Interest doubles. Just halve the price of land?

Interest of 5,2% for five years fixed? That is the last financing proposal from one of our clients that I saw pass by. Half a year ago, a rate of around 2,5% for five years fixed was quite normal for him. Despite the explanation of the European Central Bank (ECB) that interest rate hikes will level off, interest rates have now more than doubled in the past year. And we're not there yet.

In addition to interest rate developments, land prices are a constant topic of discussion in the agricultural sector. An agricultural company needs land, it is the basis of its revenue model. The call from the government is that dairy and arable farms should produce more extensively. But doesn't more extensive mean more land with a drop in turnover? The need for a good revenue model is therefore only increasing. Especially in combination with the high inflation and rising interest rates.

Every agricultural entrepreneur will agree that with today's knowledge, he would have liked to have bought more land in the past. But then land was already (too) expensive and it has certainly not become any easier. Agricultural entrepreneurs are also seeing more and more competitors entering the land market; the government that has to fill in a residual nature reserve (NNN), which will require thousands of hectares in the coming years. The energy issue and the availability of land for solar parks has repercussions on the trade and availability of agricultural land. In addition, we want to build 1 million houses in the Netherlands in the next ten years! These residents also want to recreate in a beautiful environment. All in all, a fierce battle for the scarce space in the Netherlands.

In 2016, I performed a calculation exercise into the development of land prices in relation to interest rates. From 1960 to the beginning of this year, there was a nice correlation between the price of land and interest. This except for a few exceptional years, such as the difficult arable farming years in 2002-2004 and the government buyers' strike, initiated by Henk Bleeker at the time. For the greater part of the past sixty years, a high interest rate resulted in a lower land price, while the low interest rates of the past ten years coincided with a doubling of the land price!

One and one equals two, the interest has doubled so the land price is halved? Nationally, you now pay about €70.000 for 1 hectare. This, coupled with an interest rate of 5,2% and a repayment of 3,3%, requires a payment capacity of 8,5% = €5.950. We quickly calculated with that, you cannot calculate a return for that for a long period of time. Anyway, this is at odds with the knowledge that the long-term existence of an agricultural company requires more land.

We will have to be creative to get land available. The need for land has never been greater. To remain a farmer you have to work with more surface area. Extensify, while the high yielding crops are needed to pay the bill. And the dairy farmer needs liters of milk per hectare to add value to the land.

I myself am confronted with this reality; as a farmer to tie land to my company and also as an advisor in the day-to-day work field. The math to pay for land from the proceeds of the land? That is no longer correct. How you see it, I'm curious. If I see all the movements in the land market and the balance between supply and demand remains so skewed, I very much doubt whether my statement above this column will be correct. As usual, time will tell.

Farmers Funding & Advice unburdens you in the field of business administration, business economics, tax-legal matters and realizes the most suitable financing.

Arjan Ausma

Arjan Ausma is senior relationship manager at Farmers Funding & Advice and he is a steward/broker. He also has his own farm.