ACE2006:  The FarmLand Market

Clive Aslet ( UK Land Directory Ltd. 17.05.08) "You won't need telling that 2008 has not been a particularly jolly year for property. According to Henry Pryor, of online property portal Primelocation.com, the price of an average house is falling by £1,000 a week. But one part of the market is bucking the trend: farmland (with, of course, farmhouse). You'd be forgiven for having forgotten it; throughout all those years when the City was booming, banks were shovelling money into mortgages and property in the south of England went stratospheric, agriculture was in the doldrums, and the price of farmland refused to budge. Now, just when the rest of the market has gone to a darkened room feeling queasy, the farmland market is galloping away, ruddy-cheeked and jumping five-bar gates.
Farm favourite: the asking price of more than £10 million for the 1,130-acre Morval estate, at Looe, on the south coast of Cornwall, reflects the boisterous good health of the agriculture industry and the performance of farmland in the property market. Everywhere you go, farmers have eye-popping tales of fields in their county that have sold for three times what they would have fetched a few years ago. Figures from Savills estate agency show that prime arable land increased in value by 26 per cent in the first quarter of 2008.
James Laing, of Strutt & Parker, who sells more farmland than any other agent in Britain, thinks it has further to go. "Land has gone from £3,000 an acre to £7,000 an acre in three years,'' he says. "I believe it will reach £9,000 an acre. At £9,000, there is still an acceptable level of profitability in terms of yields. He has just put Grange Farm, South Kyme - 800 acres of flat, potato-growing south Lincolnshire, with a Victorian farmhouse - on the market at £6.5million; it would have been £3million three years ago. As for the credit crunch, no worries. When the land agents Smiths Gore surveyed lenders last month, they found the banks just as happy to lend on farmland, still regarded as a prime asset with a low record of bad debt, as they had been before Northern Rock upset the apple cart for residential buyers.
It was in 2005 that prices started to move. There were three stimuli. First, Celtic hordes swooped on the west coast, via the ferry port of Stranraer. Irish farmers, having sold land either for development or because the price of farmland in Ireland had gone into orbit (£20,000 an acre in some cases), were traditionally distrustful of banks, had too much to stuff under the mattress and so put their bundle straight back into farmland in Britain.  Second, Danish farmers, highly efficient but unable to expand in their own country, followed the route of their Viking ancestors, and devoured the pickings to be had in East Anglia (even at today's prices, land in the UK is still cheaper than in Denmark).  Third, hedge fund managers began putting their own funds, so to speak, into hedges: they liked the lifestyle, had spotted a rising market and, although generally too young to think about inheritance planning, may be influenced by the tax advantages of owning farms (because land that is not let to tenants incurs no inheritance tax, and tenanted land enjoys a 50 per cent rebate, it is a handy way of passing money to the next generation). "

It is now some time since I did any research on the UK Agricultural Land Market (1989!), and very little has appeared in the literature since then. However, some comparisons might be instructive.

This figure compares average English farm land prices for all sales in real terms (base 2003, deflated by the GDP deflator) - right axis - with the series of Real Agricultural Gross Product (UK) - left axis.

Notice the the first serious spike in land price coincided with the spike in real GDP as a result of the commodity price boom of the early 1970s. This was followed immediately by a correction, and then a subsequent spike and slower correction - rather typical of asset and stock market over-reaction and then over-correction. Nevertheless, this period does indicate that British farming took the dramatic improvement in farm returns to be permanent - as a consequence of UK entry to the EU - rather than temporary (as a consequence of emphemeral world market conditions).

From 1980, the land price in real terms seems to reflect the performance of farming (as reflected in real GP) until the 1990s, when the spike in real GP (following the UK's exit from the ERM and subsequent depreciation of the sterling exchange rate w.r.t the euro), was not reflected in the price of land, which actually became depressed through this period. This suggests that macroeconomic influences on the asset prices (interest and inflation rates) may have been more important in this period than the agricultural income earning prospects.

Since 1992, however, English land prices have been heading in the opposite direction to farming returns.  Why?  Two reasons seem obvious:


This last proposition seems to be supported by a comparison between the farm land price (in nominal, current terms) with the FTSE 100 share index (right hand axis) since the ealry 1990s.  However, the land price did not suffer such a major correction in the early naughties as did the stock market - the land market is, apparently, less susceptable to speculative bubbles than is the stock market (or the housing market)?

As a final illustration of the possible mechanics of the farm land market, this chart shows the performance of a farm land market model, (explained in detail in the companion paper), which I estimated in 1989.  The estimated real land price here, based on an estimation period from 1947 to 1981, hypothesises that the land price (Pt) depends on:
What is quite interesting is that the explanatory equation seems to perform reasonably well until the 1990s (although the full paper does indicate that there are some considerable statistical problems with this equation - for the purists, the variables do not display the same time-series properties, which they need to for the results of their correlations to be reliable). However, since the early 1990s, this estimation (which might be taken as an indication of the agricultural value of land) has been diverging from the actual land price.

I have not had the time or the resources to get back to looking at the behaviour of land prices over the more recent periods - but it would make an interesting exercise for someone!


In any event, land dominates the industry's balance sheet, as shown here (data, as above, from Defra, Agriculture in the UK statistics). Again, these data are in real terms (deflated by the GDP deflator). The industry as a whole cannot be said to be over-geared - total assets exceed total liabilities by a very considerable margin - with net worth strongly positive throughout this period, albeit subject to variations in the price of land.

Clearly, the  land base provides the industry with a very considerable asset base from which to lever investment funds, though, by the same token, also representing a major obstacle to entry - if would be farmers are determined to be landowners as well. If so, it is clear that farming cannot justify present land prices on present earnings - so purchase has to be justified in pure asset ownership terms (resting, in this case, on the expectation of continued growth in non-farm demand and hence in capital appreciation).


Global future prospects? - for an excellent and well-structured assessment, see: "The Global Supply and Demand for Agricultural Land in 2050: A Perfect Storm in the Making?" by Tom Hertel, 2010

Back to Index