Farm land prices are not rising and haven't been for at least a decade. Clearly farmers are not 'farming for capital gains', no matter what farm type you review

Farm land prices are not rising and haven't been for at least a decade. Clearly farmers are not 'farming for capital gains', no matter what farm type you review

There seems to be a perception that farmers are farming for the capital gains on the land values of their property.

However, the evidence doesn't seem to be there for that presumption. It certainly undermines the presumption that foreign buying has pushed up median prices. Perhaps in a few selected locations, but certainly not overall or over a long timeframe.

The Real Estate Institute of New Zealand reports farm sales data monthly and included in that is their farm indexes and price per hectare by farm types.

Of course, average selling prices per hectare nationally is of little value as a metric. Prices of farms vary widely by farm type and by location. So sales mix changes distort the overall averages.

But within each farm type, and within each region, it does make more sense. It is not definitive obviously because farms come with many variables like development investment, buildings and local soil and climate attributes. A growing distinction is access to irrigation water.

However, despite these obvious variables, a look at the top-line data shows that sellers of farm land are not reaping capital gains.

Our records go back in detail more than a decade. Crop, dairy and livestock prices are currently near historic highs. Weather and climate conditions have been very favourable. Access to fresh water is better rather than worse, especially in areas that decades ago suffered regular drought stress - such events are rarer now.

If we look at the high profile dairy industry first, it is very clear that farmers can't be winning capital gains based on land prices. Yes, some individual farm prices may be high, but it is not because of land prices.

In the traditional dairy regions like Waikato and Taranaki, the evidence for land gains isn't there either.

In Canterbury where water access is available to sustain dairying, even there, there is no strong evidence that prices being paid are especially high or growing in comparison to other major dairy regions. The addition of irrigation has given a slow boost to overall values, but not as much as you might have assumed - although it might be factor in holding up Canterbury prices more than other key regions.

And in Southland, again there is a lack of evidence from the sales transaction records that farm sellers are cashing in on land capital gains.

None of these price trends are rising. To be fair, this price tracking is of farms that sold, rather than valuations of all farms in the sector.

If we change our attention to arable properties, or grazing property, the story is little different.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Interesting analysis, DC. And yet (NZ Herald, Nov 30, 2010): Andrew Gawith, Director of Gareth Morgan Investments, described the economics of farming in New Zealand as “speculative” as the financial benefits are almost entirely dependent on capital gains. Other than dairy, income is puny and unreliable, he said.”Farm finances don’t add up.” Whereas UK and US price of rural land doubled in a decade, the value of farmland in New Zealand has risen at 10.7% a year over the past 20 years. (That is the value of farmland doubles in less than seven years). “That’s a real after tax return of something in the order of 7 percent to 8 percent a year.” He points out this is double the return of sharemarkets. He says, “Farming is the most popular business for banks to lend to. While other areas of economic endeavour are starved of capital, banks have very nearly drowned farming with debt. The ease with which farmers can get capital has helped push up the price of land. (Story courtesy: http://neweconomics.net.nz/index.php/2014/10/why-our-are-farmers-farming...)
Your analysis, DC, begs the question: if there is no capital gain, how will agricultural debt be redeemed?

Not to disagree with what you say (i.e. the importance of capital gains to farmers). However, i do not think comparing the value of farming land (especially for dairy) in NZ to UK and USA is as easy as that (i.e. the change in value in NZ land is directly comparable to USA and UK). Grass grows here without much work, and is available all year round in many places. the UK and USA farmers have too feed their stock with grains (much more expensive). It is therefore logical for land prices in NZ be growing faster than those of US and UK (as they are much better than theirs for dairy farming)

Id guess they were trying to farm capital gains, its just failed.

Possibly? RBNZ claimed: In the dairy sector, 35 percent of debt is to highly indebted farms, defined as farms with more than $35 of debt per kilogram of milk solids produced annually. Link-page 7 (13 of 48) PDF Were the banks lending to outsize GDP qualifying activities?

Selective period David.

