Only 2% fall likely and then recovery

1 September 2000

Only 2% fall likely and then recovery

By Louise Rose

NOMINAL farmland prices are expected to fall by just 2% this year as the market continues to fare considerably better than the fundamentals suggest.

"In real terms, after allowing for inflation, this corresponds with a fall in the price of agricultural land by 4%," finds the MMD, Forecasts for Agricultural Land Prices 2000-2002, which appear in the autumn issue of Farmland Market.

Thereafter, the model suggests, the price of agricultural land should begin to recover, both in nominal and real terms.

"Our base forecast for 2001 is for a 1% real increase in the price of agricultural land and a 9% increase in 2002. By 2002 the real price of farmland will have returned to the level achieved in 1996 and stand at almost 10% above the present level," it predicts (see table).

These forecasts are calculated by passing various assumptions through the agricultural land price model. Alternative scenarios are then produced which show the likely range of price movements for the forecast period.

Key influencing factors include the economy, which has now seen three consecutive quarters of above-trend growth having slowed during the first half of last year. Interest rates are tending to rise, but are low by historical standards and domestic expenditure reflects the relatively buoyant mood.

The combination of higher government spending and improved export performance, because of greater buoyancy in world trade and a fall in the sterling exchange rate, mean that growth should accelerate later this year. Economic growth is forecast to peak at 3.5% in 2001 before slowing to 3% in 2002.

An investment series is included in the farmland price model as an indicator of demand for marginal agricultural land from industrial, commercial and residential developers.

Investment expenditure growth is expected to slow from 6% in 1999 to 3.3% this year. The positive economic environment should generate further investment growth in 2001 and 2002 of 5.2% and 5.5%, respectively.

During the past year the stock market was rather turbulent, with huge rises in the price of high technology shares and a wave of merger activity, which lifted prices in other sectors. Now the technology bubble has deflated and asset prices remain subdued.

"After a period of retrenchment during the next three to six months we expect share prices to advance at a healthy rate during 2001 and 2002. Buoyant economic conditions should drive share prices up by around 6% next year and by a similar amount in 2002," it forecasts.

House prices increased by an average of 16% in the year to June, but the rate of growth is predicted to revert to more sustainable levels. Prices are expected to rise by an average 13% this year in nominal terms and another 6% next year, but the rate of growth is expected to slow by 1% in 2002.

Agricultural producer prices are included in the model as a proxy for farm incomes. With the exception of the first quarter of 1999 these prices have fallen every quarter since the middle of 1996.

In the first five months of this year, crop products fetched an average 19% less at market than in the corresponding period in 1999 and animal and animal product prices fell by 3%.

"We remain relatively pessimistic regarding agricultural producer prices during the next three years. Indications of further price weakness can be gleaned from the commodities futures market and we expect producer prices to decrease by another 3% in both 2001 and 2000," it forecasts.

Forecasts of agricultural land prices (constant prices)

1996 1997 1998 1999 2000 2001 2002

Base forecast

Index, 1985=100 97.3 101.6 96.0 91.4 87.7 88.2 95.9

% change on year 24 4 -6 -5 -4 1 9

Optimistic forecast

Index, 1985=100 97.3 101.6 96.0 91.4 87.7 92.0 114.4

% change on year 24 4 -6 -5 -4 5 24

Pessimistic forecast

Index, 1985=100 97.3 101.6 96.0 91.4 87.7 78.1 79.6

% change on year 24 4 -6 -5 -4 -11 2

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