Farming yields fall below value of government bonds

“The traditional rule of thumb was that lease rates were struck anywhere between 4 and 5 per cent of the market value of arable dryland country depending on the level of arability, management history and the length of the lease term,” Mr Garnsey said.

Until about five years ago, a dryland cropping property in an area with more than 500mm of rainfall could lease for between $75 and $85 an acre on country valued in the range of $1600 to $2000 an acre, he said.

“Similar types of properties are now trading at levels anywhere between $5500 and $7000 per acre,” Mr Garnsey said.

“However, recent lease negotiations we have seen are struggling to achieve rates higher than $100 per acre.”

Rabobank said in 2020 that rents were typically calculated at 4 per cent to 6 per cent of the value of the property on a per-hectare basis, and lease terms ranged from three to five years.

A yield below 4 per cent would now generate a lower return than investing in either 10- or 15-year Australian government bonds, where yields have risen above 4 per cent in the past month because of rising interest rates.

Stronger competition

Rabobank’s 2020 report also found that nationally, more than a quarter (28 per cent) of farmers already leased a portion of their operating land. In addition, fund managers such as Stafford Capital buy and lease out farms.

Strong competition from cashed-up farmers looking to expand and record low-interest rates have driven up farmland values – the median price of a hectare of farmland rose 20 per cent last year, according to Rural Bank’s Australian Farmland Values report.

However, on the leasing side, higher input costs – particularly fertiliser, diesel and chemicals – had reduced cropping profit margins and put a cap on rents, Mr Garnsey said.

Even though commodity prices were also high, lessees needed to factor in the risk of costs falling back to more traditional levels, as well as the potential for the current run of above-average seasons to come to an end when entering into three to five year leases, he said.

Tom Russo, head of real estate at Elders, said prevailing yields varied significantly depending upon the scale and quality of the asset in question.

“Quality assets in high-value segments such as permanent tree crop horticulture continue to command yields in the range of 5 to 8 per cent,” Mr Russo said.