The double-edged sword of increasing farmland prices plays out in Australia

Across the nation, the price of broadacre farmland used for cropping or sheep and beef grazing has increased by more than eight-fold since 1992.

Increasing farmland prices might sound like a good thing, but they can create complex situations.

It means farmers need more capital to buy new land or to improve their existing operations, particularly if they are seeking to expand or are newcomers to the industry.

These are key insights from a new report released by the University of Wollongong School of Business, New South Wales, that delved into farmland prices and the farming industry's profitability in Australia.

School of Business research leader, associate professor of Economics, Amir Arjomandi, said in recent years, the correlation between high farmland prices and the profitability of Australia's farming industry had been widely debated.

He said while some argue that rising farmland prices can hinder the sector's profitability, others attribute farmland price surges to robust agricultural seasons spanning various crops and regions, complemented by low interest rates.

"Our study examined the relationship between farmland prices and the farming industry's profitability, as captured by the rate of return," professor Arjomandi said.

"We found when farm profits rise, farmland prices tend to increase as well - with a lag of two to five years.

"But there's a catch - higher land values push up production costs, which can erode profits over time.

"This feedback loop, where higher profits lift farmland prices but those higher prices eventually squeeze profitability, has some serious implications for farm business viability.

"We found rising farmland prices indirectly diminish the farming industry's profitability by increasing production costs.

"At a State level, our modelling reveals that farmland prices react positively to profitability shocks within a two to five-year timeframe across most Australian States."

The Australian agricultural sector accounted for 2.4 per cent of the gross domestic product (GDP) and 11.6pc of goods and services exports in the year 2021-2022, according to the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), highlighting its pivotal role in the nation's economy.

Agricultural, fisheries and forestry production have increased by a remarkable 59pc in real terms from 2002 to 2022, driven by various factors across sectors.

Technological advancements have offset price drops in cropping, and the livestock sector has flourished due to rising global protein demand and events like US droughts and disease outbreaks.

Since 2020, Australian broadacre and dairy farms have reported record average farm cash incomes, a resurgence mainly due to favourable seasonal conditions and strong commodity prices, marking a recovery from the previous drought-affected lows.

Professor Arjomandi said the research found despite these positive industry signals, significant challenges persisted for the sector.

He said farmers faced climate unpredictability and commodity price volatility that resulted in fluctuating outputs and incomes.

"Rising land values can inflate property taxes and insurance premiums, eroding profits even for those not purchasing land," professor Arjomandi said.

"The rise in farmland values may generate significant borrowing costs for new farmers and existing farmers who are expanding their businesses.

"Higher property prices require bigger loans, which lead to higher interest rate payments and - ultimately - diminish profitability."

Professor Arjomandi said the researchers found Australian farmland values had soared in the past two decades.

He said the cost of land per hectare had shot up from about $1165 per hectare in 1992 to more than $9400/ha in 2023.

"There was a significant surge in values between 2020 and 2022, which was attributed to high demand from diverse buyers, optimism in agriculture due to good commodity prices and weather, low interest rates and limited land availability across Australia," professor Arjomandi said.

The rise in farmland values in Australia reflected a global trend in increased farmland prices, which were up 11pc from 2002 to 2021.

Professor Arjomandi said across the world, the increase in land values reflected concerns about food and land scarcity and recognised the environmental value of farmland, such as carbon storage and biodiversity credits

He said fluctuations in farmland prices had a negative influence on the profitability of the farming industry by increasing various costs for farmers, such as higher insurance premiums and land taxes.

"Farmers and rural communities in some regions also struggle to afford land and maintain viable livelihoods - which can lead to population decline and weaker local of communities," professor Arjomandi said.

"Pressure to maximise returns on high-value farmland may also lead to intensive practices that may have a negative impact on the environment."