25 December 1998

Bolstered by non-farm forces

AS 1998 draws to a close, UK farming income is starting to recover after a very severe fall of 73% over two years. In contrast, a bottom in the land market is not yet apparent. Over the same two year period, the average value of British farmland with vacant possession is likely to have fallen by just 15% and in some regions the reduction in value will be nearer 5%.

The most publicised reason for this apparent paradox is the very significant non-agricultural demand for land with vacant possession in recent years. Up to mid-November, 33% of the English farms bought or sold by a client of FPDSavills in 1998 were bought by a non-farming buyer, compared with 16% in 1995.

Values have been firmest in the south of England where the value of medium quality arable land has fallen by an average of 7% since peak in mid-1997. In the east Midlands, where the commercial component of value is dominant, the value of such land has fallen by an average of 21% since peak, although prime arable land has been better supported, falling by an average of 10%.

Even in the most commercial farming regions, the reduction in the value leaves market values above current productive worth, a measure derived from the current productive capacity of land. This disparity is partly a consequence of a build up of cash in the agricultural sector during the 1994-96 period. In the arable heartlands, a return to surpluses from potato production will provide support for the better quality soils. Nevertheless, we expect values to continue to fall towards productive worth during 1999. We expect demand for residential farms and estates to provide less support as UK economic growth slows and uncertainty over the risk of recession delays plans for investment and asset acquistion.

Looking ahead, our baseline expectation is that sterlings depreciation against the ECU will continue against the euro in 1999, raising intervention prices by 11% from mid-1998 levels. This should provide further price recovery in the dairy sector, but that will not be sufficient to move the bottom 25% back into profit. For cereal farmers 10% set-aside in 1999 will delay income recovery, but the prospects of a cyclical recovery in world wheat prices give grounds for optimism post the Agenda 2000 reforms, within a more volatile context.

This leads us to expect a recovery in arable land values during 2000 and we believe that there will be cyclical purchasing opportunities in certain markets within the next two years.

Jim Ward, director

FPDSavills research