As we have noted, capital growth during the first half of the year has been strong, especially at the top end of the market. We have revised our forecasts for 2014, although we expect the increase in farmland values to be more muted during the second half of the year. However, our forecasts for 2015 to 2018 are unchanged and factor in the issues noted below.

Although the general economic outlook has improved, and this is forecast to continue, there are a few darker clouds beginning to shade farm profitability and cash flows.

These include:

■ Commodity prices – the outlook is increasingly bearish across the arable and livestock sectors and not only for the remainder of 2014 but into 2015. On arable farms this may be alleviated by higher yields but as our Arable Benchmarking Survey for harvest 2013 shows, the average total cost of production for combinable crops was, at prices 20% higher than current prices, a significant proportion of crop price.

■ CAP reforms, especially the new Greening measures, will have some impact on farm businesses and overall subsidy incomes will be reduced.

■ Interest rates – an earlier than expected interest rate rise may add pressure to farm cash flows and investment plans.

■ General election – the prospect of a change of government creates uncertainty although we don’t expect this to have any real impact on the market.

It is a tale of two parts:

On the one hand, we have the fundamentals of food production and food security competing with other land uses which include energy, new homes and infrastructure, and all against a backdrop of a finite and diminishing land supply in the UK. The uplift in the general economy will add more wealth and therefore potentially strengthen the demand from non-farmers to invest in farmland.

On the other hand, as often happens when the general economy picks up, prospects for farm incomes are dampened (farm incomes tend to be inversely correlated to GDP growth). Early interest rate rises, albeit from a very low base, may add additional pressure to cash flows on some farms.

We expect income pressure to bring additional supply to the market over the next 18 months, but it is unlikely to be significant enough to put downward pressure on values. The market will remain diverse with growth likely to be more muted across all sectors than has been recorded in the previous ten years and even more so than the past five years – see Graph 4.

Click the graph below to enlarge

Taken from
Market in Minutes: UK Farmland Market Q2 2014