September 13, 2022TO: Seniors Agribusiness Investment Services Manager Mark Barber sat down to express his thoughts on the many drivers of rural property prices ahead of the next edition of Elders Rural Property Update.
These are interesting times as we layer inflation, war, sanctions, and ongoing (albeit waning) pandemic disruptions to try to figure out what the future holds. The big question from a rural property value perspective is: what will rising inflation and interest rates affect the rural property market in Australia?
Here is a collection of thoughts that might influence your view:
- At times like these, many see agriculture as a safe haven for investment. Agricultural production is uncorrelated with most other asset classes, driven by the constant demand of a growing global population (especially on Australia’s doorstep) for access to food. Food demand is inelastic. People may decide not to buy the latest iPad or upgrade their car, but they will still need to eat.
- Recent equity market volatility has been largely fueled by an inflationary environment and central bank actions to slow things down. For agriculture, historical data support the hypothesis that commodity prices generally rise during periods of inflation. That said, higher commodity prices and increased production will lead to an increase in global demand for agricultural inputs such as seeds, fertilizers, livestock, etc., thus exerting upward pressure on input prices.
- Australian agricultural exports are arguably more important in the current global supply chain environment. More than a quarter of world wheat exports come from Russia and Ukraine. The demand for Australian cereals has therefore never been higher.
- The collective balance sheet of Australian farmers has never looked better, with strong equity positions (due to farmland value appreciation and debt reduction), good seasonal conditions, service costs historically low debt (even with recent interest rate hikes) and high commodity prices. These factors have also contributed to reinforcing the hold-and-operate decisions of most owners, creating a shortage of cash which is further driving up prices.
- Perhaps the most important long-term factor determining house prices is confidence in the continued strong market fundamentals for most Australian agricultural production. Demand is strong for Australian grains, oilseeds, meat, dairy and fiber products, with experts, farmers and investors having high confidence moving forward.
We believe that rising interest rates from record lows will not have a material impact on farmland prices in the short to medium term. Australian commodity prices remain very high in almost all categories and seasonal forecasts suggest production will also be high. Conversely, farmland transaction volumes are historically low, with demand far outstripping buying opportunities.
The stage is therefore set for continued appreciation in land prices, albeit at potentially slow rates of growth. Factors weighing against this are rising interest rates and inflation in input costs. These two factors are likely to reduce margins in the event of a drop in raw material prices or a reduction in supply in the event of unfavorable seasonal conditions.
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