As the farmland market becomes increasingly diverse and the price of good quality arable land continues to strengthen we discuss how finely balanced the market really is? Table 1 tabulates the key factors which influence the farmland market.
On the one hand, supply is historically low, the product is finite and demand for arable farms is strong. The increased demand on land for renewable energy, which is competing for food production to feed growing populations amidst rising concerns for food and fuel security are all drivers for a competitive marketplace.
However, there are always issues which threaten to upset the balance with downward pressure. These include interest rates, debt due to pressure on profitability and cash flows particularly if we have a third successive poor harvest, changes to taxation and subsidy regimes – all of which have the potential to increase the supply side of the equation and therefore putting pressure on future price growth.
Where does the balance lie? We believe there is currently more upside than downside however, evidence suggests that although demand is strong, some buyers are increasingly sensitive to what they are prepared to pay and there is more focus on the income generation potential of the farm or estate. Therefore, we remain confident that our Farmland Value Model forecasts outlined at the beginning of the year are on track with prime arable growth exceeding our base line forecasts of around 8%.
Graph 4 illustrates our base forecasts over the next five years relative to the long term.
We expect values to increase 6% to 8% per annum over the next five years or 3% to 4% per annum in real terms which is just ahead of the independent forecasts for inflation compiled by HM Treasury.
There will continue to be polarisation in the market, with the quality farmland selling for a higher price and more muted growth for poorer quality farms with a higher residential weighting.
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