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Geoff Simmons investigates the claim that farm land prices could be cut by $40 bln as environmental limits bite

Geoff Simmons investigates the claim that farm land prices could be cut by $40 bln as environmental limits bite

By Geoff Simmons*

This week we saw discussion around a report from Ag First economist Phil Journeaux which estimated that land values could fall by $40 bln across the country as environmental limits (such as limits on water use, nutrient leaching or greenhouse gases) are put in place.

To understand this figure, and whether it is right, we need to understand the drivers of land prices, and how they might change when environmental limits are in place. That is the subject of this Whiteboard Friday.

The report has been criticised by experts for a number of reasons. The report itself shows that link between the productive return on land and land prices is tenuous at best. This shows that consumptive and particularly speculative reasons are key drivers, yet the report only looks at the productive impact.

The scenario chosen for the costing is very much worse case scenario, and could easily be offset by improvements in water quality, which increase the consumptive drivers for owning land.

However, we must acknowledge that in some sensitive environments, limits will impact on the productive uses of land.

This is likely to impact on land prices as it has in Taupo.

But is this necessarily a bad thing?

Are higher land prices the main measure of success for farming? They have been in the past because of the focus on farming for tax free capital gain.

Obviously a drop in land price isn’t good news for the current owner, but all businesses face a risk that the value of their business will rise and fall.

Over time, lower land prices lead to lower costs, so the return on farming would normalize as a result.

Geoff Simmons is an economist working at the Morgan Foundation. This article is here with permission and first appeared here.

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New Zealand should be adaptable and see a huge opportunity to find its niche in environmental care and animal welfare. At present they are their own worst enemies, going for max production for minimum price......this is ultimately reflected in farmings low return on capital, suggesting unsustainable high and very risky land prices. It means less profit and less tax for our country at the end of the day and what government would promote that?

that's right scarfie are there any laws that prevent dumping from countries with poor environmental practices? What about animal welfare caged pigs chickens etc.? No laws against selling this ? Of course not. It's more about creating laws to promote corporate interests.

Celibrating $40 billion of value destruction Is short sighted but not unexpected from the Morgan foundation

What do they expect the current land owners will do in that situation
1 they will stop investing in there properties
2 they will stop investing in environmental mitigation
3 unless forced , will not sell there farms
3 there bankers will force up the cost of borrowed Capitol
4 banks will reduce there support for investment on farms
5 Agricuture produtivity will reduce
6 Rural sevice sector goes into decline
7 Rural towns/ provinces go into decline

But it all that doesn't matter as long as houses keep going up in value and the population keeps buying cheap food off these farms

Westminster, you fail to recognise the difference between production and profit. The opportunity is to leverage the lower environmental impact to gain better returns. Read the link that scarfie has inserted upthread.

I very much know the difference between profit and production and know the Taupo Beef story well . What I was pointing out is while celebrating $40 b of write down consumers have not contemplated the impact of that change or put there hand into there pockets as Taupo Beef are trying achieve ( except a small group of niche consumers )
Taupo beef accept off shore food consumers may not be willing to pay for extra environmental costs

SS I don't agree that off shore leveraging lower environmental impact in NZ is going to hold much sway with buyers other than perhaps those that buy on what they see as an ethical basis. EU farmers, it could be argued, farm with lower environmental impacts than NZ. But it is only sustainable on that scale because of subsidies.

John Penno has a view that I agree is closer to the reality:
"We don't have a monopoly on beautiful clean green places, and yet we act as if we do and act as if people should pay us for it," he told industry people at the NZ Institute of Agricultural and Horticultural Science "Towards 2030" forum at Lincoln University. "They won't."
"New Zealand has no advantages in clean-green over Australia, North America or the European countries," he said.
Penno thinks most affluent consumers want to buy local produce and will only buy foreign if they have to.
"Would you rather buy local beef or imported beef," he said. "It goes without saying you would choose local beef."
"Interestingly, our partner in Los Angeles apologises in his marketing material that he works with a New Zealand partner. He says 'if I could get this same product in the US I would but I can't so I have gone to the next best thing' which is a supplier in New Zealand

Im with you C/O, if you start marketing clean green grass fed product, it kinda implies that the other stuff you are selling isn't.

