The number of farms sold in the three months to the end of June was down 18.9% compared to the same period of last year, according to the Real Estate Institute of NZ.
The REINZ figures show that 261 farms of all types were sold in the three months to June compared to 322 in the three months to June last year.
Dairy farm sales were hit even harder, with 24 sales in the three months to June, down 29% compared to a year earlier.
In the month of June only one diary farm sale was recorded, compared to eight in June last year (see interactive graph below for the monthly trends in farm sales by type of farm).
While the COVID-19 lockdown that was in place for much of April would have contributed to the low number of sales in the second quarter, it was not entirely to blame.
The REINZ figures show that the number of farms being sold has been declining for at least five years.
In the second quarter of 2015, 479 farms of all types were sold.
That declined to 472 in Q2 2016, 459 in 2017, 427 in 2018, 322 in 2019 and 261 in 2020.
Farm prices were also down overall.
The REINZ All Farm Price Index, which adjusts for differences in the mix of farms sold by type, size and location, was down 10.1% in the second quarter of this year compared to the second quarter of last year.
The REINZ Dairy Farm Price Index was down 8.6% compared to a year ago.
"The slide in sales numbers poses a pertinent question. Are numbers going to stabilise at the current level, or is the downward trend going to continue?" REINZ rural spokesman Brian Peacocke said.
"Should it be the latter, given the range of issues currently impacting on the rural sector, not the least being the need for youthful regeneration of the farm ownership structure, it could be that an avalanche of potential sales is building up behind an earthen dam.
"Should the dam burst, what is the likely impact on farm values? Will values increase, stabilise or decrease?
"Irrespective of the outcome, what is clear is that the current average return on investment for those with investment in the rural sector will need to improve or there will be a decreasing incentive for attracting much needed, affordable capital into the rural sector," he said.
You can access all of interest.co.nz's rural data resources by clicking here.
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48 Comments
Andrewj,
Some questions from someone with no farming background, but a small business background. I accept what you say, but surely you need an adequate ROC to able to do stuff like improve the environment. That's how most businesses work. I don't understand the model.
I have been reading up on Regenerative farming and from my outsider's viewpoint, it looks compelling. According to figures have seen, NZ is the 4th highest user of mineral fertilisers in the world. Why? That is surely both financially and environmentally costly. Why do we lose so much soil each year? Frankly, to me the standard dairy farming model looks primitive.
linklater01 - NZ farmers already practise regenerative farming in the form of rotational grazing. NZ's soils are very young compared to most of the rest of the world, as a result of this we need higher amounts of fertilser applied to growth the drymatter that our climate and soils allow us to growth - if we had a colder climate we would grow less drymatter and therefore need less fertiliser. It is the nitrogen fertiliser that may cause some environmental harm as this move through the soil profile very quickly compared to P,K & S.
Every country in the world loses soil, but in reality this is normal in that this is how the flood plains of the world have been formed over the last few billion year.
Dairy farming in NZ is the most efficient user of carbon in the world e.g. carbon/kg/milksolids is the lowest in the world.
Virtually everything us humans do is a drain on the planet in some way shape or form. NZ's milk is basically the only grass fed milk in the world, consumers pay a premium for it over the normal milk where cows are fed maize and crops that are cut and carried to cows that are housed for their whole lives.
It's tough one because we all different in so many ways, climate soils ambitions, area farmed, debt. Our light volcanic soils are high retention need lots of fertiliser, I'm not so bad here but low on Mg and a few others.
For a long time NZ inc has been pushing production and it has come at a cost. Even today most advice is handed out by Fertiliser or spray reps. I doubt the soil loss figures but looks like forestry can lose a lot after harvest. Farmer behind me pushes boundaries, right now has 400 rising 2 year bulls on a crop on a hill side and it looks a mess. He has been feeding out to them since Feb.
I am trialing regenerative ag, but i need to grow feed in mid winter not when everyone else has it. All fields are going multi species.
Our 3 million $ farm only carries 300 cattle, I should probably budget for a $300 a head trading margin. I have a trading margin of 90k and about 30k of costs before drawings. I'm struggling to get a %3 return more like %2 and a loss from drought or some other disaster every 5 to 7 years.
Andrew, $300 per head margin for trading cattle was the norm about thirty years ago, if it hasn't improved since then why bother. Several years ago I was getting $900 margin between buying in yearling steers in Sept at 300kg l wt and finishing them to 330 kg c wt by the following Nov. When the buy in price rose to $1300 I gave it up and took on dairy grazers. Now I get $600 p hd p year from 100kg l wt to 350kg l wt. The market for store cattle is ruined by people pay too much and do not insist on a decent margin.
I'm buying R1 bulls at the moment, i'd be happy with a $500 margin but those days could have gone. I get very dry in summer so I have to plan for very low stocking rates Dec to April, I am working on solutions. One problem I have is lifestyle blocks around me inflating land values and Regional council consent to farm regulations.
