Research key to farmland values

A Nuffield scholar hopes his international research will bring some clarity to agricultural land value, writes Lucy Knight

Data value: Nuffield scholar Bernie Byrnes on his property near Gunning in NSW.

NSW sheep and wool producer Bernie Byrnes has long been intrigued by trends underpinning agricultural land values.

But he believes the ongoing surge in prices, even during tough economic times, often defies logic with Australian farmland values continuing to rise irrespective of farming returns or seasonal constraints.

He’s about to delve a little deeper into what might be defining those trends as the recipient of one of this year’s Nuffield scholarships.

Once international travel restrictions ease, Bernie will research factors driving farmland values internationally by looking at transaction examples in the US, Canada, New Zealand, Ireland, Netherlands, UK and Poland.

This will then be cross-referenced with cases in Australia, with the broader goal of putting some data behind farmland values and, specifically, whether they reflect current farming returns.

He hopes his research will also help borrowers understand debt serviceability for an asset which he says, “is really in a class all of its own”.

FULL PLATE

BASED at Gunning in the NSW Southern Tablelands, Bernie works as a farm manager to investment firm Bridge
Lane in addition to running a 2500 DSE superfine wool enterprise, Fairview. He initially managed the operation from Sydney before moving to the farm full time about three years ago with his wife Sarah.

Six years ago he introduced grazing crops to better-utilise the (usually) high-reliability rainfall in the tablelands.

He is a recent convert to the application of gibberellic acid, which helps boost pasture growth in colder months to increase feed on offer for what he says is quite minimal cost — enabling an extra 1000kg/hectare-plus of feed for a cost of about $30 a hectare.

“It’s a good investment, but you’ve got to have those pastures that can respond to that gibberellic acid.”

In addition to superfine wool production, Bernie produces 300-500 crossbred lambs a year, joining Merino ewes to Dorset rams to finish lambs on grazing crops. Significant late summer and autumn rain has triggered a major turnaround in seasonal conditions at Gunning and across the Southern Tablelands, with newly-sown canola and oats grazing crops taking off following more than 300mm of rain so far this year.

In recent weeks sheep have been released from drought confinement lots, used last year for the first time.

RETURN SERVE

AFTER analysing rural property prices in Australia for many years, Bernie believes evaluating a property based solely on individual operating return “is a very narrow view”.

“It works from a purely economic perspective, but in terms of investment there is so much more to it, particularly when you look at the growth of capital gains in the past two decades.

“Instead of looking solely at an individual farm’s operating return I will be looking at the individual or company’s ability to service that debt — whether it be through off farm interests, or through other farms.”

He said the Australian Farmland Index was the most transparent method currently available for analysing farmland value trends, however it is heavily weighted to horticulture properties.

Bernie hopes his Nuffield report will provide a deeper perspective about the factors influencing land values and put some numbers around farmland as an investment both in Australia and abroad.

SEASON BUSTER

WITH his combined experience in commodity markets, as well as corporate and family farming operations, Bernie has monitored the year-on-year acceleration in farmland values that have defied seasonal conditions and the drought-induced drop in income for many farmers.

Bernie said he had his own views on why land values might go up or stagnate but would use his research “to try to get some data around some hard numbers”.

“I’m trying to understand whether Australia is different, whether we’re going on a different trajectory to agricultural land in other countries, and what is driving that.”

Firstly Bernie will assess how international countries value farmland as well as their historic trends and how it compares to Australian values using metrics such as dollars per dry sheep equivalent, dollars per adult equivalent, dollars per hectare, and return on assets, as well as interest rates and foreign investment restrictions.

This should help build data around the operating returns farmers in other countries are getting in accordance with land use — such as dairying, or horticulture, for example — as well as how rental terms are valued, either as a percentage of land value or based on the farm’s operating return.

GLOBAL ROAMING

ONCE armed with that data, Bernie intends to examine whether the rate of increase for land in Australia — about 6-8 per cent annualised over past 30 years — correlates to the global trend.

Bernie said ultimately he would like to “piece together” data that can be traced back to a standardised value.

“My view is that agricultural land is an asset class in its own right, and people are seeing that owning farmland is an uncorrelated asset to equities or urban property and real estate.

“I want to be able pull all the information together to evaluate this view.

“At the moment people are valuing it differently to what common economic logic would suggest in relation to its operating return.

“Playing into that is the narrative about increasing demand for agricultural products which is being driven a lot by the corporate sphere and external investors looking for a diversified investment portfolio.”

That aside, however, Bernie says the vast amount of transactions he’s studied in Australia were still very localised — a factor he believes is being driven by family farmers with confidence, who are using new technology to increase their operating efficiencies.