Low farm prices stall economy

Photo / NZ Herald

The boost from high commodity prices and improved terms of trade are unlikely to be felt across the wider economy until farm values stabilise and improve, says ANZ bank.

New Zealand's terms of trade is up 20 per cent on a year ago but rural land prices - down 25 to 30 per cent during the past two years - are limiting the upside, ANZ said.

"Commodity prices have gone through the roof," it said. New Zealand's food exports made up 7.5 per cent of gross domestic product - the highest of the 80 largest economies in the world.

"And as a relatively rich country, food makes up less than 20 per cent of household budgets on average, meaning the income effect dominates," ANZ said.

"Assuming our own paddocks are not too badly effected by the weather extreme New Zealand stands to do quite nicely."

But the property bubble had now burst and that meant farmers were focused on "recapitalisation" which was diverting spending from the general economy.

The ANZ Commodity Price Index increased 2 per cent last month to a record high.

Meanwhile, farm values relative to underlying returns suggested the property market was not far off a floor, the report said.

On-farm input costs had also increased 35 to 38 per cent during the past 10 years.

Farm buyers and sellers were in a Mexican stand-off as people look to deleverage and catch up on maintenance rather than splash out on property.

"Weather and pasture conditions and talk of restrictions on foreign ownership are also not helping the market and will only lengthen the time before the market stabilises," ANZ said. "To end the stand-off and see land values increase will require sustained high commodity prices over several years, low interest rates, with a pinch of good weather to lift production and confidence."

The Real Estate Institute of New Zealand said last month there had been a small rise in the number of farm sales and the median sale price was up on the same time last year.

A total of 170 farms were sold in the three months to November, down on 223 in the same period the previous year but up from 147 in the period to October.

The median farm price was $968,500, which was up on $880,000 in the same period the previous year and on $950,000 in the period to October.

Latest figures from the institute are due out this week but a spokesman said the December figures for dairy farms were very encouraging with considerably more properties sold compared with the same period in the past couple of years and strong reported interest throughout the country.

"The market is finally starting to gain some momentum," he said.

Federated Farmers economics and commerce spokesman Philip York said the market would always find the right price and farm prices were not seen as a barrier to people joining the industry.

"It's a huge step ... but it's never stopped enterprising people in the past," York said.

DairyNZ's Mark Paine said the price of dairy farms had been a barrier but was diminishing. "They were more of a barrier 18 months ago," Paine said.

"Farm property values have softened since then and people are making investment decisions based on the productive value of the farm rather than capital gain."