Financial advice for farmers: Irish land price follows the economy

The review has insights on agricultural land values and rents, and views on anticipated agricultural land market activity in 2020.
Financial advice for farmers: Irish land price follows the economy

The annual SCSI/Teagasc Land Market Review and Outlook 2020 was published recently, providing an in-depth analysis of key agricultural farmland market trends in 2019, and a predicted outlook for 2020.

The review has insights on agricultural land values and rents, and views on anticipated agricultural land market activity in 2020.

It is compiled by members of the Society of Chartered Surveyors Ireland who are auctioneers, valuers and chartered surveyors operating in the land sales and rental market.

Their findings suggest a fall in agricultural land prices across the country of about 6% on a national basis, from an average of €9,346 per acre in 2018 to €8,823 per acre in 2019.

Within the regions, the variance in land prices was more pronounced in Munster, with a 9% drop in prices from €10,622 in 2018 to €9,719 in 2019, whereas the Connaught-Ulster region experienced only a modest price fall, of 1%.

The Review and Outlook, which also has contributions from Teagasc, highlighted that the output prices for several important agricultural commodities declined significantly.

On an annualised basis, the output prices for milk dropped more than 5.6%, beef and lamb prices were also lower in 2019 relative to 2018, finished cattle prices declined by approximately 6% relative to 2018.

In 2019, cereal prices were much lower at harvest time relative to harvest 2018, down by between 25% and 30% for barley and wheat.

It’s clear that the 2019 fall in agricultural commodity prices was correlated with the fall in agricultural land prices. The report highlights that Covid-19 is a new, negative shock to the economy which is likely to reduce profit margins in all farm enterprises.

When this report was published, it was too early to assess the extent of that Covid-19 profit margins reduction in any detail.

However, the SCSI/Teagasc report underlined that the impact on food production, and agriculture by association, should be a lot less than other sectors.

It remains to be seen if lower farming profits will continue for the remainder of 2020, or whether prices might edge up as economies restart.

The report includes a long-term land price and land rental series compiled by Smith Harrington, a firm of chartered surveyors and estate agents founded in Meath in 1870.

This record of 1,286 land sales and 54,406 rentals which occurred primarily in Meath and surrounding counties shows that, over the last 50 years, the price of an acre varied from €290 in 1970 to over €20,000 in 2007, at the height of the Celtic Tiger, before falling to between €9,000 and €10,000 in recent years.

The rental price rose from about €40 per acre in 1970 to over €200 in 1979, and then plateaued at €100-150 in the ’80s and ’90s until it rose to €170-190 from 2012 onwards.

Looking at a graph of these Irish land price trends, it is easy to see the price pretty much followed the trajectory of the economy.

As the economy boomed, following accession to the European Economic Community in the 1970s, agricultural prices increased at an exponential rate.

Land prices fell dramatically in the early 1980s, following the oil crisis and a hike in loan interest rates.

Land prices pretty much plateaued for the next decade or so, into the mid 1990s.

In the 15 years or so from the mid-1990s to 2008 (the Celtic Tiger era), land prices increased significantly, fuelled by falling interest rates, availability of credit, and demand for land from those who sold for development.

Then, land prices dropped sharply again, before plateauing in the last 10 years.

The big question now for both buyers and sellers of land is what will happen to land prices in the coming years.

On the supply side, there is an expectation that much more land will become available in the next decade or so, given that approximately one third of Irish farmers are aged over 66.

Economic modelling suggests that a large increase in supply should result in reduced land prices.

However, it is also important to examine the demand side of the equation.

In the 50-year Smith Harrington trend, the demand side for agricultural land is correlated to the economic health of both the overall economy, and the economic wellbeing of farmers themselves (which deteriorated in 2019).

Currently, reduced farm productivity, which negatively affects profits per hectare, and the loan repayment capacity of commercial farming in turn, is likely, due to additional regulations and restrictions on output, mostly linked to climate mitigation.

This is likely to be the case especially for dairy farmers who are currently availing of the nitrates derogation.

On the flip side, such farmers may be more anxious than ever to scale up in order to maintain their current production levels — therefore adding to demand for land.

But such demand for land is more quickly translated into a demand for rented land that for purchased land, which explains why land rental prices have steadily increased over recent years.

Apart from the impact from climate mitigation, it is now more than probable that the UK will leave the Customs Union at the end of 2020, which might cause severe disruption, and might reduce the market returns available to Irish farmers, especially for beef, if tariffs are imposed in the absence of a trade agreement.

Indeed, 63% of respondents for the SCSI/Teagasc report believed that Brexit was deterring sellers from selling in 2019, and 73% believed Brexit was deterring buyers from buying.

Meanwhile, Covid19 will be negative shock for financial institutions as a result of a default in some business loans arising from the pandemic, which is likely to feed in to a reduced appetite for lending.

The overall consensus points to lower land prices in 2020, mostly due to reduced profitability for farmers.

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