Farming sector still lagging behind other property sectors trends

The farming property market is yet to witness the rebound in sales activity being experienced within other property sectors, according to Bayleys real estate’s rural research report.

The lag of the farming sector behind other sectors is due to the recent volatility in commodity and foreign exchange markets and the increase in farming debt levels, according to Bayleys Research senior analyst Ian Little.

“The rural market was the last of the major property sectors to experience a downturn in purchaser activity, and given the unique factors in play, the rebound in sales activity being witnessed in the other sectors has yet to become apparent in the farming sector.”

Mr Little says the latest farm sales statistics released by the Real Estate Institute of New Zealand (REINZ) clearly illustrates the sharp fall in purchaser activity that has impacted on the rural market over the past year, and the resulting effect it’s had on values.

“This suggests there has been a marked difference in the price expectations of vendors and potential purchasers, which has stopped numerous sales from being completed.”
“There is no doubt that purchasers remain in the market, but they are keenly aware of the change in values that have occurred over recent months and their offers are reflecting this,” says Mr Little.

Mr. Little says that debt levels within the agricultural sector have doubled since 2004 and there has been particularly strong increase in debt within the dairy sector, which now accounts for almost two thirds of total agricultural debt.
The Reserve Bank advises that several farms are experiencing significant financial distress, and are working hard to cut costs and reduce debt levels. The bank warns, however, some farms are holding too much debt, and will be forced to sell some or all of their operations.

“Despite a recent increase in commodity prices those prices remained well below levels reached in 2008, while the volatile New Zealand Dollar has tempered the benefit of the increases,” says Mr Little.

A commodity price index compiled by ANZ reported that commodity prices rose in October for the eighth consecutive month - meaning that commodity prices had increased by 24 percent from the low measured in February.

“The latest increase was driven by a further rise in dairy prices, up 8.3% in October which equates to a 44 percent increase since February.”

“The recent rebound in commodity prices may result in renewed confidence within the rural market, however, a stubbornly high New Zealand dollar and farm debt levels will continue to weigh upon the sector.”

Little says the downside for New Zealand farmers is that in the February to October 2009 period, the rise in the value of the New Zealand dollar on the foreign exchanges had been even greater than the increase in commodity prices meaning that when international prices are converted to local currency, prices have declined by approximately 11 percent .

“It appears that in the short term, gains in the NZ commodity price index will have to be driven by further gains in the price of commodities as opposed to through currency movements,” he said.

“While dairy prices have been the major driver of the increase in the commodity price index, the latest figures also show strong increases in the value of forestry products and wool.”