Australia's record-setting farm property market is at risk of being overheated, a bank report says.
ANZ Bank says on its present trajectory, rural land values could jump by almost a third by the end of this decade.
"While rural land values have been growing strongly for a number of years now, including throughout recent drought years, there is some growing nervousness in the industry over the sustained, stellar growth in land values," ANZ's head of agribusiness Mark Bennett said.
ANZ's latest agri report said the surge in rural land values, driven by low interest rates, strong commodity prices, farm consolidation and fewer farms for sale, had caused "both excitement and nervousness amongst the industry".
"The question preoccupying industry players is - how high is too high?
"Are the current increases justified?"
The ANZ report said record prices being paid for farmland had left many in the industry asking whether those prices can be justified based on the productive capacity and profitability.
Mr Bennett said there are many factors in play which are well recognised including strong commodity prices, low number of farms on the market and low interest rates.
"The value of rural land as a standalone asset, however, is less often discussed and when rural land is considered next to commercial and residential property, it appears that rural land is in a 'catch-up' phase compared to growth in alternative property-based assets."
He said demand for rural land isn't only coming from traditional farming.
There are more investors seeing value in Australian property prices, international buyers looking for significant purchases, city dwellers looking to escape lockdowns and even the recent trend of carbon farming and investors looking for offset opportunities.
"And while the strong demand for rural land must be considered a good thing for the industry - it does have ramifications for many, from new farmers looking to enter the industry and generational farmers looking to take advantage of high prices," Mr Bennett said.
ANZ says Australian agriculture is one industry which has thrived despite the COVID-19 pandemic.
"With livestock prices at or around the highest level ever, last season's record wheat harvest and record dairy prices, Australian farmers are in the midst of some of the best conditions since the wool boom," the report found.
Official data shows the value of Australia's rural land has appreciated by more than 30 per cent in the three years to June 2020.
ANZ said the perception land values were "out of control" was being fed not only by strong demand but also by a reduction in supply.
"With commodity prices a very strong levels and good seasonal conditions over the past 12 months, not many farmers are selling - leading many in the industry to surmise that land values are being boosted by a lack of properties being offered," the bank report found.
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"At a time when medium and large farmers are looking to grow their footprint and farm consolidation is driving change across the industry, the relatively small number of properties going to market is driving buying seen by many as 'over-priced'.
"Historically, rural land values have tracked commodity prices fairly closely, with drought years or commodity price slumps translating across to lower property values.
"If this were the only real factor driving rural land prices then, we would expect to see rural land perform on par with both residential and commercial property."
Instead, the report found, rural land value growth has been outperforming the national residential property value growth by an average of three per cent each year (albeit from a low base) in the past five years - including drought years.
Until the mid-2000s, residential, commercial and rural property had all shown relatively similar growth rates.
Since around 2016 however, land prices have continued to rise strongly despite drought years or stumbles in the commodity price such as the milk price drop.
"Clearly rural land values - and land values across all sectors - are strongly connected with historically low interest rates has provided a significant impetus for purchasers to buy now."
The report states with every boom comes the inevitable impact on asset prices.
Rural land prices began to appreciate even before the end of the most recent drought, and before commodity prices had appreciated, raising the likelihood that the run on rural demand was more about consolidation, with medium-to-large farms buying and expanding their operations, than it was about pure profitability.
Commenting in the rise and rise of cattle prices, the report said the National Livestock Reporting Service was forced to call in IT experts to add a fourth digit to its online operating systems.
"If the experts at the core of the industry had not predicted that prices would ever reach this level when designing and building their systems, then the market is clearly in a whole new era.
"It is also worth reflecting that this price level means that the EYCI has effectively doubled in around 18 months."
The report also painted optimistic pictures for grain, dairy, cotton and sheepmeat.
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