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Minimal impact to farm price values from falling commodities

Media Release
5.02.2015

Minimal impact to farm price values from falling commodity price index


A drop in the latest primary produce commodity price index will have little effect on the valuation matrices many farmers will use for base data when calculating their potential rural property purchasing levels, according to a senior figurehead in the real estate industry.

The latest ANZ Commodity Price Index released this week recorded an overall 0.9 percent fall in January – the 11th consecutive monthly decrease in the index, which is now down some 18.8 percent over the past 12 months.

Casein prices were the biggest loser in values – dropping 14 percent, followed by wool falling six percent, and beef slipping in value by three percent. On the positive side, whole and skim milk powder prices lifted slightly.

However, Bayleys’ newly-appointed national country manager, Simon Anderson, said the lower revenue levels for much of the primary sector would have little influence on how many farmers estimated their future revenues. Farmers use revenue level data, costs of production, and debt servicing when calculating how much they believe they can budget to purchase a new property.

“Farmers, and more importantly their banks, are taking a long-term view of commodity prices. And long-term, the outlook is strong for sheep, beef, and diary prices,” Mr Anderson said.

“So while Fonterra is budgeting for a farm gate milk price of $4.70 per kilogramme for the next season for example, the banks actually take a longer term view of pricing more around $6.30,” Mr Anderson said.

“There’s nothing new about the cyclicality of the rural market – but the banks and farmers take a more flat-line approach to their revenue forecasts, working instead on long-term rolling averages rather than historical high and low positions which can fluctuate quite markedly over relatively short time frames.“

Mr Anderson said Bayleys was noting more ‘corporate’ activity in the rural property-buying sector – with high-equity farmers increasingly looking to develop economies of scale through the purchase of additional properties close to their existing operations.

“With bigger operations spread over dual or multiple near proximity locations, farmers can take advantage of such factors as fertiliser input, pasture management, seed or crop planting, feed production, and staff management,” he said.

“Those economies of scale matrices are far harder to calculate than commodity prices because, while commodity prices are the same for all in their chosen sector, economies of scale benefits vary markedly depending on a farmer’s experience, equity, location, and business plan. Hence why bidding ceilings can vary so markedly when a rural productive property is taken to auction.”

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