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Shortage of farmland underpins land value

Surely the price of farmland should be falling with many challenging market factors?

(Source: www.farmersguardian.com, 16 Oct 2009)

At the time of writing, we have spot wheat prices stubbornly fixed at around or below £90 per tonne, the credit crunch is still affecting the way banks operate, and lifestyle buyers, who generally add value/buoyancy to the market, are less inclined or able to purchase – clear examples which would normally drive prices down. Yet our research suggests the opposite.

Figures show the average value for all land growing by roughly 3% in the third quarter. Savills’ data implies this trend is evident across the spectrum of land types with the biggest increase on the price of arable land at 5% growth. This is perhaps surprising considering the price of the commodity produced, but clear evidence commercial arable farmers have confidence and are taking a long-term view.

The livestock and dairy industries have enjoyed a more profitable 2008-9. Aspirations for expansion from farmers in these sectors are driven not only from this increased prosperity, hoping to benefit from economies of scale, but also the requirement to comply with new environmental regulations.

With farmers representing more than 50% of buyers to the end of September, they are still key players this year and those buying land for inheritance tax planning are active.

Agricultural land remains a tax-efficient means of passing on wealth. Larger strategic investors also see agricultural property as having a part to play in their investment decisions. While rival property sectors remain an uncertain bet, an asset class such as agriculture which is producing stable returns, is attractive.

Lack of supply

Very few large commercial farms have come to the market this year and this shortage is the main factor underpinning value.

Despite an increase in activity with the supply of land on the market in recent weeks, demand for quality commercial units is consistently outstripping supply. Figures show a more than 15% reduction in supply in England for the first eight months of 2009. Scotland has seen roughly the same decrease.

Although a number of larger farms have come to the market recently, it remains to be seen whether these properties meet enough of the purchasers’ prerequisites to sell well. Just because the amount of alternatives remains low compared to demand, doesn’t mean land will sell at any cost.

One result of the economic crisis of the past 24 months is purchasers are reluctant to overstretch themselves to grow their business and are taking a more realistic approach to growth. This, combined with banks applying higher levels of scrutiny to business plans before lending on land, means we are not seeing the ‘increase acres at any cost’ approach to land purchasing despite the fact farmers with expansive business aspirations are making up most of our applicant enquiries. What we are seeing is a more selective approach. Commercial farming is key and those farms which provide this continue to sell well.

We believe the land market, both in value and supply, will generally continue in the same manner as it has so far in 2009.

But how long historically-low interest rates continue and concern over wheat prices are both crucial factors which may influence the supply of land.

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