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New Zealand farms are overvalued, says National Bank

New Zealand farms are overvalued, says National Bank
The increase in the value of farm land in New Zealand has outstripped growth in farm income, the National Bank said in its September 2008 Rural Report. New Zealand's biggest rural lender said that the real price of rural land in New Zealand doubled in the past seven years, and that data suggests the financial sustainability of the farming industry can be questioned. "Business results have not supported the increase in the value of rural land," National Bank said. The report questions why farm sale prices continue to rise, while data suggests that farm working expenses are trending up and that productivity has plateaued in sheep and beef farms, with dairy farms showing similar trends. Courtesty National Bank Changing land use is offered as one obvious answer for the increase in rural land prices. "There are strong indications that the average sheep and beef farm is not paying its way and the trend is deteriorating. The declining trend in the business result from sheep and beef farms is the same, albeit at different levels for different classes of country," the report said. "The business result has been negative in some instances for more than four consecutive years ending 2007. The farming year end 2008 will make it five consecutive years for many," it said. "Dairy farms show similar trends." National Bank said debt servicing costs per unit of producution had doubled for both sheep and beef farms and dairy farms. The debt servicing costs as a percentage of gross revenue had doubled to 20% for sheep and beef while it had risen to 25% from 15% for dairy. "The increase in debt servicing is due to a combination of borrowing to increase scale, increasing interest rates and cumulative business losses," it said. Ratio of farm value to gross income "Many farm businesses are providing a less than satisfactory and unbalanced economic return." National said the proportion of agricultural exports required to service agricultural debt has doubled from 6 to nearly 13 percent between 2000 and 2007. But will this imbalance in the cost of land with its earning potential cause a drop in land prices, as we seen from 1983 to 1988.   "One part of uncertainty at present is how the turn in the global credit cycle (cost and availability) will impact on the economic performance of income"“generating assets," it said. "We have already seen a correction in the value of some classes of assets in a number of countries. Rural land has been more or less unaffected to date but it is not immune to global forces. Indeed, it is one of the key risks for the New Zealand economy."   National said asset to income ratios were as wide as they had ever been and that equity markets corrected when price to earnings ratios became extended. "We respectfully suggest that buyers give more attention to the bottom line of the farm business when considering buying more land."    

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Days to the General Election: 29
See Party Policies here. Party Lists here.