What does the corona crisis do to the price of agricultural land?

The coronavirus has the whole world in its grip and so does the agricultural sector. Every day we speak to entrepreneurs who ask: "what do you think the influence of corona is on the price of agricultural land?"

The trade press headlines with reports such as 'Emergency fund agriculture in the making', 'Dairy market entering a long crisis period' and 'Agricultural farmer empty-handed for the time being'. All this creates uncertainty, confidence has fallen to a low point and parties are more likely to slow down. In this article we have listed a number of questions and considerations.

How susceptible is the price of agricultural land to the corona crisis?
Fairly susceptible. This crisis is a global problem and economists expect a contraction of the economy ranging from 0,2% to as much as 8%. If we combine this with the - actual and emotional - high prices for agricultural land and corona, this can or has already caused a turnaround in the perception. Both factors can have an impact on the price of agricultural land.

Is there still business being done?
Current affairs, at least if signed, will be completed. New deals appear to be limited. On the one hand, this is due to the busy time that has come at the companies, the work and the worries that come with it. In addition, buyers are taking a step back. All attention is focused on liquidity. What will the operating result of previous and next year look like and can all short- and long-term obligations be met? The saying, 'Don't make appointments in joy and sorrow', just pops into people's minds.

Will the price of land change?
That is very difficult to say, but a temporary interim correction is possible. The past shows that the price can fall, especially in periods of economic slowdown, as can be seen from the chart below. This is related to the financial developments in agriculture and horticulture itself, but also beyond. What is the overall economic situation in the country and what is the attitude of other real estate parties on the market? The decline in consumer confidence normally has a significant effect on the economy and the desire to build houses. But the question is also whether and to what extent governments and investors will behave differently on the land market?

Can differences in area and sectors be expected?
Basically, the land market has always been characterized by regional differences, and that could possibly strengthen corona. This is apparent from the quarterly report Agrarische Grondmarkt published by the Land Registry. It distinguishes between grassland and arable land and the land is divided into 4 parts. For the Netherlands as a whole, in 2019 compared to 2018, arable land rose in price by 3% and grassland by just 1%. The increase came from parts of the country North and East, in West and South the average price remained at the level of 2018. The traded hectares in 2019 amounted to 29.400 ha, which decreased from 2% to 1,7% of the total agricultural area. Figures by region were; North 1,3% and East 1,7%, West 1,8% and South 2,0%. In principle, every area is or will be affected by the impact of this crisis. This also applies to all sectors and certainly to dairy farming, arable farming or horticulture.

How arable farming and dairy farming - the most important land-related sectors - are ultimately affected by the crisis, partly determines how big the effect can be. In addition, we must not forget that it is certainly company-specific and region-specific. In which phase of life a company and its entrepreneur(s), what is the specific business and how is the company capitalized, are important aspects that play a role here. The consequences can be very different in a specialized dairy area than, for example, in a seed or starch potato area.

Developments in the interest rate market and what effect will that have?
Although the medium-term interest rate outlook is fairly stable, the market today is unstable. Actually attracting money, according to banks, is difficult for them and considerably more expensive. This means that additional liquidity surcharges are calculated, which means that the current customer rate for 10 years is fixed by about 1% or more than at the beginning of March. It seems that some kind of overreaction is now occurring in the market. How long that will take and how much interest will continue to rise, who knows.

It is a given that the interest rate is a well-supported factor for the price of land and can be seen in the graph below.

A low interest rate makes it more affordable for agricultural entrepreneurs and therefore more attractive to invest in land. At the same time, it is known that investors are also looking for alternative investments, where agricultural land is considered to be solid with little risk. After all, unlike other real estate, it has no vacancy, renovation or demolition.

Knowing this data, it is almost inevitable that the current situation on the interest rate market has at least a temporary price dampening effect. Be that as it may, the land market is and remains special. Of course we don't know what potential buyers think and do. However, they often have the following thought in their peasant heart and back of mind: “the world keeps spinning and not a single beam is added”.

Would you like more insight into and optimization of your financing? Make an appointment now with one of our specialists.