Which is not going to go down well with farm lobbies in said countries.

"But it is only sustainable on that scale because of subsidies."

I would argue ALL farming is now only viable because of subsidies - ie printed money to subsidise the entire system. So that farmers can survive off capital gain and consumers can consume (which elevates commodity prices) with debt ... But it cant last.

Sheep Shgger are you getting a suitable premium for your top quality Otago lamb produced in an environmently benign way from NZ and European consumers ?

Westminster, no I don't but I know others that are.

CO, I don't think Penno's comments back up your interpretation. While he is dismissive of the "NZ Story" he is attempting to leverage various compliance points.

"It doesn't matter where they are, wealthy people are prepared to pay for food if it's good and nutritious, looks after the animals, the environment and the people working around it."

$40b sounds a lot but that's only 3-4 years of no capital gain at the historic rate given. Though having seen the recent article on interest showing that Dairy farm prices have been rising lately it does seem nothing short of a nuclear detonation is going to stop gains for that period, and 9% a year long term for sheep and beef that's just a joke, similar if not the same as a one bedroom shack in Auckland for $1m. Jeez economics really isn't about logic and science is it, it's a religion. No wonder I suck at wealth accumulation, I Abhor organised religion.

In a very general sense, farming NZ suffers from narrow mindedness. While sporadically there are those who look outside the box they are generally met with scorn. In about 20 or so years it will be 2 centuries and many generations since the first settlers brought their staple stocks and crops in and cast them on whatever land to which they could lay claim. Unsuited land just meant you needed more of it and greater use of fertilizer to make it work. I recall how outlandish it was when sheep farmers finally capitulated in Marlborough and someone seeing idle land whacked in some grapes, because it sort of looked like the place they grow heaps of the stuff, Surprise!!!!. So, largely, we continue to force the land to what we know rather than knowing something better.
Taupo Beef managed to sell samples for a premium to some high rollers charging it to the company. As with so many things, it is all doable if we can compel someone else to pay more for it to protect the margin, support the inefficiencies and lifestyle. I don't count that as a solution. When farmers cry they are beset by regulation and cannot make a buck, I am hearing them say they just don't want to look for a viable alternative. No! you cannot just keep trashing the land. Dairy conversions much????? How about wake up and smell the disruption, you are running a business, you are not owed special consideration because it is a farm, if you do not adapt you will not be able to continue.

I find it admirable Taupo Beef are getting more for their product using less N and P. However to do this they are leapfrogging off other high users of fertilisers. It is my understanding they are buying in weaners. Not producing their own. In the past they have purchased off one of my neighbours. This farm uses plenty of fert. Its runoff enters the Waikato catchment. Be careful of the self promoters. Check the backstory. In the mail today was the Waikato Healthy Rivers Accord letter. The map which showed the priority areas was not specific. Lol. I still dont know what area I am in. You would think they could give us a map that meant something.

Good observation - akin to environmentally "friendly" countries that effectively outsource their pollution to China.

Belle doesn't matter if in the red zone or not , if you are in Waikato Healthy rivers area you are going to be part of the $40 billion write down in land value . Your land has just been permently capped at it current use , just like Taupo Farms .

I am ok with that Westminster. Though I believe this grandparenting thing is ridiculous. Lets just reward the polluters. You know I havent been told anything officially until yesterdays letter and that was very obscure. I am not thick....but couldnt understand what it meant. Thinking back to some of the country in the higher altitudes with all those creeks running everywhere, beats me how they can be fenced. And then the cost of water reticulation. It wont be just a matter of lower land values. They would be better off to restrict cattle numbers per ha at a time. Which really comes down to the cropping thats going on now. That is out of control. Rip the ground up then breakfence a heap of cattle onto it is not conducive to clean water. The authorities need to get to grips with the non polluting nature of sheep as well. They dont drink much, generally fear water, and dont all poo and pee in one place. In general though I am looking forward to seeing if this means less industrialisation of our land. The land around Taupo seems very unsaleable. There are blocks that have been for sale for many years. And the numbers are rising. But they are still asking a fortune. A fair bit of land is broken down into lifestyle blocks. The bigger ones of these are hard to move. Because its all pumice it needs fert to grow anything. So it does nothing but grow browntop. In summer everything burns off. The pumice seems to draw the heat. Hard to get ones head around when ones life has been farming.

