The price of farmland has risen 209% in the past six years accroding to Westpac economist Doug Steel.
Prices were expected to peak in 2007-08, as they did in previous cycles, in 1989-90 and 1995-96, followed by a trough in 2001-02.
It was not surprising that land suitable for dairying had led the increase given the rise in dairy prices, but Mr Steel said product prices, as they related to land prices, ignored the influence of productive capacity, future returns and the cost of production.
But the two did correlate, evident by Fonterra forecasting the milk price well ahead of the season and the impact that had underpinning land values.
“Fonterra’s early forecast of $7 a kg milk solids has given confidence to the market that high dairy payouts are going to be around for the next 12 months.”
Elevated land prices also reflected confidence in the dairy sector.
Mr Steel said dairy production had increased considerably in the past decade, and milk solids per hectare had increased by a compound rate of 2.6% a year, reflecting more more cows per hectare and also more milk solids per cow.
But Mr Steel said research showed that the top 10% of dairy farmers in the 2006-07 season were producing 25% more milksolids per hectare than an average operator.
Similarly, sheep production had improved markedly.
Lambing percentages had risen from 105% in the mid 1990s to over 120% now.
Looking ahead, Mr Steel forecast a milk payout for the coming year of $7.10 a kg m/s but revised down to $6 from $6.30 his predicted payout for 2009-10.
. . . The return of US beef to Asia had also put pressure on prices, but growing demand from Russia was supporting prices.
Mr Steel was optimistic about prospects for the medium term.
He was equally optimistic with lamb prospects, saying prices this season should be “considerably better than the dismal returns of the past few seasons”.
He picked prices to be 50c a kg higher than they were in 2007-08 and $1 a kg better than 2006-07.
Sheep numbers were falling all around the world and meat prices in Europe were 30% higher than they were a year ago, while prices for co-products were also improving.
“While growth in demand in the EU and US may ease with economic growth, reducing supply is likely to keep prices firm.”
Chris Nixon an economist with the New Zealand Institute of Economic Research analysed the price of farmland and its reflection of economic activity for Agmardt. He presented his findings at the AGmardt breakfast during the National Bank Young Farmer contest and you can read it here.