Canterbury March 2020
The 2019/20 dairy season is shaping up as a year of consolidation for the Canterbury dairy market.
There is currently an imbalance in the market between the number of vendors looking to sell their properties and a smaller pool of potential buyers with the access to capital to affect a purchase. This imbalance has led to a gap in the pricing expectations of market participants and a marked reduction in the number of sales occurring in the 2019/20 dairy season. So far we are only aware of two dairy farm sales and both of these are situated in North Otago.
The greatest market influence at the current time is access to finance and it is apparent that the market is being impacted by a lack of liquidity. We understand that many farming businesses capitalised losses incurred during the period of low farm gate milk prices from 2014 through to 2016 and pressure is now continuing to be applied to farming businesses to strengthen their balance sheets.
The Capital Review initiated by the Reserve Bank of New Zealand has also stimulated tighter banking practices in relation to dairying. Alternative providers of shorter term finance, namely out of Australia are starting to emerge in the market, which although being priced above the trading banks may provide breathing room for large scale farming businesses.
International purchasers effectively remain shut out of the Canterbury dairy market and may have turned their attention to competing investment opportunities in other sectors such as forestry and horticulture or other countries around the world.
Good Management Practices as required by the Canterbury Land and Water Plan are leading to positive on farm changes, however the market is currently grappling with the uncertainty of future farm production in those parts of Canterbury where nutrient loss reductions are required beyond Good Management Practice. Other regulatory changes such as the passing of the Climate Change Response (Zero Carbon) Amendment Act 2019 and the announcement of the Essential Freshwater Package also add to the uncertainty currently being experienced within the Canterbury dairy market.
As a result our representative Canterbury dairy farm, upon which our Colliers Canterbury Dairy Farm Index is based, is showing an 8.9 percent value reduction in the 12 months to February 2020, and the implied pre-tax capitalisation rate is now approaching 6%.
Other external factors such as the Covid-19 Coronavirus, the impact on international trade and the response of global share markets may also influence the Canterbury dairy market in the year to come.