..this might help
"The idea that businesses should generate a return sufficient to cover the cost of capital doesn't seem to apply to farming. That is, the yield most farmers and horticulturalists achieve does not cover the cost of fully funding the market value of the assets they purchase...."
https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10…
Heres the problem for farming. Cash yield from farming needs to cover at least debt interest and principal plus a living wage and then a return on capital. The sad fact is a lot of farms cant do this at current land prices. This is the real problem for farming - without capital gain you have a high risk model - drought, floods affecting production and then there's market fluctuations with a product you have to sell at a certain time each year.
Its nice to love the lifestyle but the reality is everything has to pay its way for you to eat plus take into account risk for the lender. The land Ponzi scheme has to come to an end for the sake of all new farmers wanting to take up the reins. This over inflated land value is the biggest threat to farmings future. Young people will just leave and go elsewhere - you only have to look at many rural areas and they are dying because of this. Its easy to blame everything else - regulation, water rules, trees etc etc - but every business has higher costs because of something and the long term trends like for wool are hard to ignore no matter how much we want to believe it will get better.
The killer in land values is now going to be the unwinding of 20 odd years of interest only financing - I know of one particular farmer who could not get finance from any of the big four banks at 70% equity - they needed I+P repayments (at 4.5% interest) over twenty years. He's gone to a second-teir lender, interest only at 7.5%
Banks say they are business as usual, but they know its not..... farm values will fall as finance from lenders evaporates...
Jack - farming is a "price taker" business while most other business's are "price makers". Climate is a risk as is Covid 19, Fonterra's business skills are a risk, the level of the $NZ is a risk - there is risk in everything we do.
Land prices are a result of a willing buyer and willing seller agreeing on a price. Peoples perception of risk is different from one man to the next.
The availability of credit (e.g. Bank lending) is a big factor in farm land prices.
Farm buyers have different objectives e.g. in bad times such as we are in now with the likely hood of high inflation in the near future and the fact that no bank deposits are gauranted in NZ a lot of money will move into land investment as its now seen as a very safe investment.
Interest rates have fallen 50%, this fact reduces the Cap Rates for farms (so they are likely to go up in value as a direct result).
Carbon (forestry) demand has doubled the value of dry stock farms, kiwifriut farms have increased 4X. Yes dairy has been soft but due to a number of factors discussed above.
All market values fluctuate based on many many factors. There is no Land Ponzi Scheme as you claim, it is simply a market thats made up of many variables.
The young people have been leaving the land for the last 40 years, this is normal considering how the worlds changed e.g. planes fly us around the world in 24 hrs, young ones prefer to be well travelled and live with shallow pockets rather than working hard and having full pockets - this is a product of the new world and from what I see all business's are struggling to get quality staff!!!
Theres an old saying a wise old man once told me - there are 3 generations of business/farm owners 1. those that make it 2. those that struggle to keep it 3. those that lose it.
Maybe Covid 19 is the great leveller that is going to rebalance the world and put more focus on productive quality natural food and reduce the human foot print as theres no more tourists burning carbon. Last weeks Dairy Auction is indicating that there is big demand for quality natural food - I'd bet the house that the dairy industry is going to have a great future from now on - youd better get in quick and buy yourself one!
The difference is that housing is a far more liquid asset - much easier to sell than a farm - why are the fundamentals of milk strong?(I don't think they are) there is a growing protein glut in the world market, but it seems like there is not enough houses to go around....
If your happy and making a dollar all power to you. As I said some farms can’t. Dairy if well structured and run has a good cashflow. I know the banks are a lot tougher now. Interest only is pretty much gone. I’m seeing farms that can’t get a buyer as banks won’t fund. Talking to a friend in banking a lot of rural sections now being put under the commercial section which runs on yield. The commercial guys run a traditional economic model and banks risk profile on a lot of farming has raised considerably. Time will tell I suppose. I personally would own a house as there’s a lot more buyers and banks are more willing to lend on these.
JL - Banks are fair weather friends, they almost always get their timing wrong regarding when they should lend more and when they should lend less. Farms are complex businesses and need strong business skills to make it happen. Unfortunately yesterdays world discounted farmers efforts to put food on the table, todays new world is quickly realising how important the farming world is to our survival.
Banks wont be moving rural loans to their commercial bankers as the commercial bankers have no experience in rural business. The clients you talk of are what we call "problem clients" that will be under the control of the banks default teams. This is normal when loans/clients dont do what they say theyre going to do.
As with everything farming goes through cycles of good times and bad times - I'd bet the house again that we see a lift in Agr related students at our universities in the next year or two, this will be driven by the effects of Covid, one of which will be peoples desire to escape the death traps of the city lifestyle (which we are seeing already in NZ and offshore in areas badly hit by Covid.
