It’s been an uncertain year for farmland values. There have been plenty of buyers worried prices will rise again, while sellers have held back, fearing the icy fingers of recession will nip farmland prices. So where now? Ian Ashbridge reports on new forecasting model.
Savills‘ head of research Ian Bailey emphasises the amount of historical data underpinning the firm’s new economic model. “Looking at things over five or six years isn’t good enough – you need a robust base if you’re going to make any credible forecasts.”
The objective was simple enough – to predict, as accurately as possible, where farmland values might go in the next few years. And the outcome is a forecasting tool which is built on 35 years of data. “We have derived a robust model from extensive statistical analysis which provides a good fit with historical land values and provides a firm base for our forecasts,” he says.
“Everything we could brainstorm, all the possible variable that might have a bearing on land values, have been included – everything from wheat prices, farm incomes and house prices to national GDP, exchange rates, oil and gold values and population density.”
Each of these variables (see table, below) was then tested through logical analysis and correlation and regression studies, two established statistical methodologies for comparing variables.
Correlation tests how closely a single variable taken in isolation – like wheat price – relates to the average land price over 35 years, where +1 is a perfect fit and -1 is a complete divergence. “For example, feed wheat yield holds a very positive correlation to land values at a value of 0.82. So we can establish there is a positive link between average land prices and the profitability of arable farming.”
Regression analysis compares one or more independent variables over the longer term – in this case back to 1975. Savills has used data on land prices from its own sales combined with DEFRA’s land price series, which was halted in 2005.
Factors influencing land trends
The outcome of the historical section is impressive. The results of Savills’ economic model fit eerily well with the average price for all types of farmland in Great Britain over the last 35 years, as demonstrated by our first graph.
“The model makes no adjustments for low supply of land or supply constraints,” says Mr Bailey. Although on manipulating supply, it isn’t as powerful a factor on prices as one might think. And there has only been one year in the last decade when supply was significantly restricted – 2005, when the Single Payment Scheme was introduced and it was clear that land occupation and the establishment of entitlements would be essential to secure support.”
The model uses information on Total Income From Farming up to 2008 and includes DEFRA’s estimates for 2009 and 2010 (just over £4bn in 2008-2009, falling back below £4bn in 2010). For the purposes of forecasting, it has supposed TIFF remains at about the same level through to 2013. “It’s difficult to accurately predict this, particularly given the effect of the value of the euro on the single farm payment this year. Exchange rates will continue to be an important factor going forward.”
Although it might not seem like it, wheat prices have risen steadily over the last decade – albeit with a few peaks and troughs – and Savills has reckoned on the underlying trend continuing. To stay in line with the trend, the model assumes wheat prices climb by £10/t each year from £110/t in 2010.
“As one would expect, the historical rate of increase in wheat yields since 1975 has slowed – and we see little to change that in the short or medium term,” says Mr Bailey. Historical data shows average wheat yields rose from 4t/ha to 6t/ha between 1975 and the early 1980s, but took more than 20 years to move from 6t/ha to 8t/ha. For its farmland price forecasts, Savills expects this slower rate of increase to continue, with average wheat yields growing from 8.2t/ha in 2009 to 8.5t/ha in 2015. “Testing the model reveals that wheat yields have surprisingly little influence on values – even if you add a couple of tonnes to the hectare,” says Mr Bailey.
Single payment scheme
“The effect of the single payment this year has been significantly enhance by the weakness of sterling against the euro. We don’t expect any major changes to the single payment system until the next round of Common Agricultural Policy reform in 2012, and it’s likely that some support will be shifted away from direct farm aid. For the purposes of the model, we’ve assumed the value of the single payment will reduce by about 10% each year.
The farmland price model is also influenced by Savills’ prime country house index. “There is a strong correlation between the two, but the farmland price model refers only to land and farm buildings – it doesn’t include any residential property capital.”
Savills residential property research forecasts prime country house values to slip in 2010 by 1%, recovering to 5% growth in 2011 and rising by 6-9% a year until 2015.
The graph represents Savills’ price forecasts for the average of all types of farmland in Great Britain based on the firm’s detailed statistical model. The results suggest growth of between 5 and 6% each year until 2015, putting average farmland prices at about £6300/acre in 2015, compared to current values of about £4500.
The model also suggest a rise in values for average Grade 3 arable land, rising to just under £7000/acre in England and just over £5000/acre in Scotland by 2015.
However, in reality, some regional markets are seeing values eclipse this already. In south-west England, Savills’ David Cross says he is seeing £7000/acre already in some cases.
Farm size, quality and the type of holding will affect values, as well as varying demand for commercial farms or those with greater amenity or residential values, Savills says.
Is £10,000/acre possible?
“Certainly there is nothing to suggest this could happen for bare land. But for prime arable land in England, the model suggests it is possible,” says Mr Bailey. “If you apply the model’s percentage forecasts, and take into account factor like a continued weak pound or exceptional growth in soft commodity prices, the model suggests values for top of the range, prime arable land in the east of England could reach £10,000/acre by 2014.
“The weakness of sterling, if it continues, will make a significant difference to UK agriculture. And the supply of land, if it were to fall further, will make a difference. Also, a series of exceptional quality farms in favourable locations or with great sporting potential could all make the picture much more bullish,” Mr Bailey says.
Savills has also sought to identify how much of a contributing factor the availability of land and farms for sale has been on values. “There is a clear negative correlation – as supply falls, values have risen. But we can’t see anything out there likely to make a big difference to supply. The drivers are likely to be the usual ones: Death, divorce, debt and downsizing.
“But demand remains strong – our applicant list currently has funds of over £7bn. At £7500/acre that represents over 1m acres of land that there is potentially a buyer for.”
The Savills model suggests a point where a supply grows and ceases to have an upwards effect on land values. According to Savills figures, the average annual supply of publically marketed acres was 123,000 between 2000 and 2009. Set against average values for grade three arable land, the model suggests supply becomes balanced at about 130,000 acres a year in England, and 50,000 acres in Scotland.
FW LAND TRACKER
As 2009 draws to a close, our Land Tracker reveals a market that has shrunk almost 30% in a year.
The Farmers Weekly Land Tracker measures the number of acres in Great Britain advertised in the hard copy magazine each week. It excludes overseas property, parcels of land less than 12 acres, but includes sporting estates and moorland. It does not duplicate – even if a farm or an area of land is re-advertised, it is only included once.
In the year to 18 December 2009 saw only 131,498 acres of land publically marketed in Great Britain. Agents estimates of the level of land traded privately, and which never comes to the open market, vary from 15-30%.
In contrast, 2008 saw nearly 185,000 acres on the open market.
This year represents the lowest level of land publically marketed since 2005, when the introduction of the Single Payment Scheme – and the need to be in occupation of land in order to claim it – caused the available acreage to shrink below 130,000.