New Zealand dairy land values have been "stuck in neutral" since 2010 and are expected to come under downward pressure over the next five years, rural lender Rabobank said in a report.
The report, by the bank's dairy analyst Emma Higgins, said tighter credit availability, reduced flows of foreign capital and pending environmental change would contribute towards softer dairy land prices across the country in the short to medium term.
Additional stress would be placed on dairy land prices by the anticipated erosion of cash returns for dairy producers, she said.
"Over the next five years, we're forecasting an average farmgate milk price of $6.25kg/MS, above the current 10-year average, but below recent price levels," she said.
"During this period we also expect to see operational and compliance costs rise and production per hectare slow down, with improvements in genetics and management offset by the need to reduce stocking rates and fertiliser in some regions," she said.
"Based on this view, cash returns to dairy assets will fall, and the price ratio of land relative to its revenue potential will rise – both of which will put downward pressure on
the value of the asset itself."
Fonterra's milk price hit a record high of $8.40/kg in 2013/14, before slumping to $4.40/kg in 2014/15, and to $3.90/kg in 2015/16.
At last December's update, Fonterra said that a $7.30/kg milk price - if it comes to pass - would be the fourth highest milk price in its near two-decade history.
It compares with DairyNZ's estimate of break even of $5.95/kg.
Higgins' report follows REINZ data out this week that showed that the median price per hectare for dairy farms had fallen by 6 per cent over the past 12 months.
ASB senior rural economist Nathan Penny said there had been a "Mexican standoff" between buyers and sellers of dairy farms. That could change if the milk price remained firm.
He said the threat of a capital gains tax and environmental constraints had dampened sentiment last year, but that it had improved now that the tax is off the table.
Penny is more optimistic than Rabobank about the prospects for the milk price, which he says is likely to remain firm due constrained supply here and around the world.
"I believe that the milk price has moved structurally higher and that volatility has fallen structurally as well," Penny, who expects a $7.50/kg milk price this season, said.
Dairy farm prices would improve once farmers became more confident around the prospects of a $7 plus milk price this season and next.
"The (dairy farm) market could start to clear after what has been something of a Mexican standoff," Penny said.
The Reserve Bank has said the agriculture sector represented a significant credit exposure of the banking sector. Dairy debt, in particular, was high and concentrated.
Higgins said a declining dairy land market would have implications for all industry participants.
"Investors will need a high level of competency to attract capital and succeed in a declining market, with increased regulatory complexity for all industry participants.
"Investors will also need to undertake long, and more expensive, due diligence before purchasing dairy land and this will slow down the land-buying process and remove some
of the drivers of market tension that have previously inflated land price."
Rabobank's New Zealand chief executive Todd Charteris said despite an expected easing of dairy land values across all key dairy regions, the bank remained committed to the sector and the wider agricultural industry.
The report said rising farmgate milk prices were a key driver of escalating dairy land values between 2000 and 2008 and the industry was able to tap into these rising prices, with the nation's export receipts benefiting.
Over this period, readily available capital significantly underpinned the dairy land value boom.
Land values softened during the financial crisis in 2008 and 2009 as the milk price slumped, capital dried up and sector confidence fell.
Listen to Jamie Mackay interview Rabobank's Emma Higgins on The Country below:
Despite milk prices remaining relatively high since 2010, the report said land prices have shown only modest gains since then.
Reduced capital has been the key factor restricting land value growth during this period.
"All regions will face credit constraints as a headwind over the next five years," Higgins said.
"And over this period, Canterbury has the potential to see the largest land recalibration due to a lack of foreign capital underpinning large-scale property sales."
Environmental regulation was another element weighing on farm prices.
She said land prices would vary greatly depending on the location of the farm relative to the regional land and water plan, with specific reference to nutrient allocations and the availability of natural resources.