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Land values could have started to enter over heated territory when assessed against historical returns

Rural News
Land values could have started to enter over heated territory when assessed against historical returns

The dairy land price paid per kg of milk solids has broken through the $40/kg mark and it is being predicted to keep on climbing with land value rising by up to 9% in the coming year.

At an average of $41.50/kg, this is a 12% lift on the post global financial crisis average of $37.

Commentators in the February ANZ Agri Focus say looking back through history, the $40/kg  has been an important psychological level.

It also suggested land values could have started to enter over heated territory when assessed against historical returns.

The seasonally adjusted price for dairying properties has crept up to around the $37,000 per ha mark since July last year which is a step up the $32-$35,000 band that had been the norm post GFC.

It is noteworthy that a 413 ha property sold by Federated Farmers Dairy chairman Willy Leferink in Mid-Canterbury recently sold to Italian interests for more than $$60,000 per ha.

The land price multiple to the milk payout has averaged 4.95 since July 2013 and this was well below the 20-year average of 6.3. [This is using the farm gate forecast of $8.40 for this year’s payout so given this is a record it is unlikely to be the future long-term average].

Assuming ANZ’s current forecast for next season of $7.25kg of milk solids and using the long-run average land price multiple of 6.3 this implies scope for average land values to head towards the $41,000/ha or $45.70/kg milk produced mark over the coming year.

These calculations include only the revenue and productivity side of the farming equation and higher costs impact on margins and profitability. There are higher capital requirements also for cows and shares.

Cash rates

According to Agri Focus, dairying cash rates of return are likely to average 8 to 10% this year

This is the highest level since the early 2000s and well up on the 10-year average of 5%.

Normalising the cash rate of return to the long term average of 5% by changing the land value component of the equation and using an average milk payout of $7.25kg MS. This implied land values had scope to move by up up $3,000 per ha or 9% on the 2012/13 season.

The recent move upwards of up to $3500/ha implied the market was making a similar assessment.

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The change in value benchmarks in certain regions has increased sharly over a 6 months period. From a South Island perspective Mid Canterbury and Central Southland are fluid, active and showing strong demand and benchmark levels ($55,000 - $60,000 / ha in Mid Canterbury and $42,000 - $48,000 in Central Southland). However, demand is very specific and second or third tier properties, properties with higher fixed cost structures or development required remain sluggish.


However, while the above rates may be share exclusive, but the sale of Willy LeFrinks property is widely mis reported. It is in fact $60,000 INCLUDING SHARES. The property is also a higher input system operating at around 2000 KgMs / ha and held shares to that level. When correctly analysed the share exclusive benchmark is between $47,000 - $48,000 / hectare on a share exclusive basis, which is consistent with benchmarks for spray irrigated units in Mid Canterbury at that point in the market.


The reporting of that sale created a lot of problems in the mis reported nature of the benchmarks among banks, farmers et all. 


Lets hope that returns hold up for a reasonable period, the market is very very hot at the moment


You are right, reporting of that sale created a lot of problems,

How do you see benchmarks and rules of thumb working out on WLs new Mitcham venture (refer the Xmas Exporter). Looks like 200ha, 900 cows, year round milking, two large stall barns.…



Stall farms are a completly different kettle of fish and in the absence of sales (there are none), an economic test is the only way to determine value. Basically you are looking at a specialised asset that can be assessed on depreciated replacement cost assuming the avaliable cash flows support that level.


The reality is that in a season such as this, if the system is operating correctly, they are cash machines. However, they have high fixed costs, replacement costs and have a massive exposure to feed cost and supply lines and this needs to be taken into account if you are looking at these options. No doubt they can work but they are specialised and infer a higher level of risk and lower level of market liquidity and in a low payout season the profitability dissapears quickly.


Reading the Canterbury Regional Plan and understanding the production of milk from pasture v's milk from cut & cart feeding systems and the long term environmental effect of both systems, I suspect that subject to the future milk payout (e.g. if the current high milk prices are maintained), it is highly likely we will see the NZ Dairy Industry go down the track of Housing Cows (7-12 months/year) and cutting and carting their feed.

We know for a fact that under with our existing dairy system the energy the cow requires for walking/foraging/keeping warm outside the equivalent of 150-200kgms/cow/year. 

I also know that we could harvest 30-35 ton drymatter per ha per year with cropping (maize etc) v's grass at 12-14 ton/ha. This means we could almost tripple the cows/production we currently produce.

IF NITROGEN is going to be the elephant in the room for the dairy industry and the Regional Councils are going to legislate to drop Nitrogen losses to 20kg/ha then the WL system may well be the way of the future for the NZ Dairy Industry. 

The issue for the industry is how we fund such change? I suspect there are more than enough farming balance sheets capable of financing such a change however we wont see alot of farmers rushing into a housed cow setup until we see some stability in the milk prices.

Regarding land prices - it is good & healthy to see that the market has finally understood that well located top farm land is worth a premium over lessor farms.