The number of Southland dairy farms sold to date since the beginning of 2019 has remained relatively consistent to that of the previous two years. We have noticed however that the composition of these sales has changed, with more A class properties having transacted since the start of the year, albeit generally at a level lower than what we would have expected two years ago. This reflects that there has been a reset in vendor expectations of sale price.
Farmer optimism in the dairy sector started relatively positively for the 2018/19 season, despite the prior 2017/18 season having its share of setbacks. We are observing that potential purchasers are now preparing their offers based upon an expected cash return, rather than future capital growth and market appreciation. We have also noticed the increase in equity partnerships being formed as a way to raise capital to purchase properties.
Overall, we consider one of the key influences on which way the market will be led in the coming months is going to be the level of liquidity in the market and the flow of capital due to transactions (or lack of) occurring.
As it stands, with foreign investment constrained for the foreseeable future and banks sending a clear signal to their dairy client’s that further consolidation is required, we believe liquidity in the market will remain tight. The fundamental conditions for optimism in the market do exist, i.e. the dairy payout is looking generally more positive and interest rates are remaining low, however continued cautious sentiment suggests it is difficult to see dairy farm values recovering in the short to medium term.
The graph below identifies the analysed effective land value per hectare of ‘A’, ‘B’ and ‘C’ class properties in the region since the beginning of 2015, together with key external influences. ‘A’ class farms are typically situated in the Central Southland locality or the area to the east of Invercargill, on flat land with good soils and have a good standard of buildings, farm infrastructure and improvements.