Dairy land values set to slide: report

New Zealand dairy land values have been ‘‘stuck in neutral since 2010’’ but are expected to fall over the next five years, according to a Rabobank report.

The report by dairy analyst Emma Higgins said tighter credit availability, reduced flows of foreign capital and environmental change would contribute to softer dairy land prices across the country in the short to medium term.

Milk prices were also expected to fall while costs were likely to rise, putting further pressure on land prices, Higgins said.

‘‘Over the next five years, we’re forecasting an average farmgate milk price of $6.25 per kilogram of milksolids, above the current 10-year average, but below recent price levels.

‘‘During this period, we also expect to see operational and compliance costs rise and production per hectare slow down with improvements in genetics and management offset by the need to reduce stocking rates and fertiliser in some regions,’’ she said.

‘‘Based on this view, cash returns to dairy assets will fall, and the price ratio of land relative to its revenue potential will rise, both of which will put downward pressure on the value of the asset itself.’’

At its first-quarter update in

December, Fonterra lifted its farmgate milk price forecast for 2020 by 25c to $7.30/kgms, 95c higher than the final farmgate milk price for the previous season.

Higgins said rising farmgate milk prices were a key driver of escalating dairy land values between 2000 and 2008, and the wellorganised New Zealand dairy industry had been able to tap into those rising prices.

However, land values had softened during the financial crisis in 2008 and 2009 as the milk price slumped, capital dried up and sector confidence fell.

Despite milk prices remaining relatively high since 2010, land prices had shown only modest gains, with reduced capital the key factor restricting land value growth.

‘‘The regulatory impacts of the global financial crisis still linger today, setting the framework for a different banking era,’’ she said.

Policy changes requiring banks to source more of their funding from retail deposits and long-term wholesale markets, tighter rules relating to foreign investment in agricultural land and capital constraints on the offshore parents of local banks had all tightened capital availability.

Higgins said all regions would face credit constraints over the next five years.

Environmental regulation would also impact land values.