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End of drought boosts prospects for NZ land prices

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The ending of New Zealand's drought has handed the country's farmland market a "strong platform" for the important spring season, real estate professionals said, amid bright hopes for the important dairy sector too.

Economic data on Thursday highlighted the impact to New Zealand agriculture from one of the worst droughts on record, with the sector seen shrinking 4.8% in the April-to-June period from the previous quarter, thanks largely to the impact on dairy farms of poor pasture conditions.

"Dairy production was the biggest contributor to the fall, while sheep and cattle farming also fell," the official statistics office in New Zealand, the top milk exporting country, said.

However, country's real estate institute, Reinz, flagged a "mood of optimism prevailing in the rural sector" now that rains have returned, with "kind weather" meaning that early spring grass growth is "the best experienced by many".

'Buoyant market'

"The livestock market in saleyards around the country is buoyant and a healthy barometer for the rural environment," Reinz spokesman Brian Peacocke said.

"Because of those conditions, the majority of farmers are in good spirits."

With less pressure to sell farms, "the net result across New Zealand is strong demand, particularly for quality, sensibly-priced property, and a current shortage of supply".

Rising prices

New Zealand farmland prices in the June-to-August period were 10.3% higher than in the same three months of 2012, according to a Reinz index adjusting for location, size and type of properties sold.

The unadjusted value of land sold in the period averaged NZ$21,676 per hectare, up 21% year on year.

In dairy, the raw farmland value rose to NZ$32,234 per hectare, up 32% from the NZ$24,492 per hectare a year before, with sites sold typically of about 130 hectares.

However, the biggest number of sales was of smaller, and cheaper, grazing properties, averaging 53 hectares, which also saw stronger growth in unadjusted land values, of 48% to NZ$16.744 per hectare.

'Exacerbate supply tightness'

The resilience in dairy farm prices, despite a particular downturn in the sector's fortunes because of drought, comes amid a resilience in world milk prices, which are being supported by firm demand at a time even as output in New Zealand and Australia is recovering.

"Production in New Zealand and Australia is having a good start to the new dairy season, but is unlikely to be able to fully supply the market in the immediate future," National Australia Bank said on Friday.

While output growth in Europe and the US has also recovered from poor starts to calendar 2013, when production was held back by a cold spring and elevated feed prices, "most of the production in these regions will be directed at domestic consumption rather than exports".

NAB flagged the boost to prices from a decision by New Zealand-based Fonterra, the top dairy exporting company, to cut sales of milk through commodity channels in a shift to focusing on higher value products.

"This is likely to exacerbate the supply tightness situation in the short term and keep prices high," NAB said.

"However, it is not clear how quickly the market will be able to respond to these price signals."


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