Pricing of New Zealand dairy farmland
| Pages | 118-134 |
| DOI | https://doi.org/10.1108/14635781311302564 |
| Date | 01 March 2013 |
| Published date | 01 March 2013 |
| Author | Song Shi,Iona McCarthy |
| Subject Matter | Property management & built environment |
Pricing of New Zealand
dairy farmland
Song Shi and Iona McCarthy
School of Economics and Finance, Massey University,
Palmerston North, New Zealand
Abstract
Purpose – The purpose of this paper is to investigate the relationship between dairy farmland prices
and farmland rental incomes in New Zealand from 1982 to 2009.
Design/methodology/approach – Using the net cash income received under a 50/50 share-milking
agreement to proxy the net cash rent, the paper attempts to explore the prices and rental incomes
relationship using the present value model and then apply them in a pool regression model to show
how farmers formulate their price bids.
Findings – Results show that over the long-term dairy farmland price growth tends to be in line
with rental growth. However, there is substantially higher growth in land prices in relation to the
rental growth since 2002. Moreover, the risk premium placed by farmland owners on future rental
cash flows since 2002 appears substantially below the historical average. The research further shows
that farmers nowadays place more emphasis on the current season’s payout than historical incomes in
their price bids.
Practical implications – As a consequence the recent high land prices will be extremely sensitive
to a permanent change to the low interest rate environment and future growth of dairy income.
A policy recommendation is also highlighted.
Originality/value – The results of this paper indicates that the rapid price appreciation for
New Zealand dairy farmland since 2000s might give rise to bubbles.
Keywords Dairyfarmland prices,Rental growth, Capitalgain, Present valuemodel, New Zealand, Farms
Paper type Research paper
1. Introduction
The price paid for dairy farmland in New Zealand increases at a real rate of close to
10 per cent compound per annum between 2000 and 2009 (Hargreaves and McCarthy,
2010). This rapid price increase prompts commentary that farm buyers’ expectation of
continuing growth in the value of land may not be sustainable (Wilson, 2009; Eves and
Painter, 2008). In New Zealand dairy farmers consistently earn around 93 per cent of
their gross income from milk sales DairyNZ (2002-2012)[1], thus milk income is a
critical component in dairy farmland pricing. Gross milk income earned in a dairy
season is derived as the product of dairy company payout and annual production.
Steady production gain has been made over the past three decades but gross milk
payout prices have become increasingly volatile. Figure 1 shows the milk production
and real gross milk payout from 1982 to 2009.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
The authors thank the Editor, Nick French, and two anonymous referees for many useful
comments. The authors also thank Andrea Bennett, Bob Hargreaves and David Tripe for
valuable comments on earlier versions of this paper. They are also grateful to Matthew Newman
and Angie Fisher from DairyNZ for kindly providing the farmland income data.
Received January 2012
Accepted March 2012
Journal of Property Investment &
Finance
Vol. 31 No. 2, 2013
pp. 118-134
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635781311302564
JPIF
31,2
118
The reason for this recent increase in farmland price may include high milk payouts
in 2002 and 2008 and increased demand for milk products from the developing
world (Delgado, 2003). However, in New Zealand farming business is characterised
by cycles. Rapid increases in dairy land prices in the early 1980s and 1990s were
followed by significant declines as shown in the New Zealand rural property sales
statistics (Valuation New Zealand, 1980-1997; Quotable Value Ltd, 1998-2011).
The recent volatility in world dairy commodity prices may have increased the risk of
greater volatility in land prices. The real national average dairy farmland prices and
real farmland rents are shown in Figure 2.
In this paper we seek to explore two important questions. First, what is the
relationship between dairy farmland rents and farmland prices? Under the traditional
present value model, an asset price is defined as the expected present value of future
Figure 1.
Milk production and
real gross milk payout
$3
$4
$5
$6
$7
$8
$9
500
600
700
800
900
1,000
1,100
82 84 86 88 90 92 94 96 98 00 02 04 06 08
Milk payout Milk production
Real payout (NZ$/kgms)
Production
(
k
g
ms
)
Figure 2.
Dairy farmland real
prices and real rents
$8,000
$12,000
$16,000
$20,000
$24,000
$28,000
$32,000
$36,000
$40,000
$44,000
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
82 84 86 88 90 92 94 96 98 00 02 04 06 08
Real farm land price
Real farm land rent
Real land price (NZ$/ha)
Real land rent (NZ$/pa)
Pricing of
New Zealand
dairy farmland
119
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