The ongoing round of interest rate rises shouldn’t tip world farmland markets into reverse – unless higher borrowing costs spark recession, Rabobank said, even as it flagged that the “tide is turning” for Australia’s land price boom.
Analysis of historical data suggests that periods with rising interest rates – as now, with Canada and the eurozone among those unveiling rate rises last week – do not cause “any immediate downturn in farmland values”, the bank said.
The correlation between interest rate gains and falls in land prices is “weak”, said Stefan Vogel, general manager of RaboResearch Australia & New Zealand,
“Rather, it is the longer-term recessionary impacts on the broader economy which often follow interest rate hikes that are found to exert downward pressure on farmland values,” he said.
“And this is generally with a delay of several years.”
Ag prices vs costs
He identified, in fact, that downturns in farmland values had also coincided generally with changes in agricultural policy – or with periods marked by a combination of poor harvests, low prices and elevated input costs.
The comments came even as he flagged the potential for farmers in Australia to face weaker harvests ahead, after the bumper crops boosted by La Nina-inspired rains, and greater pressure on margins too.
There is the “likelihood of agricultural commodity prices and production volumes in coming years falling short of the exceptionally high or even record levels seen in 2021 and the first half of 2022”.
Although ag prices are “likely to stay well above the five-year average for the next one to two years”, costs too will “exceed their five-year average”.
Indeed, Mr Vogel said that “the tide is turning slightly” in the Australian farmland market, after “staggering growth” both last year, when values soared by 27%, and so far in 2022, which has witnessed further appreciation of 25% so far.
However, although farmland price growth is expected to slow, “no decline… is on the horizon” the bank said.
Mr Vogel said: “Our base case forecast is that farmland price growth will continue, but we expect a significant slowdown in the rate of growth in prices in 2023 and the years beyond to 2027” as compared with the “unprecedented growth seen recently”.
The pace of growth in arable land in Australia “in recent years” has outpaced that of Canada, western Europe and the US, although has lagged a “surge” in Brazil and Romania, Rabobank said.
‘In hot demand’
Separately, National Australia Bank said that Australian grain prices were “likely to remain high by historic standards” for now.
With weakened world economic prospects having only a “limited impact on grain demand fundamentals… Australian grain will remain in hot demand throughout 2022 and into 2023”.
However, NAB noted too the potential for a rebound in costs of inputs, after declines from highs reached earlier in 2022.
“Signs over the last month point to stabilisation, or in some cases even a re-emergence, of price growth,” the bank said.
The bank’s fertilizer price index rose by 7.5% in August “and is now around 60% higher than at the same time last year”.