The events of 2020 have obviously been shaped by Covid-19. And, for New Zealand at least, the impact has been more an economic shock than a health one. The global demand for healthy nutritional food with confidence in supply chains has now gone to the next level. In this sense, our NZ primary sector is very well placed to respond as global demand for our produce continues to grow. Our carbon footprint, environmental standards and the level of premiums captured within product categories all count in our favour. Something we sometimes lose sight of with our daily NZ farming communication feeds.
Our rural property market, domestically, is evolving in tandem with these broader international themes. The outlier these last four years has been our dairy sector with rural property sales contracting by both number and value as dairy pay-outs continue improving year on year. I’m pleased to report this is now changing at last, but not necessarily all as a result of improved underlying earnings from our dairy sector.
A trend particularly evident in the lower north island is that beef producers are buying productive dairy units, and deconverting them to beef systems. This activity is occurring while returns from dairy generally remain head and shoulders above many beef production systems. Our view is that this trend will continue, while strict limits on dairy sector borrowing continue, and beef producer balance sheets hold up, supported by favourable loan-to-value ratios. Beef producers are prepared to pay in excess of $40,000 for well-located dairy farms with quality soils, particularly in the North Island. The ‘dairy to dairy’ sale and purchase agreement these days is a hard-fought document to go unconditional. By comparison, ‘dairy to horticulture land use’ is now often running at two times the dairy farm values!
As we look forward to 2021, cash is still king, and without it, life gets very challenging. On this basis we see horticulture remaining a significant influence this year on the rural property market, particularly for Kiwifruit.
Our dairy sector continues to offer a very stable risk-return profile, and this is translating into more long-term lease agreements, more so than we have seen in prior seasons. The interesting point here is that in a credit-constrained dairy market, a dairy unit marketed for sale with a long-term lease, and proven operator at scale, is actually very well-positioned to attract city investment.
Elsewhere in the economy, investors are striving for options in an overheated residential property market, and very low rates on Term Deposit. Our view is that city investors will be attracted to the dairy market if environmental plans are in place, and the deal is structured with contractual returns (long-term lease) supported by proven operators.
So, never count a rural market out. The fundamentals of our primary sector remain proven, and there is always something different to maximise the value of your asset. We remain committed to rural and provincial New Zealand and are focused as much on the long term as we are on the year ahead.
