Effect of the Agriculture Boom

Interested in opinions on the effect of the agriculture boom on regional house prices.

The agriculture boom has arrived and may be set to continue for some time.
Farmland values have increased considerably and the good times are also stimulating the regional economies that rely heavily on agriculture.

We're also seeing the Sydney market enter a correction phase. In the past the strong growth of the Sydney market has taken time to ripple out to the regional areas and in the last cycle regional property prices were accelerating fairly rapidly while Sydney was in the doldrums. We're already seeing the ripple spread to the Central Coast, Newcastle, Hunter Valley, South Coast etc. Last cycle this ripple effect continued right out to the back o Bourke eventually.

A lot of the regional areas that I follow (non mining) have not seen much growth since the last boom. Whilst not dropping much most have been stagnant for about 8 years.

Could the ripple effect combined with the agriculture boom and it's effect on rural economies stir up some action in the regional markets?

Willy

 

Was talking to a bloke from a citrus area in regional Queensland yesterday......he said they have had good rains, dams are full, lots of good crops, cannot get enough workers and prices are rising all across the area as demand slowly increases.
People moving into the area for work are stimulating some growth......young families & couples from the city looking for change.

But it is relatively small - not really a boom - yet...!

 

One of the good/bad things about smaller populations is that it only takes another thousand - or even a few hundred - people to create a housing shortage.

 

Is there an "agriculture boom"? I'd certainly suggest some towns are doing well at the moment.

It also takes one year of bad weather to hurt a town as well.

I'm not opposed to taking a bet and buying in a smaller sleepy volatile town but my philosophy is always buy at the bottom if you do this. Especially in a town with 1 industry (the 1 horse race). You want in before housing prices go up. You want to know they won't fall and the town won't dissapear. Track vacancy rates and get in when they're tightening

Or make sure the town is supported by infrastructure projects and has multiple industries. I'm much more comfy this way.

I'm VERY KEEN to see how inland rail effects some of these towns.

Take Goondiwindi for example. A town that has cotton, grain, other agriculture, retail and just had the DA for a $100 million abattoir granted last week. This will become the towns largest employer AND it's also getting inland rail. Add an agriculture boom and it looks like a winner.

I'm closely following the whole of the inland rail development with anticipation. This is going to put some smaller agriculture based towns on the map. As far as I can tell, this can only be a good thing!

 

Very good point about the inland rail development.

Agriculture boom is a fairly broad statement. Certainly grazing areas are booming with wool, lamb and beef all at or near record highs combined with better seasonal conditions and low interest rates. Rural property prices have jumped considerably and there is a lot of foreign and corporate money pumping into the system.

One thing farmers wont do is pay tax. They put their money back into their properties creating work and putting money into their local economies.

I think in time all food production will do well. The big end of town is certainly betting on it.

 

Farmers wont pay tax, They will buy machinery there is no servicing hurdles to jump, just have show assets and the machine is the security. Then they will lease land it is much more tax effective. They will take long leases with yearly increases of 2 or 3% paid in advance.

 

If i were bullish on ag, i personally wouldnt take a regional specific risk on resi. I would prefer expousure to the farmland itself.

Rural Funds Group

 

While some rural areas are booming house price have dropped in the last 12 months while their is demand their is no shortage of supply, but lower prices means better yields which are good ,6%+. Demand has increased supply with more residential land available. Of course anywhere, their will be specific location that are desirable usually near CBDs that will give good appreciation and have tight supply, and you need to be at the right place at the right time and be able to buy when the opportunity presents itself. The rural boom has caused farmland to boom but the houses are worth little. I have had offers that are up 60% on values 2 years ago. The bargains aren't their like they have been for the last 10 years, farmland is still has better potential than RIP. The ripple effect has a big contributor to farm land prices, from both high rainfall to low rainfall areas, as well as foreign buyers mainly Chinese. Aggregators are paying big money sometimes with the idea of getting a large parcel to sell foreign entities for large gains

 

There are wealthy Au and OS funds and families quietly buying farms in the $3m-15m price bracket and these buyers have a VERY bullish long term outlook on global meat and crop prices with ongoing expansion of middle class in Asia. If you understand what to buy and where I think there is capital appreciation and cash flow in the mix. Obviously there is no way to eliminate drought risk entirely this is part of our nation's fabric and history. You need to track long term weather patterns, soil types, carrying capacity etc etc to have a semi accurate idea of what a property can return. Then you need to have deep pockets and be willing to manage occasional 0% return years when weather is bad and then overall returns can be very attractive.

 

Agree, there are plenty of better ways to get ag exposure.

I'm thinking more along the lines of whether an ag boom will indirectly help to support regional house prices by stimulating rural economies.
Certainly some towns that are getting new abattoirs etc will be directly influenced.

 

Having worked in Asia and witnessed Asians craving for Aussie quality products, ranging from Avocados to Angus Beef to cauliflower vegetables, I am actually surprised with the cheap prices of farmlands here.

