Rural property warning: Skyrocketing land prices outbid farm earnings

Valuers and experienced farmers warn rural property values have become decoupled from what can be earned from the land.

“Return on capital has diminished to virtually nothing,” says Rupanyup grain grower Andrew Weidemann.

Skyrocketing rural property values are no longer linked to farm earnings, which are barely keeping pace with repayments on record-low interest rate loans, prompting warnings from farmers and rural advisers the boom could soon come to an end.

Locally the Commonwealth Bank has raised its fixed-term home loan rates, while international markets are already factoring interest rate rises after US inflation surged 4.2 per cent, a level not seen since the years leading up to the 2008 global financial crisis.

In the Wimmera farmers have seen land prices soar from about $7000 a hectare in March last year to anything to as much as $16,000/ha this year.

Rupanyup grain grower Andrew Weidemann said land values had become decoupled from farm earnings.

He said his land could grow 4-4.5 tonnes of wheat or barley per hectare in 300mm rainfall years, grossing about $1000, less costs of about $550/ha, to deliver earnings of about $450/ha.

That’s a 3.5 per cent return on land worth a median of $13,000/ha, against current farm business interest rates of about 3.2 per cent.

“What’s really happening is the return on capital has diminished to virtually nothing,” Mr Weidemann said. “We’re looking to invest off farm.”

“One older farmer told me it used to take 10 years to pay for a block, now it will take 20.”

Farmers and rural advisers are warning simple arithmetic shows farm earnings per hectare are barely keeping pace with current interest repayments on grazing land purchased for $17,000 or more a hectare.

While most farmers are paying interest of about 3 per cent on their loans, Meridian farm business consultant Mike Stephens said even a slight rise to 4 per cent mean a repayment of $692/ha on land purchased for $17,290/ha ($7000 an acre).

The latest Livestock Farm Monitor Project report shows the average producer generated a gross margin last financial year of $782/ha in Gippsland, $827/ha in the South West and $514/ha in the state’s north.

Once overhead costs were stripped out, average farm earnings (before interest and tax) fell to just $254/ha in Gippsland, $455/ha in the South West and just $53/ha in the north.

“The cost of land in relation to its earning capacity is way out of whack,” Dr Stephens said.

But Rural Bank analysts Matt Ough said he expected land values to rise at the same pace in 2021 as last year, due to a good season and strong commodity prices, even if inflation and interest rates went up.

He said “inflation is only one factor” affecting property values, which were strongly correlated with commodity prices.

“From 2001 to 2007 compound annual growth rates (in farmland values) were 14.4 per cent”, when inflation and interest rates were higher, Mr Ough said.

Even over the past seven years he said Rural Bank found compound annual growth rates had ticked over at 9.6 per cent.

But valuer and agricultural economist Sam Paton said assuming commodity prices, which were already at record highs, would continue to drive up land values was something farmers and investors should not bank on.

“The psyche that’s crept into the agribusiness sector is very unhealthy, because the underlying perception is land values will keep in rising, because that’s what the last five years has shown us,” Mr Paton said. “It’s almost like the old MIS (managed investment scheme) stupidity.”

“Everyone should realise banks’ costs of finance are on the rise and they will undoubtedly pass that on in higher interest rates.”

Ouyen grower Phil Down said it was clear land was overvalued in the Mallee, at more than $3000/ha, when his own earnings had averaged about $120 to $150 (EBIT)/ha over the past decade, from his 2000ha mixed sheep-cropping operation – a return of about 4-5 per cent.

“Most people I’ve spoken to say it’s too expensive for what you get off it,” Mr Down said. “If interest rates get up to 6 per cent it will have a big impact.”

Ouyen farmer Leonard Vallance warned investors would eventually “cash out of the casino”, because of opportunities for better returns elsewhere.

Irrigator and accountant Richard Anderson said his message to anyone contemplating buying a property was to realise “at some stage the world economy is going to recover and financial costs will get higher”.

“Don’t look at it through rose-coloured glasses,” he said. “Even if you’ve got 50 per cent equity in your own place and are going to buy the place next door you need to step back and think: ‘how much you’re going to earn off it?”

OPINION: RURAL LAND IS OVERPRICED

The ultimate value of rural land is what you can earn off it.

But that’s not how land is being valued in Australia right now.

Bankers are talking up the market, predicting the capital growth of 2020 will continue, on the back of good seasonal conditions and high commodity prices.

Early evidence points to the 2021 property market doing just that, as the national beef herd comes off record lows and analysts talk of China’s protein shortage, while the US drought drives up grain prices.

However banking on commodity prices rising even further or even being sustained at current levels in the long term is a big mistake.

Argentinian ranchers are in talks with their government on lifting its price-induced beef export ban, while Brazil keeps on clearing more land for grazing.

Droughts end, as do shipping constraints, container shortages and COVID-driven supply disruptions.

And don’t believe the furphies that “they’re not making land anymore” and the world is facing a “food security crisis”.

The United Nations Food and Agriculture Organisation has repeatedly reported the area of land under agriculture in developed nations is declining, while global food supply surges on the back of more land being opened up to farming in developing nations and rising productivity.

Money will not remain cheap.

Inflation and interest rates will rise as global production and supply chains recover from COVID disruptions and global competition heats up.

Every farmer and investor needs to start factoring in a rate rise to their operations and think twice about paying far more than a piece of ground can earn.

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