5 mins on the net showed the period 1990 to 2008 (just before your small dataset) showed a massive 300% increase in dairy land prices as shown on the following site.
https://www.rbnz.govt.nz/financial-stability/financial-stability-report/...

Kiwi farmers are like the Chinese bosses, they take the long multi generational view.

One thing ingrained in every farmer I met was "..they're not making any more land eh?"

Those graphs and numbers are on a monthly basis, annual numbers would paint a different looking picture. For instance the five years 2010-15 in the Waikato look to have given a 30% gain. To much noise in the monthly figures.

Indeed, it's obscuring what looks to be an otherwise clear uptrend

You'd be hard pressed to say any of those graphs show a 10 year return significantly greater than inflation.

Capital gains on farms are usually only made when someone sells a farm they have inherited. The longer its been in the family, the bigger the gain

The analysis is a stark contrast to the urban situation where Capitol gain is being chased with fuel from banks.
One wonders what happens when urban NZ and or banks wake up to the inevitable flatlining/declining house values and debt hangover
Good work David

Good analysis DC. It ties in with what farmers tell me they are looking for. Average profits are not great, but farmer buyers usually make more than average, and I’m seeing plenty of farms justifying value on a discounted cashflow basis. The big issue for farmers is overgearing, often long-standing, and high bank margins when this is the case. It’s a bit like the environment - most farmers are outperforming urban perceptions by a lot.

Do the charts above assume that farm type does not change? Or do they imply that switching from grazing (say $15,000 per ha) to dairy (at around $30,000 per ha) would generate a 100% capital gain... which would give some insight into why Canterbury farmers may have been taking on debt to fund irrigation for dairy conversion. Even if Central Plains Water ends up costing $7,000 /ha, that would still represent a tidy capital gain - particularly when CPW gained millions of dollars in govt funding...

Farm values depend on the milk payout as well as production volumes. The payout is increasing for now so farm values should be too but at the same time, dairy farmers in particular are having to deal with new water regs that will affect their profitability. Increased uncertainty will keep potential farm buyers nervous.

One might want to consider the long term sustainability of the current source of most irrigation water, including the byproducts of intensive grazing on fragile soils.

There are other things to consider with land intensification, like drinking water for the urban masses and clean waterways to protect our tourist and export image.

Thankfully this government is looking at the wider picture, rather than the market failure of the previous governments policies; which only enriched the speculators and overseas banksters..

Think through the methodology of farm valuation, it is assuming the smart operator, does not count forced sales... not what the property has done in last 3 yrs actuals
That drives system improvements, being more production, and/or change of system, eg. Canterbury water enables other systems, other cost & revenue structures. Think gross margin analysis. Eg, any metric /kg not really gone up (commodities). Long gone the days of 110% lambing.

As mentioned above elsewhere. Metrics, like payout, drive waves of cost layer by service industry and govt. All assuming everyone is performing in the top 25%.

Hence the 75% feel & get squeezed always (often borrowing more to stay current, no choice to steady state). See the examples where some are looking to go broke by fencing off everything now.

Not capital gain as an Auckland house investor would recognize.

If you are looking for the sole reason for volatility in dairy land prices; some of which has been speculative and to deliver volume, look no further than the uncompetence of how Fonterra has been managed in the past two decades.

Henry van der Heyden, Craig Norgate, Andrew Ferrier, John Wilson & Theo Sperings were all just a ship of fools, enriching their own egos and the banksters at the expense of the Fonterra shareholders.

With the explosion of dairy farms down in Southland; which are highly dependent on supplementary feed, this put pay to Silver Fern Farms which is now under the control of the Chinese.

Anyone remember Jonkey saying the market should decide, yet he forgot to tell you his government would save the 4 banks. Now he gets a personal invitation to China. Pity for the fools that believed him!! Now they have Noddy trying to con whats left of his followers.

Irrigated dairy farming in Canterbury adds about 5-10mm a year of high quality top-soil (with benefit of massive carbon sequestration), and after about 200mm of top soil is added it becomes more valuable for horticulture than for Dairying - so there will be a natural progression away from Dairy over coming decades.

Yep difficult to have a green party over that fact.