2023, Volume 26, Paper 15
ISSN: 2209-6612
This Too Will Pass: Farm Land and the Animal Spirits that Bedevil It
Bill Malcolm – School of Agriculture, Food and Ecosystem Sciences, University of Melbourne
Alex Sinnett – School of Agriculture, Food and Ecosystem Sciences, University of Melbourne
Paul Deane – School of Agriculture, Food and Ecosystem Sciences, University of Melbourne
Abstract
Farmers today are managing a farming business and a farm land (real estate) owning business. Of late, the real estate component of farm returns has been extraordinary. History, and reversion to the mean, indicates this is not always the case and rather the recent bout of exceptional farm returns too will pass. In this paper a range of approaches or methods in determining agricultural land valuations are discussed, or put another way, what a farmer or investor might pay within the context of current land prices.
In theory, what a farmer or investor might pay for some land can be based on sales of similar property. Other methods on how much to pay are determined by economic thresholds and financial constraints, including a desired return on capital and values they could pay based on debt servicing ability. All of this information gives a guide as to when to stop bidding in order to have a good chance of earning the required rate of return and, more importantly, to be able to service the debt. In practice, current market prices and what can be financed, are the key bits of information in decisions about land value.
But the decision to buy does not only rest with these considerations. When buying farm land there are significant layers of complexity, where each case can have its own unique ‘angle’ on the land purchase decision. Other factors to consider include family situations, longer term goals, growth objectives, long-standing informal arrangements between buyers and sellers, taxation and legal complexities, risk considerations, marginal returns from expansion, development potential, ‘animal spirits’ and future beliefs of optimism and pessimism on the outlook for agriculture.
As to the current state of affairs, the authors view the combination of the recent past pattern of runs of rising commodity prices, underpinned by negative real discount rates and very low nominal borrowing rates, accompanied by exceptionally good seasons, as a trifecta of uncommon rarity. Given the recent strong confluence of factors at play, chances are the extraordinary period of farm returns too will pass. Rational buyers of agricultural land at current valuations can ask ‘how much of the recent good times is now capitalised into land values and what are the chances of a repeat of the enticing combination of high prices, good seasons and cheap capital over the next 10, 15 or 20 years?’ Investors’ answers to this question will determine where they sit regarding the next phase of valuations and price trends for Australian farm land.
Key words: Farm land prices, land valuation, agricultural prices, Australian agriculture
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