There has been a lot of angst in recent years about housing affordability in Australian cities.
That is because, while the meteoric rise in house prices is good for those who own a home, it is a diabolical problem for the economy and society in general.
The same thing is happening to agricultural land prices, and it is also locking out new farmers.
For some strange reason, the experts herald the huge increase in land values as an indicator of resilience in the sector rather than an indication of underlying structural problems.
The 2021 Australian Farmland Values report by Rural Bank shows commodity prices havenât kept up with the growth in farmland prices since 2017. This is a bit of a misdirect though because, in reality, commodity prices havenât kept up with production cost rises, including land, for decades.
In my view, the experts play down the problems of soaring farmland prices based on deeply flawed notions.
For example, Regional Investment Corporationâs chief executive, Bruce King, says the (mortgage) risks are lower in agriculture, pointing to this yearâs beef, canola and grain prices and the earning capacity of farmland.
âI think thatâs being reflected in the underlying land price, so perhaps that decoupling isnât quite to the same extent or to the same consideration that youâre looking at in a housing market sector where youâre comparing wages which, while theyâll influence what people are able to buy, are not necessarily an outcome or a byproduct of the underlying asset,â King said.
First of all, agricultural incomes are not regulated like wages. Using a short-term commodity price as a guide for debt serviceability is an egregious misrepresentation of the long-term profitability of a sector which is declining.
Commodity prices are at best seasonal and debt on land is decadal. Australian farmers are exposed to some of the most volatile market conditions with some of the lowest levels of structural support in the OECD.
On top of this, climate change is a real and permanent disruptor. It is delivering on its promise of increasing the frequency and intensity of extreme weather events.
The floods impacting in the past month are just another example that reinforces the increasing risk facing the agricultural sector.
Simply, agricultural incomes are much more volatile/risky than non-agricultural wage incomes. It is plainly absurd for the head of any rural finance organisation to suggest that agricultural mortgages are less risky than home mortgages or should even be compared in the same context.
Land prices continue to soar, but this phenomenon is not an indication of improving profitability or resilience in the agricultural sector.
It reflects a genuine decoupling of the agricultural real estate business from the agricultural production business. And it will precipitate a necessary structural adjustment that has the potential to be very destabilising to both businesses.
Kodak was founded in the 1880s. In 1981, sales exceeded $10 billion. In 2012, Kodak filed for bankruptcy.
Kodakâs story is a spectacular example of what happens when the people in charge donât recognise the significance of changes to their operating environment and adapt early to the ensuing disruption.
We should constantly assess what is happening around us and what it might mean for our future. After all, we donât want to be used as a case study in management failure in the future.
I am a farmer, but I am also a businessman. The biggest commercial investment I have â beyond my mind â is the land I farm. I am not a âbigâ farmer and now my desire to expand is heavily tempered by the outlook for the sector.
My outlook differs significantly from those people who many traditionally look to for guidance or assurances about what lies ahead. It is a little bit terrifying that my industry seems to be charging ahead in Kodak-esque business-as-usual fashion.
I appreciate not everyone is a farmer. You may ask why you should care. Indeed, my concerns might seem to be more whinging from, or about, a sector that lurches from boom to bust with lightning speed and generally has its hand out asking for assistance.
It is increasingly apparent that geopolitical stability increasingly depends on food security, which relies on functional agricultural supply chains, pre- and post-farm gate.
It is increasingly important that the commercial and policy structures around agriculture in this country are fit-for-purpose. A viable agricultural sector is a social imperative in an increasingly food-insecure world.
Two weeks ago the grains industry was heading for record profits and this week huge proportions of the NSW crop is under water. This, on the back of years of drought.
Despite all this, agricultural land prices continue to soar and farmers are apparently buying machinery in a frenzy.
So is there a problem or isnât there?
Well, I think there is. I also think there are serious problems with how the experts talk about the current situation and what it means.
Like it or not, further destabilisation in the ag sector is bad for everybody and a well informed and robust conversation is urgently needed to reassess commercial and public policy settings around agriculture in this country.