Belle you can download a copy of the plan from the WRC website. It gives you all the time-frames etc, but I guess if you have had a letter maybe you are in the priority 1 area. Submissions are open at the moment if you want to have your say. Also there is some funding available for fencing if you are in a priority 1 area, I'm guessing you'd need to get in quick for that.

At the moment the Feds and Council are working through costings and scenarios for different types of farms. But certainly many sheep and beef farms will be up for $200,000 or $300,000 of fencing and water reticulation. I expect fencing deer out of waterways would be so expensive as to make deer farming unviable. Sheep are exempt from water exclusion as far as I know.

It is possible that fencing extensive hill country farms could make water quality worse, because instead of the cattle being spread over the hills, they will be mobbed up in smaller paddocks. I hope the science is robust and the evidence convincing about the benefits of some of these things! I also have heard that Overseer is not very accurate and they keep changing the parameters.

There is plenty of disagreement about the "grandfathering" of N allocation and there will be plenty of submissions on that. Essentially it means that if you have land suitable for cropping or market gardening but you are currently grazing it you will never be able to change land use. Hort NZ have been making a lot of noise on this issue - market gardening is being pushed out of Pukekohe by urban sprawl, but the plan will prevent them gardening very suitable land around Pukekawa and other areas in North Waikato.

The grandfathering is not an entirely free ride however. I believe if you are in the top 25% of N emissions then you will have to reduce them to the 75th percentile.

My farm is up to scratch on the waterway exclusion and has a low stocking rate but because I have contour over 15 degrees I guess I'll have to pay a ticket-clipping parasite of an environment consultant to write me a plan.

I downloaded it looking for a better map and more info. I kinda got nowhere. Though looking at it on my phone screen probably had something to do with it. I think some of the boffins need to come and look at some of the fenced off waterways. The weed problems are ridiculous. I am surrounded by native here, between the tut blackberry and the rabbits the job is endless. Imagine those problems zigzagging through farms. No easy answers.

The elastrators and rings are more than likely heading for the four wheeler, where they will go on a tikitour with the calfeteria. I think we are going to be inundated with friesian yearling bulls next spring on a falling market. I might as well not add to it and steer the whitefaces. Shame. Nothing grows like a bull.

I don't know how we get into these situations. I can only imagine that once again the interests of the meat industry and finishers has led the rearers up the path again.
The desire by the industry to get numbers on the ground, to encourage calf rearers to guarantee numbers in future years, results in these situations.
This time I really do think it's different. I should come talk to you about the logic behind sticking with large finishing animals, the flexibility gives you the upper hand every time, if things go wrong you get to pass the pain down the line to rearers. The time to swap is during low prices.
I am worried about grand parenting too, I have been trying di-calcic and it's been working well but eventually I will run low on P.

Really this intensification drive by MPI has led to very poor outcomes and environmental consequences that won't be fixed this way, and the layers of costs will drive young innovative types elsewhere to places where there is still potential.
The old guard, the %60 of farmers who intent to retire in the next 10 years with no children on the farm have created a very precarious situation for family farms, corporates will never be able to replace them in the same capacity to evolve.
The thought that councils should have a cost plus mentality, that you can add layers of complexity and pass on any unfortunate outcomes is ridiculous.

With cheap milk powder I dived back into rearing instead of trading. Trading had got too hot, couldnt make money. I will get back into it when things settle. The cheap milk powder didnt help much though. The crazy rearers just bid up the price of calves. Then the weather has just stayed wet so the calves arent as heavy as usual. The milk powder ran out earlier than Agbiz acknowledged. Back in late august I heard Wrighties put in a massive order to Agbiz. They couldnt fill it, let alone look after RD1 sales. Yet nothing was said or done. I had suspicions the crunch was coming so I bought extra. Turns out I used all of it. But I dread to think what has happened to a lot of calves. I do wonder if Fonterra wanted farmers to get caught out then have to pull milk out of the vat. Who gave any thought to the welfare of the thousands of calves that arent reared by dairy farmers and had no access to whole milk. What a total cock up. Yet if I knew in late august....why did they stay quiet til late september.