Dairy farm sales activity in the second half of 2021 indicates renewed confidence in the Canterbury dairy market. Good quality dairy farms with sound nutrient outlook and quality, and efficient infrastructure have received strong interest and provide for a sound banking proposition.
The realisation of a record high farm gate milk price (current Fonterra milk price forecast sits between $8.40 and $9.00), together with a favourable outlook in the medium term has given the market renewed impetus. Although interest rates are now starting to climb, they remain low by historic levels and the positive outlook is now being reflected in a noticeable uptick in prices.
This is a change from 2020 when we considered the buyer pool and demand for dairy farms to be low. Factors contributing to this were a lack of liquidity through an absence of overseas buyers, a reduction in bank appetite for lending, and uncertainty around how environmental rules and regulations could impact farming systems resulting in lower farmer confidence.
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However, recently we have observed interest in Canterbury dairy farms from non-traditional sources of capital including syndicates, sale and leaseback arrangements and international entities taking a minority interest in proven large scale dairy farming businesses.
Interest in dairy farms is also coming from the sheep and beef sector with established, larger scale operators looking to diversify their farming interests into dairying, and further deepening the buyer pool.
Alongside interest from the sheep and beef sector, demand and prices paid for dairy farms appears to be strong when the dairy farm offered for sale has strategic appeal to neighbouring or nearby farmers. Demand for support land to lease or buy appears strong as larger scale Canterbury dairy farming businesses look to take control of their grazing and feed requirements.
Another development of importance is the recent Fonterra farmer vote in favour of capital structure changes. This is another step in the evolution of Fonterra and we will watch with interest how interested parties will factor the capital structure changes into their negotiations when buying and selling dairy farms.
Furthermore, the National Policy Statement for Freshwater Management 2020 (Freshwater NPS 2020) may have more impact on regions outside of Canterbury where environmental rules and regulations are already generally well understood by participants in the dairy market.
An emerging potential issue is Greenhouse Gas Emissions and possible additional costs to farming businesses.
With more buyers in the market and lenders more willing to support those dairy farming businesses that have been able to reduce borrowings, transactions are being finalised. Farmers who have confidence that their production systems are sustainable are buying dairy farms.
Real estate agents are reporting vendors who previously may have wanted to list and sell their dairy property are now withdrawing from the market due to improved returns and a lack of competing alternative investments, limiting the supply.
We consider that dairy farm values have risen in response to a potentially deeper buyer pool and fewer farms being offered to the market for sale.
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