As the price of land continues to rise many clients feel caught in a bind. Declining terms of trade and inflation combined with stalled or negative total factor productivity continue to erode profits. Land looks too dear to purchase, but in many cases it will be difficult to grow the business without more land. Leasing will be an option for some but with the current low interest rates and high lease prices for many it is an unattractive option.
There is nothing new about land being too dear but as Mark Twain is reputed to have said ‘They aint making any more of it’. In fact the reverse is true. As land is put aside for non-agricultural activity in many countries there is less available for agriculture. In some areas productivity is being reduced because of climate change and although some land will become more productive if you are in a district where productivity will decrease you will need more land to produce the same amount as at present.
This may be the underlying reason that, while the operating returns remain reasonably constant, the average price of agricultural land, in Australia has risen at six per cent per year every year for about the last twenty years. Effectively the “price of land” is underpinning the “price of land” rather than the operating return. However, when the price is considered in relation to the cost per DSE carried, the figures look better. Recent land prices per DSE where grain cropping is not a major part of the enterprise have been between $350 and $700.
A western Victorian property was sold in 1899 for £4/7/6 per acre and the property was able to carry about one DSE/ ac. In 1899 if you wanted to run another DSE you had to acquire another acre and £4/7/6 per DSE is $641.81 in today’s dollars. In general terms the price/DSE has bounced around in the range of $350 to $650/ DSE ever since. That means that current land prices are at the top end of the range but they are still within it.
So perhaps land isn’t too costly after all. Or if it is, then it always was!
Are you considering the purchase of additional land and need to consider how it either fits in with your current farming system or understand where the cost sits alongside your budget and strategic plan? Call a consultant at Meridian Ag to discuss more – 03 5341 6100.
See below figure from Rural Bank regarding Australia’s historic performance for land prices and transactions.
Figure Source: Rural Bank, 2018 (Link to download Report)
Article by Mike Stephens