Agribusiness Review - Vol. 7 - 1999

Paper 1
ISSN 1442-6951

Trends in dairy farm sales and factors influencing dairy land prices in New Zealand (1990-1997).

G P Rauniyar and A E Dooley - College of Sciences, Massey University, Palmerston North, New Zealand,
W J Parker - Dairy and Beef Division, AgResearch (Ruakura), Hamilton, New Zealand

Dr G P Rauniyar, Senior Lecturer, Institute of Natural Resources, Massey University, Ag/Hort Science Building,
Level 3, Private Bag 11222, Palmerston North, NEW ZEALAND.
Phone: +64 6 350 6182. Fax: +64 6 350 5680.
Email: G.P.Rauniyar@massey.ac.nz

ABSTRACT

Keywords: dairy farm sales, land prices, farm size, New Zealand, dairy farms.

1. INTRODUCTION

The outlook for the milksolids price, new technology, the relative profitability of alternative land-use enterprises to dairying, interest rates and the motivation of herd owners all impact on dairy farm land values, and the number and size of herds. The 1990-1997 period was particularly dynamic for the dairy industry with significant growth in national milk production (NZDB, 1997) due to expansion of existing herds, conversions of sheep and beef cattle farms to dairying and improved productivity per cow (LIC, 1996) . The signing of the GATT agreement, lower interest rates, ‘bullish' projections for dairy products and relatively good prices for milksolids from 1992/93 to 1994/95 all contributed to an optimistic outlook for dairy farming (Kilsby et al. , 1998) . These factors were capitalized into dairy land values. The optimism for dairying began to abate from around 1996 when milksolids prices declined, the need to own shares in dairy companies proportional to the milk supply was foreshadowed for the 1997/98 season and interest rates edged upwards. This paper presents an analysis of dairy farm sales for the 1990-1997 period. Changes in land values by farm type and size are reported.

2. DATA AND METHODOLOGY

Dairy farm sales for the period 1990 to 1997, a total of 5,542 properties, were included in the initial data set. The VNZ data subset was subjected to trend, bivariate and multivariate analysis using the Excel and SAS packages. Net sales prices were converted to 1990 constant dollars using the Consumer Price Index (CPI). The total dairy farm sale data records included farms of all sizes. The analyses of farm size, sale price and productivity were based only on the data for economic units (n= 3513), defined by VNZ as "a farm unit capable of supporting at least one family". Economic units producing less than or equal to 5,000kg MS/year (n=24) were excluded from the data set. Nine other outliers, comprising farms over 120 ha and producing less than 20,000 kg MS, were excluded as well to give a final data set of 3480 sales.

Buyer-seller relationships, as defined by VNZ, were examined for 1990, 1993 and 1997. Farm buyers were classified as either expanding or not-expanding property owners, while farm sellers were classified as either subdividing or not subdividing. The farm buyer was classified into one of the four categories: existing farmer, new farmer, businessperson and other (Government/Local Authority and other). Similarly, the ownership structure of the buyer was divided into one of the four types: individual, partnership, company and other (co-operative, trust, Government/Local Authority and other).

An economic model was specified to explain dairy farm sale prices. Operational farm size, production performance, location of farm, buyer-seller attributes and time of sale all play important role in determining sale prices. Farm sale prices were hypothesized to be function of farm size (-); production per ha (+); location (Waikato in relation to other regions); buyer attributes (operation type, new buyer and enlarging); and a seller attribute defined as subdividing. Changes in technology and management practices were captured in a variable representing time. The first half of 1990 was assigned a value of 1, the second half a value of 2, and so on. The time variable also captured changes in the market environment, including the MS price received by farmers. Farm specific MS payments that reflected individual company performance and milk composition effects were not available.

Exploratory analysis was undertaken to determine data-appropriate functional form that was consistent with economic theory and hypothesized conceptual relationships. In the end, a log-linear functional form provided a better fit for the data and was found superior over a quadratic functional form. The parameters in log-linear models can be conveniently used as elasticities and easier to interpret without further computations. The empirical model was specified as in Equation 1. In the econometric model, farm level revenue attributes were not included because information on actual revenues from milksolids sale was not available. Furthermore, because of closure or merger of dairy companies regional milksolids payout could not be ascertained. The authors are aware of this limitation in the model specification and results should be interpreted accordingly. However, we contend that relative profitability from dairy farming is partially reflected in farms being sold.

ß 4 AUCKLAND + ß 5 BAYOFPL + ß 6 TARANAKI +

ß 7 LOWERNI + ß 8 SISLAND + ß 9 FSBN + ß 10 FSSN +

ß 11 BTSFRMI + ß 12 BTVFRMN + ß 13 MYR + e (1)

where:

The Waikato region was treated as a reference farm location, and thus was not included in the regression model. All explanatory variables specified in Equation 1 were subjected to collinearity diagnostics (Besley et al. , 1980) . None of the variables used in the model posed a collinearity problem.

3. RESULTS

3.1 Trends in dairy farm sales

The overall national trend in the number of dairy farm sales from 1990 to 1997 is shown in Figure 1 . Economic units accounted for 55% to 68% of total dairy farm sales per annum during this period.

Figure 1: Number of "economic unit" and "other" dairy farms sold between 1990 and 1997.