No doubt, intensive farming is not practised here leading to lower yield. But that is by choice rather than a rule and the yield can be improved if need be. So if one is looking into yield, the potential for future upside is there.

In terms of capital appreciation, the upside is good too.

In many countries round Asia, it is hard for foreigners to buy farmland as they are considered "national interests " but not here in Australia. With the middle class in Asia exploding and increasingly, willing to pay more money for quality product, demand for Australian farmland products should increase. With increased demand, prices should also go up for the best farmlands.

Moreover, some of these farmlands, in the very long term, might get rezoned to residential ones? They need not be near the capital cities. Being near to regional centre like say Shepparton, Mildura, warnambool etc will be good enough. Not to forget that they are most likely bought very cheaply initially so the capital appreciation will be very substanrial.

Funny that many locals don't dabble in such lands. Most felt it's too much work and too hard.

 

Depends on overall supply and demand. If stock and vacancy rates were already tight a few new jobs will impact local markets, but if there was a glut a small uptick in jobs won't be enough to drive prices a long way. IMO demographic shifts like people being motivated to move to locations en mass are bigger movers of the supply demand equation.

It is work and the costs are real and property (especially large rural holdings) can be illiquid so there are obviously risks and barriers to entry that slow people down to playing in this space.

 

To be honest I'm not sure how successful some of these foreign buyers of Australian farmland are going to be. Most of the ones I've dealt with have absolutely no idea what they are doing and have bought the wrong country for what they want to do and have paid way too much for it. There will have to be a big boom in property prices just to bring the market up to the level that they have paid because they have no idea how to value country based on what it can return. Agents and sellers know this and are pricing properties accordingly when there is overseas interest.
It's like valuing a residential property based on $600 /week rent (because the agent said so) and then finding it only rents for $350/week.

It takes a lot of experience to even come close to determining what a rural property is capable of returning. A lot of experienced Australian farmers wouldn't even come close if you took them to a different geographical area than the one that they were familiar with. Many have gone broke trying. What are the chances of someone coming from the other side of the world with no farming experience whatsoever and making a sound assessment?

The upside potential is definitely there in agriculture and it's true a rising tide lifts all boats but in my experience a lot of foreign buyers are starting off well and truly underwater.

The smart ones are partnering with experienced Australian companies to combine capital with a proven track record in agriculture.

 

Agreed - that was the point of my original reply - there are some very uneducated buyers in this market (including retired north Sydney Dr's not just OS buyers) getting it WAY wrong. They pay too much and their farms underperform. There is a specialised/involved set of due diligence required to make reasonable assumptions on a new purchase. Quality management is also essential. People need to either take their time to learn or get the right help to make informed choices.

 

Not all farmland is regional, In Adelaides north we have prime ag land butted up against and surrounded by surburbia. The fed/state gov are funding an infrustructure expansion within this region.

Northern Adelaide Irrigation Scheme a step toward South Australia’s export future - InDaily

"will create 3700 jobs and add a projected $500m per year to the state’s economy."

Also in SA technolgy is allowing farming to take place on arid land.

Home - Sundrop

Sundrop System - Sundrop

"A Sundrop greenhouse turns seawater and sunlight into energy and water. We then use sustainably sourced carbon dioxide and nutrients to maximise the growth of our crops.

Because we don’t need soil, we’re able to grow our produce on degraded land in arid areas previously considered too barren for agriculture."

 

Wouldn't keeping the prices down in Australia destroy some of these farmers who cater only to Australian markets ? Something that happened with the dairy farms recently. Also countries like India are going to take such decisions : Multi-million-dollar pulse export market stunned by new Indian tariff
With a lot of countries in Africa offering so much of arable land at almost throw away prices, I am highly sceptical of a 'boom' in ag in Australia. Just my opinion.

 

Willy for the last 200 years foreigners have very successfully taken up farming in Australia it is what has built and is still building Australia. Foreign Investment is just that, investment . They hire highly qualified managers. and agronomists. Often The previous owner is employed as a manager. He gets a **** load of money, instead of being asset rich and cash poor, gets a good job and remains occupied, living and doing what they love, and get all the latest whiz bang machinery to play with and the resources to be more efficient.

 

Land is useless with out the capacity to move preserve or store the produce, or even get paid for it. Investing in land if you are dubious of how long you will be the owner may not be desirable. yes there is corruption in Africa.

 

Interesting how you pick one instance that was a normal situation a few years ago, but don't mention all the free trade agreements and importers who have or are going to remove all tariffs in the next 2 years.

 

Agree with everything you've said however this isn't how I'm seeing a lot of the current Chinese investors operating.
I deal directly with 7 Chinese companies who have purchased farmland in recent years and of those there is only one that has engaged local knowledge and employed good management. The rest are in various states of disarray because they don't trust anyone to manage them, they don't trust anyone to lease them and they try to manage themselves with no idea about what to do.
It's unbelievable really, with the money they've got they could employ top class management but there definitely seems to be some kind of trust barrier there.
Whereas other foreign investors, as you say, pay the best money and have the best equipment and attract the best management.