Why Farming Assets Never Pay for Themselves but Create Substantial Wealth

By Ian Robinson

A common outcry amongst the farming community is that the price of farms seems out of context to the income they can generate.  There is a strong misconception that a farm should pay for itself, and if it can’t then it is too expensive.  But this argument is flawed by simple economic fundamentals within an unbiased deregulated market.  Here’s why.

Like all assets, an asset is priced at its highest and best use within a supply and demand framework.  There are FOUR key points to note at this juncture that are relevant and unique to farmland.

  1. Where supply is potentially unlimited, like the production of push bikes, then the price function will be a proponent of the number of buyers vs production units.  Too many bikes produced, and the price will fall.  Land is a finite resource.  In fact, it is a globally shrinking resource due to urbanisation, land degradation and regulation.  Demand pressures are continually increasing for farming commodities due to rising level of global wealth and demand for protein within the current population.  Then add a growing population baseline and you have a strong tailwind of future earnings.  In conjunction with diminishing land availability, you now have a unique thematic of where the price of land is heading into a realm that is disconnected to the immediate production parameters.
  2. The second point is “highest and best use”.  A push bike is self-explanatory and most likely finite within the universe of possible uses.  A farm can yield value on many different spheres.  Some tangible and measurable and others intangible which create unexplainable “white noise” around expected pricing.  Traditional farming enterprises come to mind initially.  Then there is the collage of boutique agricultural possibilities – bio security credits, carbon sequestration, intensive farming – change of use, eco-tourism.  White noise may entail but not limited to land banking as a counter cyclical investment, emotive passion for an agricultural vocation, and even space has a value just to name a few.  The highest and best use for one buyer could be very different to another.
  3. The third point is that land is geographically non transferrable.  You cannot move your asset to a more desirable location.  Therefore, geopolitical, and geologically it is an asset very rigid asset.  By definition, this makes agricultural land even more attractive if the geophysical position of the land is in a desirable location.  Australia for instance is highly regulated, politically stable and noted for its clean and qualitative food production. Tick, tick and tick.
  4. Fourth point is derivation of extracted value.  A more cost-efficient farmer (whom may already has procured economies of scale, applies superior technology and management application) can extract a higher return than potentially the asset operating as a standalone undercapitalised enterprise.  Therefore, the bidder who can extract the highest value can afford to bid the price of an asset higher against someone that wishes to operate the farm as a standalone.

Low interest rates and good seasonal conditions are just adding fuel to the fire.

A generic topic of conversation but one that is heating up with the current rush for agricultural land.

Will it continue.  Our view is yes.  Buyer demand is still very prevalent and with another substantial harvest about to play out coupled with strong commodity pricing recharging the financial war chests, it is buyer pitted against buyer for land that is finite and highly desirable.

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