In any industry there are top operators, bottom operators and those in-between, the same applies to farming. Presently the banks risk profile for farming is high because the banks over lent to the sector between 2010-2015, believing the payout would be $10/kg etc etc, unfortunately they got carried away as did some farmers with the end result being that some farmers would go to the wall when prices change or the weather didnt do what we told it to do. This is simply the business cycle of life which has happened several times in my time as a Rural Banker, Consultant and Farmer. Its tough but Im happy to say that this is the cycle every industry goes through from time to time e.g. Commercial/Industrial/Retail Markets are getting smashed right now due to Covid contagion effects, residential property is all good simply because the Govt's printing money and throwing it at home owners in order to keep them happy (3 months out from an election) (how long will this song keep playing for??).
At least Agr in NZ is doing it all on its own with no support, we should be very happy we have this industry!
I applaud your positive outlook which is a necessary to succeed in any business. Whether banks are right or wrong is immaterial to a point as they control the money. I no for a fact that some rural divisions are now reporting to commercial overlords and this is driving some of the change. One top banker recently told me they would really like to just be rid of the whole agri side but cant do that - I dont agree but it was a comment. The money being printed could be thrown at Farms but they arent doing it - why not? Risk - Yield - burnt before - probably all of the above. The REINZ article really says it all - the yield and attractiveness and affordability for younger farmers has to improve or without overseas buyers its could be a problem as the baby boomer farmers retire and family dosnt want to or cant buy it.
JL - The printed money isnt going to farmers because because very few farmers will ever vote for a labour government so why would Jacinda do us any favours? The yield and attractiveness for any asset is cyclical - nobody was buying shares or oil 3 months ago. Dairy prices/margins will change and demand for dairy land will change as a result. The great thing about a lot of dairy farms is that they have other land uses such as horticulture, goat/sheep milk etc etc - changing land use doesnt happen overnight but it does happen and before u know it theres no dairy farms left e.g. BOP
But Jacinda dosnt lend the money - the banks do so they are the problem or decide who gets it based upon yield, risk and ability to pay. I agree on the land change over time and we continue to see this in all land categories. BOP is an example as sheep/beef/dairy is now a small part of the economy there as other more profitable uses appear. I think you will find 3 months ago the number of share trades went through the roof and those that bought then and oil have done very very well. One young guy working for me bought shares then and has made enough to re roof his house. All about timing and risk appetite.
Agree - you have to cash the position in and thats the risk and reward - Book the profit and look for the next one or hold for more and maybe get burnt or maybe make a heap more. Still be a lot of cash in the system that has to find a home somewhere. Kiwisaver and the like means the money keeps on coming into the market for companies like F and P Healthcare - worth over double that of Fontera now. Tech is the future.
Andrew- Yes, valuations are a real problem- if someone pays too much that becomes the norm for future sales, until there is a dramatic event which causes a reset. A recent example near us of an elderly couple whose 40ha block received a RV of $1.8m tried to sell but the best offer they got was $900k. The house and a few ha could have been subdivided off for $500k, leaving 38 ha for $400k, which would be plenty given regional council regulations concerning land use. But the valuation was based on a previous sale nearby two years previously of a much superior class of land @ $48,000/ha.
Interesting read and a lot of valid points in the comments, but all old problems. The industry and government have had a long time to consider these issues and we get no closer to resolving them. Taking all the comments on board, who will be farming in 20 years? and how will they make money? when there are such low returns for investors and young people are exclude. Given the direction of investment, then food is going to be lab produced - KFC the latest to go that way according to yesterday's news. This shift will surely increase if food prices rise given a decline in production, continued low returns from production and a continually growing population - anyone bought courgettes this week to go with their cheap chips?
As long as any price increase covers the declining production then the equations balanced (except for the fact that someones going to go hungry!), however if the market demands fresh wholesome trustable food then NZ has backed a winner provided the $NZ doesnt run away on us..............
PONW - There is money in it at current prices for those that have the good land/climate and have the skills. Sure some of the higher value land that has multiple uses may not return as well right now, but that simply a reflection of the difficult period the Dairy Industry has just come through. Lower interest rates are also helping return & those that carry debt.
When the present landowners move on there will always be someone who steps up and has a go, if we kiwis have got too lazy then there will be foreigners with the ability to step in and make it happen because NZ has a big advantage over the rest of the world - we have the climate and ability to grow lots of grass and from this produce one of the worlds highest demand products - FOOD THAT IS TRUSTED & SAFE TO EAT (and covid free at this stage!) - its also one of the worlds lowest GHG produced milk.
Without Dairying/Farming NZ is a lost cause, we all need to get positive and make it happen (even without the support of the current Government).
The main reason for higher value land being highly valued is its versatility - if it can be utilised for whatever is paying top dollar then that is what you pay for. There are situations where the land has high capability but necessary infrastructure either does not exist or is too far away- this land will then be undervalued relative to its capability. Similarly, poorer land with all facilities nearby will probably be over valued. Fonterra with its transport policy of no price differential for distance has tended to average out dairy land values.
Banks and government are definitely not helping to improve farming business. As housing is backed by any government and that results in the better interest rates. Farmers wanting to buy another property get only pushed into a higher risk profile, what can trigger higher interest rates. Why should you bother. I think biggest problem for future is to have motivated people who are going to pay the taxes.
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