Rural land price slump: A catalyst for change?

Rural land price slump: A catalyst for change?

The latest monthly figures show farm sales stand at just one-third of
 the figure for last year, while the median farm price has dropped by nearly half. With falling prices and lower mortgage interest rates, new
entrants to farming may believe it's a good time to buy land, but most
land owners are sitting tight and waiting for prices to rise, while the banks are placing tighter controls on access to credit.

Associate Professor Stuart Locke of the University of Waikato Management School says the current slump in rural land prices may have serious consequences for farmers' balance sheets and capacity to manage debt. He says it will also have implications for the next generation of 
New Zealand farmers.

With Fonterra’s forecast 2010 dairy payout of $4.55, Dr Locke says a typical Waikato dairy farm with 100% equity can expect an annual surplus of just $40,000-$50,000 “And that’s where you own everything on the property. Once we add in mortgage finance costs, the situation becomes dire. On a $6 million farm, servicing $2 million worth of debt at 9% will cost you $180,000 a year – that’s an overall loss of $130,000.”

Up to now, farmers have been willing to wear losses like these, he says. “It’s a long-established tradition among dairy farmers that they don’t make a profit. The return on assets is a negligible 2%, but the appreciation in land prices has been significant. Now we’re getting to a point where land appreciation just isn’t happening, and that coupled with growing problems in servicing debt could lead to a real shakeout in the sector.”

Dr Locke says Fonterra and its predecessors have been singularly unsuccessful at increasing the value-add component. “In real terms, milk solid prices have not increased in the last 20 years but land prices have gone up several times. But how much more cost cutting can be done to keep our heads above water?”

Maybe, he says, the bulk commodity dairy model driven by continual cost reductions isn’t the way of the future. “Perhaps we should start exploiting our pasture-fed green image, recognise regional differences, and start selling our product on appellation. After all, where’s the greatest value-add: in selling a generic cask of white wine, or marketing the product as chardonnay, sauvignon blanc or riesling?”

Dr Locke will present a discussion on this topic on Wednesday June 10 as part of the University of Waikato’s Seminar Series at the National Agricultural Fieldays at Mystery Creek.

ENDS

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