Interview with Linda Rowley from Beef Central (BC) and CEO of Ray White Rural and Livestock Stephen Nell (SN). Read the interview on Beef Central.
BC: What are your expectations for 2019? What’s happening with the farmer-to-farmer market?
SN: Although there has been a lot of jawboning and press about tightened credit and the impact this will have on rural sales, drought is the single biggest factor in the farmer-to-farmer market currently. The reality is that credit is always hard to obtain in the farmer-to-farmer space, and the impact of tightened credit on the residential regional real estate market will be felt far more than the ag sector. That’s why auction will be so critical in an adjusted market to keep days-on-market low and to attract qualified buyers who have the finance to complete the sale.
In recent years, grazier margins have shrunk due to the burden of input costs and the more astute landholders have realised that turnover is the key to profit. This has created a hunger for scale to offset these costs and has made many landholders keen to purchase additional holdings to enable efficiencies through such scale. This in itself is creating competition for rural properties that is competing against both local and foreign based purchasers who are keen to purchase in a market where there are limited quality offerings.
Q. Institutional investment, where is it headed?
You’d think that the extended dry conditions we have been experiencing particularly in the eastern states might deter institutional investment in Australian farms, but it hasn’t. Returns are down slightly year on year as you’d expect with the seasonal conditions, but overall annual returns are so strong against comparable markets that it is still sensible for institutions to have Australian agriculture as part of their portfolio. Commodity prices are strong, and presuming the dollar stays where it is, you can expect institutional investment to remain strong.
The NCREIF Australian Farmland Index, comprising the returns from companies invested in agriculture, recently announced that Australian farms had a total annual returns of 12.75%, compared with 6.87% in the US. I’m not entirely sure how they come up with that number as a percentage, but it paints an impressive picture nonetheless.
Q. And the Australian dollar?
If the Australian dollar stays at the low of 70 cents (US) this will have a marked impact of the attractiveness of Australian farmland and its commodity prices. The challenge is that savvy producers are not looking to sell cropping properties that are delivering such strong returns. So supply in that sector is limited.
The drought will play a continuing role in the farmer-to-farmer market here. The volume of cattle being offloaded is unusually high for this time of year. It’s hard to farmers to be increasing or divesting land size when they’re urgently sending cattle to market and trying to predict their next move. Nonetheless, we have a large number of active buyers particularly in the farming family demographic expanding their enterprises, particularly in the search for grass.
Q. What about foreign buyers?
The rural property market is being buoyed by both local and offshore bidders. Foreign-backed buyers were registered bidders on our sale of Tenterden Station, with local graziers paying $17.0m. A month earlier, local bidders missed out on nearby Dyamberin purchased by RFM for $13.4m. It’s swings and roundabouts. Depending on your circumstances, there are opportunities right now for both buyers and sellers.
A lower Australian dollar has no doubt created some attractive buying opportunities for international players looking to invest here. Once you combine the foreign exchange easing with reports that our agricultural sector delivers better returns than global peers, this makes local quality farmland a magnet for foreign buyers.
Much has been said about the impact of foreign investment in recent years. The reality is that sovereign risk is not an issue in Australia and quality farmland is very attractive to those seeking to own their food source. While the investment figure might look large as a total, the overall likelihood of the foreign entity becoming the final purchaser is not as strong as you might think. Still, it’s important to have international marketing and strong foreign corporate contacts in the mix when marketing prime farmland to deliver the best price outcome for the seller.
The level of foreign ownership in Australian farmland had remained relatively constant over the past few years, though it did increase by 4 per cent in early 2018 with more than two million hectares acquired in the first six months by overseas buyers. Most of that occurred in Western Australia, whilst in South Australia and Queensland significant divestments by foreign companies occurred landing properties back in domestic hands.
The majority of enquiry we have from foreign buyers is for livestock enterprises, and that’s inline with the trend. The vast majority, some 45 million hectares, of foreign-held farms are used for livestock production.
I see foreign bidders as critical to the mix of purchasers vying for property, ensuring the best result for the vendor. And thus, we will continue to tailor our marketing to attract foreign buyers into the mix.
Q. Impact of recent rain?
As my father always says, “You can make money out of mud but you can’t make it out of dust.”. The single biggest factor in rural production in Australia will always be rainfall, or the lack of it, and currently this is very much the case. Most realise that the simple facts are that a growing world population and shrinking lands available for agricultural production will eventually make agriculture the powerhouse it should be. However at the moment the influence of the climate is causing issues of oversupply, particularly in the cattle market where many grazing areas remain in the grips of drought. This will correct itself rapidly with general rainfall across the eastern seaboard and eventually, even without rainfall, due to a shortage of livestock suitable for market categories.
Rain in the southern-east of NSW has been welcomed, but then you have other pockets of NSW that are still very much in the grips of drought. Gunnedah and the North East are suffering. Dubbo had a bit of rain in January, but it wasn’t particularly widespread.
Whilst North Queensland is experiencing record flooding, areas in the south of the state are still desperately needing rain. Heatwave conditions and below average rainfall have combined to see areas that were previously considered better than most of the state to now be the worst affected. Along the border and north into the Darling Downs and the central west we still see pockets of country that are non-productive due to the dry conditions.
It will be interesting to see the impacts of the northern rainfall on the cattle market. Rains have fallen in destocked drought ravaged areas that primarily rely on running cattle for income and it will be interesting whether those graziers elect to breed up or buy up. Some graziers in the north have struggled to keep core breeding herds intact and may now be rewarded for their efforts whilst others may have to look further afield to restock.
Q. Where will demand come from?
The greatest demand is coming from farming family enterprises looking to expand, and seeking grass and fodder. Our inspection numbers are extremely high at the moment in this buyer-group, and stock is in shorter supply. Proactive buyers are our in force in this sector, and the offers coming through are high.
Q. Are there any risks to demand?
The hobby farm market, which is significant in the eastern states, is going to feel it. If there’s one sector being impacted by tightened lending in our space, it’s that sub $2million category. Even landholders with 50 per cent equity are being put through the ringer by lenders. The rest of the market shouldn’t experience much of a repercussion from credit availability, as the top end is still able to access funds. However that could all change with the report from the Hayne Royal Commission coming out today. And if there’s one thing I know about forecasters in this space is that there are only two types: those that don’t know and those that don’t know they don’t know. This is why auction is more important than ever. Our research tells us that properties listed as private treaty have only a 12 per cent sale completion rate in 30 days in this adjusted market. 12 per cent! You might as well pack up. Meanwhile, auctions are resulting in a 64 per cent clearance rate in the same period. After 60 days, 78 per cent of auction properties will sell, versus 21 per cent for private treaty. After 90 days, there’s 88 per cent likelihood an auction property will have sold, versus only 33 for private treaty. So it stands to reason that an agent worth his or her salt in 2019 will conduct an auction campaign in the interest of their client, the vendor. And the transparency of auction is ideal for purchasers in this market too. Contracts for private treaty deals are falling over all over the country with buyers unable to finalise their finance. This simply doesn’t happen in auction, where registered bidders are qualified, and qualified bidders are finance approved.
Q. What will be the most active markets?
There is always strong interest in grazing properties, and with grain prices the way they are you’ll expect significant interest in that market too. But it’s unlikely that vendors of cropping properties will be going to market any time soon. They’ll be enjoying these high commodity prices as long as they can. The $10-15 million range will be particularly busy in the part of 2019.
Q. What do you anticipate the key drivers to be?
As the evidence suggests, auction will be the difference between a sale within the first month or two in this adjusted real estate environment, or a property sitting idyll on the market for months on end. This will be particularly evident in the smaller farmland market.