Western Australia led the galloping growth in Australian farmland values last year.
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But in WA, and across the nation, the fast-paced price growth rates will slow in 2024 as the agricultural real estate market enters a new cycle.
New analysis by Rabobank shows the trend of farmers growing equity in their business has stopped, as tougher seasons and lower commodity prices, particularly for sheepmeat, start to bite.
Rabobank's Australian farmland price outlook for 2024, released on Monday, May 7, points out WA reached a significant milestone in 2023, becoming the only State to outstrip national medium land value growth.
The price per hectare of land in WA rose 48 per cent year-on-year to $6500/ha - contributing to a total 144pc increase over the past five years.
in 2023, arable land jumped 54pc to $53000/ha and grazing areas by 25pc to $15,600/ha.
Esperance had the country's highest growth last year, with median values jumping 247pc year-on-year to $10,000/ha.
The median value of the southern Wheatbelt grew 71pc, Bunbury had the highest median value at $17,000/ha but the smallest growth rate and Manjimup was the only area in WA to reduce in value, down 18pc.
"WA last year was the State with the highest growth on a percentage basis because a lot of equity had been built into businesses and farmers started to buy land,'' said Rabobank grains and oilseed analyst and report author Vitor Pistoia.
"We are not expecting a major reversal of the trend - farmland prices will keep growing but at a very smaller pace, because this trend of building equity has stopped due to lower commodity prices and lower rainfall.''
For the report, Rabobank analysed more than 1500 sales for 2023, from a data set of more than 11,000 sales across the country since 2019.
Its forecast is largely in line with Elders' property report, released last week, which analysed farm sales from 2023 and found prices had rebounded after a sluggish start to last year.
Rabobank found the national median price per hectare for all land types increased by about 11pc year-on-year in 2023, with the median value of cropping land rising by 20pc and dairy land by 22pc, while grazing land remained almost stable.
Across the States, year-on-year growth in the median price per hectare in New South Wales was 6pc, Queensland was 4pc, South Australia 1pc and Tasmania 8pc.
The report showed the capital needed to buy farmland in Australia increased by 92pc in the past five years - from a median cost of about $5000/ha to $9500/ha.
"It has become quite expensive to keep buying, so that is why the scale is important,'' Mr Pitsoia said.
But he said demand for farmland was changing, with buyers more focused on finding the right land at the right value and spending more time on their due diligence.
As well, corporates had reduced their appetite for property investment, as the new market cycle started.
The amount of land sold nationally last year dropped by about 60pc compared to 2022, and the number of big deals was down by a third.
In WA and Victoria, sales transactions were down 43pc and 44pc respectively, though the numbers held up better in South Australia, dropping by just 6pc.
"Large deals, with sales above the $10 million threshold, declined 33pc year-on-year and about in line with the decline in all farm sales," Mr Pistoia said.
It was one of the signs that after three consecutive years of double-digit growth, the momentum in farmland prices increases is shifting - Rabobank expects it to further slow in 2024 as farm profitability levels come off record highs.
The company is forecasting a "base case" increase of about 5pc in the median price per hectare nationally this year.
Mr Pitsoia said the sector was starting a new cycle where the number of farms for sale and bidders was lower, and the financial outlook - while strong overall - was not quite as positive.
He said the price outlook was mixed across the regions and farming sectors.
"Following better cattle prices and an improved market outlook, grazing area prices should return to gentle growth,'' Mr Pistoia said.
The most buying activity in WA remained in areas with an annual average rainfall of 400 millimetres to 800mm.
"This a sweet spot where land value tends to grow year-over-year and at a greater rate than other areas,'' Mr Pitsoia said.
"It is the more resilient in terms of growth.''
He said despite the changing trends, the long-term view was crystal clear.
"Farmland is in demand,'' Mr Pitsoia said.
" The pivotal point for the land market now is how to properly evaluate the risk-reward scenario of such a long-term investment."
Rabobank says the farmland market was finishing this cycle and starting a new one, where the number of farms for sale and bidders would be lower than before, and the financial outlook was not as promising.
Probability says climate headwinds are more likely than tailwinds in the seasons to come. This leads to different perspectives, depending on your ambition to:
- Enter the industry: Operational scale is one of the biggest challenges. As farming land becomes more expensive year-on-year, the relative quantity of units necessary to pay for it, as well as for interest rates and machinery, gets bigger. This is exacerbated by a tight labour market.
- Expand and/or consolidate: The macroeconomic outlook and sustainable margins are likely to be the needle movers. These elements have a straightforward correlation with repayment capacity. Higher land values can back further investments, or, in the case of future financial stress, support borrowing capacity.
- End operations: Being a farmer is quite often a lifestyle choice, but it is also an economic choice. If succession and/or ending operations is in sight, farmland shows good value relative to other industries or investment options. The question, then, is what farmers should do the day after ending operations to remain above inflation and protect capital.
