Land

Agricultural land prices are hard to make sense of. Some people think they can keep going up. Others think they are wildly overpriced. Myself? I have no idea. But here's my two cents on it.

When pricing traditional investment assets, the astute punters tend to look at two main factors: (1) the earning potential of the asset, and (2) the perceived risk of the asset.

Lets start with the earning potential of an asset. Logically, if the earning potential increases, then all else equal (perceived risk, etc), the price of the asset will increase. More importantly, prices don't change year by year as earnings change, its the punters expectation of future earnings which sets the price of an asset. Hence why companies like Uber, who don't generate much earnings now are priced on such huge price to earnings ratios. Investors expect that their earning potential will increase in the future, so are happy to pay a pretty penny for it. {add idea of high ROIC? probably too detailed}

Looking at farmland. The earning potential of our assets go up via both productivity and commodity prices. Farmland has benefited from tailwind in both these areas.

ABARE's data suggests that average sector productivity going up around 1 - 1.5% since the 1970's. Keep in mind this is average productivity. The top 20% of producers have probably been increasing productivity at least double those rates (2 - 3%). And these producers are the ones that are often setting land prices. These productivity stats also ignore the mother of all productivity growth: land use change. Just go yarn to a few cotton farmers West of Moree that use to farm a few sheep, or yarn to a few wheat cockies that sold some land to almond farmers down on the Murray. The big $$ are in land use change. See what old mate GoFarm is doing down in Northern Victoria: buying a crapload of dairy farms with good borewater with a view to convert to to horticulture. Risky, but big $$ if it comes off.

Commodity prices have also been going up. Some more than others of course (poor dairy farmers). But you can certainly name a few that have trended higher over the past few years: lamb, wool, beef, cotton, chickpeas just to name a couple.

But by itself, I don't think increased earning potential explains all the price movement we've seen in the past thirty years. .

The perceived risk of the asset is