28 August 1998

Millennium prices to drop

By Louise Rose

A CONTINUING decline in agricultural producer prices and the impact of the general economic slowdown on the demand for residential purchases are blamed for a predicted fall in farmland prices through to 2000.

"The real price of agricultural land is predicted to fall by 14% this year and 26% in 1999 before stabilising at around 63% of the 1997 average value in 2000," says the forecast for agricultural land prices appearing in the autumn issue of Farmland Market .

Also during the first half of this year very different patterns of demand for residential and commercial farms emerged. The market continued to benefit from the presence of non-farming money generating a keen interest for residential units offering the potential for amenity and sporting development.

However, demand for low quality commercial farmland in locations lacking interest from non-farming sources weakened leading to a fall in the price achieved.

"Any future farmland price growth is likely to be driven by further increases in residential demand, but with signs that the housing market is beginning to soften coupled with faltering farm incomes, we expect farmland prices to fall significantly before the end of the year," said the forecast.

Changes in agricultural producer prices are by far the most important determinant of farmland prices, but the full impact of any changes takes up to three years to work through, indicating that long time lags are at work in the farmland market, maintains the forecast.

The model estimates that a 10% increase in the price of agricultural produce generates a 42% increase in farmland prices over the course of the following three years, while a 10% increase in house prices and investment result in an immediate increase in farmland prices of between 6% and 7%. (see box)

However, share price increases have a negative effect on the price of farmland as the return relative to farmland makes equities more attractive as an investment vehicle.

The research outlines a central forecast of farmland price movements over the next three years, based upon a set of assumptions including the economy, investment, the stock market, house prices and agricultural producer prices.

By passing different assumptions through the model alternative forecasts or scenarios which indicate the likely bounds within which price movements occur were produced. (see table)

A fall of just 2% in agricultural producer prices in 1998 coupled with slightly better investment and house price returns would still lead to significant price falls over the next two years, but would cause a much better recovery in 2000.

"The pessimistic scenario assumes further output price falls of 5% in 1999 and 2000 and less rapid growth elsewhere in the economy. Under these conditions farmland prices would fall by 49% over the next three years," said the forecast.

&#8226 Farmland Market is published twice a year by FARMERS WEEKLY in association with the Royal Institution of Chartered Surveyors. For further information contact 0181-652 4920.

Forecasts of key variables

% change on year

1994 1995 1996 1997 1998 1999 2000

Base forecast

Investment, 1990

prices 4 1 2 5 3 1 5

Share prices 5 1 12 14 12 -5 5

House prices -2 -4 2 7 7 1 2

Ag producer prices -2 6 -4 -16 -6 0 -5

Optimistic forecast

Investment, 1990

prices 4 1 2 5 4 4 4

Share prices 5 1 12 14 17 10 8

House prices -2 -4 2 7 7 5 5

Ag producer prices -2 6 -4 -16 -2 3 3

Pessimistic forecast

Investment, 1990

prices 4 1 2 5 0 -5 0

Share prices 5 1 12 14 5 -10 0

House prices -2 -4 2 7 4 -3 0

Ag producer prices -2 6 -4 -16 -8 -5 -5

Source MMD/Farmland Market

Impact of 10% change in variables on land prices

Key variable Impact Duration

Agricultural

producer +42% 3 yrs

House prices +6.8% 1 yr

Investment +6.1% 1 yr

Share prices -5.3% 1 yr

Source MMD/Farmland Market