Farm prices settle down after dairy boom, data shows

The latest farm sales figures are good news, says the Real Estate Institute, despite Reserve Bank warnings of a price bubble.

A total of 266 farms were sold in the three months to April, up from 231 in March but down from 786 on the same time last year. The median price was $1 million, down from $1.2 million in March and $1.8 million in April last year.

The Reserve Bank's Financial Stability Report for May said agricultural debt levels had risen sharply and might not be sustainable, with loans to the sector accounting for 15 per cent of all bank lending.

Fluctuation in rural incomes was a risk to borrowers and lenders, and had become more pronounced as lower commodity prices and world economic weakness reduced export receipts, the report said.

"Rural land prices appear to have eased after a period of significant increase, with a considerable drop in sales volumes potentially reflecting a widening gap between buyers and sellers. This may foreshadow a significant fall in land prices."

However, Real Estate Institute rural spokesman Peter McDonald said the increased turnover was a good sign and he believed a price adjustment had already happened.

"I think it was expected and it's happened and the level that it looks to have settled at now is a level I think people can get on and budget on with a bit of confidence," McDonald said.

"The results for the three months to April are similar to what we saw in the previous three month period, settling back to the more realistic 2007 levels we experienced pre the Fonterra payout spike of 2008," he said. "Along with the 20 per cent increase in activity, that's a positive indicator."

Fonterra's available payout to dairy farmers last season was a record $7.90 per kg of milksolids on the back of an international commodity price boom.

The ANZ Commodity Price Index for dairy products in February was down 58.4 per cent on the peak of late 2007, although it has bounced back by 5.9 per cent to April.

Fonterra's forecast of $5.20 this season would be the third-biggest on record, McDonald said.

The fact that not as many farms were trading as in a normal year was a concern, he said.

"But there has been some pretty substantial issues that people have had to contend with and that's obviously why the market's where it is but the good thing is it's coming back, it's stabilised."

Westpac economist Doug Steel said prices could ease a bit more because of uncertainty in world product prices.

"Having said that I wouldn't expect necessarily to see much more because interest rates have come down quite considerably."

International dairy prices seemed to have bottomed out and may even have bounced and the forecast payout was above $5, suggesting land prices should not drop too much further, he said. Most farmers were sensible when budgeting during boom times.

"I think most farmers ... know that one year's boom doesn't mean you're in for good times forever."