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Outlook: Rural

Recent Trends in Rural Values

While demand for dairy farms in the district remains subdued with potential buyers being very cautious and watchful, the demand for pastoral land remains steady and there is strong demand for vacant parcels of horticultural land. That strong demand for horticultural land is likely to result in further increases in value, particularly for well-located properties with reliable water supply.

DAIRY

The past two years have been very challenging for the dairy industry with low payouts of $4.40 and $3.90 per kilogram of milk solids (Kgms) in the 2014/15 and 2015/16 seasons. The advance payout for the current 2016/2017 season gives some promising relief at $5.25 per Kgms.

Global dairy supply is diminishing and demand stabilising. Improved market dynamics have been reflected in a near 30% improvement  in the global dairy trade price being paid at the regular fortnightly auctions of dairy product. The $5.25 per Kgms is barely at the long-term breakeven level for the industry, and further improvement is required for long-term sustainability.

This period of low payouts has resulted in limited dairy sales in the Tasman region, with only one recorded dairy sale in 2015 of a well-developed dairy unit in Kohatu. This sale showed there is still interest in dairy units with well-developed infrastructure and in sought-after localities.  Dairy units in more remote locations and/or on more marginal dairy land have attracted very limited interest.

Since the start of 2015, there have been a number of dairy units on the market; currently, approximately eight dairy properties are on the market. The recent rise in the global dairy trade price and Fonterra’s announced advance payment of $5.25 per Kgms has rekindled some buyer interest in the market; however, there have been no confirmed sales to date.

The banking industry still appears to be backing dairy farmers with only a very low level of forced sales being recorded nationally. The majority of properties currently on the market, in a managed process with the finance industry, appear to be those properties  in which there was some financial stress before the reduction in dairy return. Overall, banks have shown considerable patience and restraint in their dealings  with financially stressed dairy farmers.

Dairy farmers who are taking prudent steps to reduce farm expenditure where possible and to limit non-essential expenditure are still receiving the backing of the major financial institutions. Some dairy farms will undoubtedly no longer be sustainable, even with an increase in dairy payout. The banks appear to be prepared to be patient and wait for the expected upturn in dairy returns before moving to extricate themselves from the funding of those unsustainable properties.

Very little appetite in the market to commit to dairy farm purchase exists while there continues to be uncertainty about when the payout will improve. However, substantial long-term interest in the dairy industry exists with buyers waiting for signs of a sustainable improvement  in returns before making any commitment to purchase. Buyer interest is therefore expected to increase substantially when the international dairy supply situation more closely resembles the demand profile.

Major banks show little interest in forcing sales of dairy farms while buyer demand remains so limited. Some reduction in dairy farm values is inevitable; however, major banks are reluctant to overplay their hand and force a dramatic drop in values.

More likely, sales activity will increase when the long-term signals of international dairy commodity prices are positive. Banks will more likely move to encourage dairy farms that lack long-term sustainability to sell once buyer interest returns. The volume of dairy farm properties on the market at that time is likely to increase to the point where the market will be in the buyer’s favour.

With the degree of uncertainty in the international dairy trade at present, it is unlikely that even a substantial reduction in dairy farm values will attract buyers into the market. More probably, a sustained upturn in the outlook for international dairy commodities will stimulate buyer interest rather than reduce values.

Pastoral

In the Tasman region, ten pastoral units greater than 100 hectares have sold within the past 18 months. Medium-scale pastoral units within sought-after locations are attracting moderate interest with several interested buyers.

However, properties in less-sought-after locations have attracted less interest. Therefore, these farms have been or were on the market for an extended period.
Properties sold in the past year have ranged in carrying capacity from 800 stock units (S.U.) to 3200 S.U. and have sold between $1080 per S.U. to $1765 per S.U.PastoralThe key factor driving the current market value for grazing land is primarily the level of economic returns being achieved in the sheep, beef and deer industries. Those returns have been variable over the past two to three years, which has had an influence on market values. In particular, the lamb schedule has been under downward pressure over the past two years with some seasonal variation around supply-and- demand characteristics.

Beef generally remains in short supply with a relatively strong beef schedule but still with some variability. The significant reduction in the dairy payout over recent months has also had an impact on the demand for grazing land.

Fewer dairy farmers are actively looking for cattle grazing land.

Stable interest rates are providing some positive stimulus to the market; however, buying decisions are as much influenced by the fluctuating levels of return as they are by the lower cost of borrowing. Buyers continue to be cautious, very discerning and price sensitive. Consequently, realistically-priced properties are attracting interest on the open market and are tending to sell, usually following protracted negotiations.

By contrast, over-priced properties attract very little interest and tend to languish on the market until vendor expectations are more closely aligned to the level at which purchasers are prepared to commit. Smaller parcels, however, are strongly influenced by non-productive factors, such as location and lifestyle aspects. The smaller properties tend to have a higher value per hectare and per stock unit.

Horticulture

Demand for horticultural land continues to be very strong. Improved returns over the last two or three seasons across a range of horticultural crops – including pipfruit, viticulture, kiwifruit and hops – have provided new impetus and confidence to those industries. Consequently, demand for bare land suitable for horticultural development is very high with only a limited supply of suitable land available in the market.

There have been a number of sales of prime horticultural land in the Motueka, Moutere Valley, Waimea Plains and the Tapawera Valleys. The sale prices indicate that there has been an appreciable increase in the underlying horticultural land values.

The hop industry, which is exclusive to the Tasman region, is experiencing unprecedented interest. That interest is a direct result of the increasing global demand for specialist hop products suited to the craft beer industry, which the local hop industry is well suited to cater for. Currently, five separate new hop ventures are in various planning or development stages. Three of these ventures involved purchasing significant areas of new land.

Several pipfruit growers and market garden interests are looking for additional land to expand production.

Summary

While demand for dairy farms in the district remains subdued with potential buyers being very cautious and watchful, the demand for pastoral land remains steady and there is strong demand for vacant parcels of horticultural land. That strong demand for horticultural land is likely to result in further increases in value, particularly for well- located properties with reliable water supply.

Congratulations Will

Will SommervilleWe are delighted to announce that Will Sommerville has undertaken and passed the Valuers Registration Board examination and has been admitted as a registered valuer. We extend our congratulations to Will on his achievement.

Will comes from a dairy farm background in Canterbury. He completed three years at Lincoln University before moving to Nelson in 2013 and working for Duke & Cooke. Will works in the rural sector. He has a keen interest in hunting and the outdoors.