 40 per cent higher than market to unlock economies of scale.”

In some regions, particularly those influenced by Melbourne investors, agents say local farmers have been priced out.

At Yea, Elders agent Bruce Elliot said “farmers are really not able to buy land here as it is just too dear to farm”.

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Nutrient Paull & Scollard Albury agent Michael Scollard said burgeoning land values were a good news story for some, but a near impossible mountain to climb for others.

He said farmers operating off a good base — such as running 1500 ewes and selling more than 2000 prime lambs a year at $200-plus each — had been able to build up cash reserves. And with bank interest at low levels, expanding or investing in more land was an attractive option.

“There are farmers out there in a very good position to borrow money and it is a positive story,’’ he said.’’

He said the threshold for these buyers was $3-$4 million, which would purchase an extra 200-300 hectares, which could be worked with existing plant and equipment.

However, for young people trying to get into the market, he said the rising costs made it difficult, if not impossible, to buy in.

Mr Scollard said a buyer looking to purchase a farm north of Albury to the Wagga Wagga district would need at leat 600 hectares to make a living.

“By the time you purchased the farm, stocked it with livestock and got your necessary plant and equipment together, you wouldn’t get much change out of $10 million,’’ he said.

“And that is the problem now, you are talking millions, not hundreds of thousands, to get into what I would call a ‘living area’ property.’’

“It’s a sad part of the job as there is a lot of terrific young people out there who would like to go farming in their own right, but the money required puts it out of reach,” he said.

However, he said there was a bolder attitude towards money and debt by the younger generation, who had not lived through high interest rates or witnessed worthless stock being shot.

“The younger blokes probably haven’t experienced much pain like 20 per cent interest rates, and the way the market has gone if they did buy land even just three years ago it is already worth more and they haven’t had their confidence kicked … and I hope it never happens to them either,” he said.

Recently, Inglis Rural Property manager Sam Triggs said globally, Australian farmland remained relatively cheap and family farming was also “as competitive as we have ever seen”, often “outbidding institutional capital”.

David Jochinke said Australian farmland prices were catching up to the US and Europe, where prices were “disconnected from production value”.

Blocks are too dear for farmers

In real estate parlance Yea ticks the “location, location, location” mantra for Melbourne investment into rural property, and another surge in demand has made it all but impossible for genuine farmers to expand and buy country.

Yea blocks are selling at upwards of $86,000 a hectare.

A new listing of 200ha of bare grazing country at Ghin Ghin has been advertised for expressions of interest at $4-million plus, or a starting point of $20,000 a hectare, while a prime 74ha slice of Goulburn River country at Whiteheads Creek is on the market for about $3.5 million ($47,000ha).

It follows a recent sale of a 36ha property at nearly double its initial listing value of more than $1.6 million, causing local property valuers to call the selling agency to check if the eventual $3.1 million price was fact or fiction.

The price worked out to be $86,111 a hectare, or $35,862 an acre.

“Farmers are really not able to buy land here as it is just too dear to farm,’’ said Elders agent Bruce Elliott, who has been selling both livestock and property in the Yea district for more than 40 years.

“It would be very difficult to make money, or get a return on the investment required to purchase country for livestock in our area, particularly for people already paying off debt (on an existing farm).

“But I don’t think we are an isolated case in that regard. It is becoming harder everywhere you look.’’

Situated just 120km from Melbourne, Yea has long been a hot spot for real estate as city professionals chase rural blocks as escapes or investments.

For larger grazing acreages, Mr Elliott said prime riverflat land near Yea would start at $37,00/ha ($15,000/acre); nice rolling country $15,000-$20,000/ha ($6000-$8000/acre), and hillier country $7000-$10,000/ha ($3000-$4000 an acre).