The Link to Primary Commodity Prices
When considering an investment inNew Zealand and Hawkes Bay rural property there are many factors to consider. The criteria for buying urban and town commercial or rental property is comparatively simple, investors usually being motivated solely by the prospect of a measured and sustainable financial return on the funds invested, with the bonus of capital appreciation a secondary but important consideration. Rural land prices are of primary importance to any potential buyer and especially to rural bank managers, however lifestyle values (a loose term commonly used in New Zealand and the real estate industry, to recognize the monitory value of recreational and life quality aspects of rural property) which are commonly associated with rural properties of all sizes, are frequently a complicating factor. More so with pastoral properties in favored localities or having special aesthetic or recreational aspects (rivers, coastal proximity, scenery, etc).
Never the less, in most instances rural land prices need to be considered in relation to the complex issue of economic viability. In common with
most New Zealand real estate, Hawkes Bay rural land has followed a long term, upward price trend. Historically however, at any point of time, farm and horticultural land prices are linked to some degree to the price highs and lows of the overseas commodity markets that inevitably dictate farm gate returns in a deregulated, unsubsidized industry.
As an obvious example; from 1999 through to 2005 the New Zealand pastoral industry enjoyed substantially improved lamb and beef prices, with the direct result that over this period pastoral farm prices escalated considerably. By example; in 1997 towards the end of an extended period of low lamb, beef and wool prices, a very good 450 hectare Hastings District sheep and cattle station was sold for NZ$750,000. The same property if offered for ale in 2005 might well have realised at least $4,000,000. In 2006 however lamb prices fell to levels considered little over the cost of production; a result of lower internetional prices as well as the artificially high value of the New Zealand dollar relative to out trading partners. Both trends have continued in 2007. As a result, farm prices in the pastoral real estate market are believed to have softened, although at the time of writing there had been insufficient recent farm sales to form a realistic pattern.
Dairy commodity prices are a factor to indirectly affect Hawkes Bay pastoral farm prices, irrespective of the fact that few Hawkes Bay farms are suitable for conversion to Dairy farming. The major dairying Districts of Taranaki, Manawatu and Waikato generally have heavier soil types and appreciably colder and wetter winters. As a consequence, dairy farm efficiency is optimised when farmers are able to winter their herds off-farm, which allowes maximum winter home-farm pasture recovery and subsequently; maximum seasonal milk production. Seasonal milk production can be further maximized when unproductive heifers are grazed off-farm in summer. With their short, relatively warm winters and (usually) free draining soils, Hawkes Bay farms are recognized as ideal “winter country” by North Island dairy farmers, who in past years have been active farm buyers in the Hawkes Bay district for use as “dairy support units”. In more recent years however dairy farmers, themselves receiving prices considered barely economic, have not been active buyers of Hawkes Bay pastoral farms because of their high prices.
In 2007 Fonterra (the New Zealand dairy producers co operative) projected a record farm gate price to dairy farmers for the forthcoming 2007 – 2008 milking season of $5.53 per kg, a 27% increase from the previous year (or an extra NZ$1.5 billion in a milk payout of nearly NZ$7 billion), a result of soaring international commodity prices. More recently a Westpac bank economist has suggested that ongoing commodity price rises might result in a payout of double this forecasted price rise – to $6.60 per kg, a total average payout boost of approximatelyNZ$250,000 per farm.
As a direct consequence it seems entirely probable that in future, competition from large and corporate dairy farmers seeking Hawkes Bay farms for use as dairy support units, will be a significant factor in (at least) maintaining Hawkes Bay farm price levels.
A further flow on effect of substantially increased dairy commodity prices will be an increasingly strong market for Hawkes Bay contract winter dairy cow grazing and summer heifer grazing. Average weekly contract rates increased from around $9 to $10 per head in 2000, to $14 to $15 in 2006. Many 2007 contracts were concluded at $20 per head. The rate will probably rise again in 2008 offering a welcome and profitable alternative cash flow to Hawkes Bay farmers.
Filed under: Advice, Hawkes Bay, Investment, Moving to New Zealand, Pastoral
