Economics influences decisions - people make them

After the previous season has wound down, before the coming season takes off, winter on the farm is a time to reflect.

Reflecting on rural property, three factors influence market sentiment:

• The cost of money.
• Returns from production.
• The season.

These forces shape farmers’ confidence, profitability and decision-making. Today, two out of three support vigour in the rural property market.

Across Canterbury and Otago, quality dairy and pastoral properties remain tightly held. When good farms do come to market, they attract multiple qualified buyers prepared to act decisively.

Finance is accessible, banks remain willing lenders, and since Fonterra’s capital restructure many farming businesses have cash available to reduce debt, invest, assist succession or purchase land.

Although commodity prices are also encouraging, the outlook varies from sector to sector.

For red meat the medium-term fundamentals are strong. Quality protein attracts growing global demand, while in key markets, particularly the United States, constrained supply underpins prices.

Four or five years ago low morale and squeezed margins beset sheep and beef farmers. Conversations centred on survival. Today profitability has improved, confidence has returned, and quality pastoral properties again attract strong buyer interest. While challenges remain, the outlook is markedly stronger.

Dairy is more balanced. Although farmgate prices remain historically strong, abundant global milk supply, softer markets, inflation and rising on-farm costs create some uncertainty; however, we are not seeing wholesale negative market trends — in fact, quite the opposite.

Interest rates are also shifting. Following the Reserve Bank’s OCR increase, markets are now pricing in higher interest rates. Before Christmas further tightening is possible. A stronger New Zealand dollar would also reduce export returns, particularly for dairy.

The third and least predictable factor is how the season will play out.

A significant El Niño pattern is widely expected, even described as a ‘Super El Niño,’ threatening to dry out eastern regions.

A prolonged dry will impact both sides of the farming business ledger, increasing feed costs, while constraining production. Farmers may be forced to sell stock earlier than planned, quickly eroding profitability across dairy, sheep and beef.

These variables, the economics of the market, interest rates, commodity prices and seasonal conditions, are all practical realities. They need to be weighed alongside something just as important, though less tangible: the people.

New Zealand farmers continue to age, yet stronger balance sheets and improved profitability don’t necessarily encourage retirement. Farming was never a purely economic decision.

Rural New Zealand is threaded through with stories of people who earned the deposit for their first farm by shearing sheep, offering themselves as rural contractors, working off-farm, sharemilking or leasing land. Often the next chapter of these stories features decades of hard work and sacrifice to overcome drought, floods and market downturns.

None of which will appear in a valuation report, though does explain why farmer age doesn’t translate into farm sales.

For many farming families, the farm is more than an asset. It’s a lifestyle, a community, an identity, a passion.

When the business is performing well and debt is manageable, many see little reason to leave, or to imagine a realistic alternative off the farm, hence quality farms remain tightly held, even in such a favourable market.

If economics influences decisions, it’s people who make them.

A complex mix of tight supply, strong buyer demand, available finance and generally favourable commodity prices currently underpin demand for rural property, offset by uncertain seasons, higher interest rates and a volatile global economy.

Who would dare predict where the market will be in two or three years?

The best opportunities are only ever obvious in hindsight: a bird in the hand is worth two in the bush.

Whether you’re considering expansion, succession, restructuring or simply trying to better understand the market, these conversations are best had while there is still time to consider the options properly.

Reacting is seldom the way to achieve the best outcome. Usually, that is best reached by careful and conscientious planning.

Whatever your next chapter is, the current market provides plenty of prompts to think about how that chapter might play out.

Content supplied by Tim Croskery, Rural & Lifestyle Sales Consultant, PGG Wrightson Real Estate, Timaru