An interesting article in today’s Australian Financial Review (subscription only) by Brian Toohey sets out some tentative explanations but none fully resolve the issue.
Agricultural outputs relative to input costs have more than halved since 1962. ABARE shows that, since the mid-1970s, broadacre farms have made an average loss of $2000 while the return on capital invested has been only 0.88 per cent.
But since 1980 large grazing properties have increased in price by 7.7% annual going from a median price of $16 per hectare to about $353 in 2006. Capital appreciation has been strongest in the Northern Territory and north and central Queensland.
Part of the explanation lies in increased concentration of ownership. Firms like the Australian Agricultural Company (in my Moneybags share portfolio) own 24 cattle stations in areas unaffected by the drought – AAC own nearly 8 million hectares or about 1.1% of Australia. For most part the prices AAC receive depend on export markets and so are unaffected by local drought conditions – in the past they have trucked cattle from one station to another to deal with regional drought issues. Indeed I noticed in a company statement the other day that AAC is taking advantage of the drought to build up its herd sizes.
Another explanation is that Australian farming is driven by intergenerational issues where wealth accumulation is calibrated purely in terms of agricultural assets. In short families borrow to expand their holdings and do not substitute away towards equities or other forms of wealth. There might be some truth in this. Farmers have told me that they would be better-off selling their farms and using the income to invest in BHP-Billiton. It would be nice to find some way of testing this hypothesis.
If this type of reasoning is rejected and asset substittuability is assumed then it must be the case that farmers see much stronger commodity prices in the future - perhaps driven by development booms in China, India and other parts of the developing world.
The implications of global warming for farm values is only now starting to be analysed. In a CSIRO report Benjamin Preston and Roger Jones see mixed effects from global warming:
Australian crop agriculture and forestry may experience transient benefits from longer growing seasons and a warmer climate, yet such benefits are unlikely to be sustained under the more extreme projections of global warming. Furthermore, changes in precipitation and, subsequently water management, are particularly critical factors affecting the future productivity of the Australian landscape. The declines in precipitation projected over much of Australia will exacerbate existing challenges to water availability and quality for agriculture as well as for commercial and residential uses.
Generally agricultural property should diminish in value with climate change. According to Preston/Jones there will be significant reductions in milk production with even a 1 degree C increase in average temperatures.
Flatulent sheep and cattle account for 12% of Australia’s greenhouse gas emissions – the third biggest after coal-fired power stations and transport fuels. Such emissions would presumably be accounted for in a carbon trading regime and would therefore reduce farm value.
So it remains an intriguing puzzle – indeed a good PhD thesis topic – why do agricultural land values continue to rise so rapidly in Australia.