The ‘economic' units tended to be much larger in area than ‘other' units, although this difference narrowed over time (Figure 2) . The number of economic unit sales peaked in 1992 at 587, and thereafter trended downwards. The number of dairy farm sales, as a proportion of the total number of national herds, ranged from 2.7% in 1990 to 1.5% in 1997, with a peak of 4.1% in 1992. The least dairy farms were traded in 1997, at nearly half those sold in 1996, however this may be partly because the database had not been completely updated for 1997. The number of dairy farm sales peaked in 1992 in the North Island and 1994 in the South Island. Regional dairy farm sales were consistent with the national trends. When farm sales were expressed as a percentage of total sales, proportionately more farms changed hands in the North Island than the South Island (90% vs. 10% in 1997).

Figure 2: Size (ha) of "economic unit" and "other" dairy farms sold between 1990 and 1997.

3.2 Trends in farm sales by farm size

3.3 Milksolids production

A regional comparative analysis of the productivity of dairy farms sold (Appendix A) , was performed relative to the Waikato, where most New Zealand dairy farms are located. All regions had lower MS/ha than the Waikato in all years, except in 1997 when Taranaki produced 1.3% more MS/ha, and in 1990 and 1997 when Canterbury produced 9-14% more MS/ha. However, the productivity gaps between Waikato and other regions were typically large in all years.

3.4 Trends in dairy farm net sale price

The South Island results were highly variable because of the small number of farms sold per year (Appendix A) . This ranged from 22 to 50 farms/year (3 to 20 farms/region/year) compared to 195 to 542 farms/year in the North Island (7 to 209 farms/region/year). Prices for South Island dairy land, on average, were $4570/ha lower than in the North Island, ranging from $2936/ha less in 1990 to $5886/ha less in 1994. Although farm land prices started to decline in North Island after 1995, prices continued to increase in the South Island. The latter trend reflects the relatively higher land prices in the North Island and the greater remaining potential for the conversion of sheep and beef cattle farms to dairying in the South Island.

In terms of size effects, land prices increased proportionately more for large farms than small farms (an increase in real price per hectare between 1990 and 1997 of 36% for farms less than 40 ha, compared to 96% for farms 80 ha and over). This trend could be associated with the greater demand for larger, and more economic, farms.

3.5 Trends in capitalisation of land values

1 Milksolids price is the season average across years, with the 1989/90 year recorded as 1990 on the graph (LIC, 1996).

2 Interest rates are for a 15 year term loan, from the Rural Bank (1990-1993) and the National Bank (1994-1997). Rates are given for January/February (Lincoln University, 1990-1997).

Thus, gains in land productivity did not keep pace with the increase in dairy land price. Land values increased with falls in interest rates in the 1992-1994 period (r = -0.98 for annual interest rate by average per hectare price for the eight years).

Land prices ($/kgMS) in the Waikato were generally higher than for the other regions, except for Auckland for all years (5.5% to 61.9% higher), Taranaki for four years (3.1 to 6.4% higher) and Wanganui/Wellington in 1992 (5% higher). Land prices per kg MS could be expected to be similar in Taranaki and Waikato, both traditionally strong dairy farming areas, with price differences per kg reflecting the size and quality of the farms sold. High land prices in the Auckland region reflects proximity effects of the city's expansion.

3.6 Seasonality in dairy farm sales

The average number of dairy farm sales per month for the period 1990-1997 is shown in Figure 7 . Farm sales were typically greatest during the summer-autumn (February-April) and least during July-September. The seasonality in farm sales was consistent across years. These results are not unexpected, as sales occur at the end of lactation to facilitate the traditional June takeover. Few sales occur during the busy spring period when lactation commences in seasonally calved herds.

The average number of dairy farm sales per month for the period 1990-1997 is shown in Figure 7 . Farm sales were typically greatest during the summer-autumn (February-April) and least during July-September. The seasonality in farm sales was consistent across years. These results are not unexpected, as sales occur at the end of lactation to facilitate the traditional June takeover. Few sales occur during the busy spring period when lactation commences in seasonally calved herds.

Figure 7: Total number of economic dairy unit sales per month for 1990 to 1997.

3.7 Buyer-seller relationships

The proportion of buyers who planned to expand their farm operation increased in 1997 compared to 1990 (15% in 1990 vs. 25% in 1997) (Table 1). The proportion who were expanding was more pronounced in the South than North Island (14% vs. 24% in 1990 and 23% vs. 45% in 1997, for the NI and SI, respectively). On the other hand, when seller type was examined, the number of farms with subdivisions was 9.9% of all sales in 1990 and 13.8% of farms sold in 1997, a 30% increase in proportional terms.

Table 1: Buyer-seller relationships for not-enlarging (NE) and enlarging (E) dairy land sales.

Of the 3,480 dairy farm sales, one in seven farms were purchased by a new owner, while 78% were purchased by an existing owner. One in 16 buyer was classed as a business operation. Similarly, slightly more than one-fifth (22%) were bought by an individual, three fifths by a partnership, one in eight was a company and one in 20 was some other type of operation (Table 1) . The majority (85.4%) of farm sales were as going concerns (not expanding), and in most cases (91.9%), farms were sold in their entirety rather than subdivided (Appendix B) .

3.8 A model of dairy farm sale prices

The model shows a 10% increase in the size of dairy farm sold is likely to decrease the net sale price per ha by 1.5%. The time trend (MYR) indicates that, ceteris paribus , dairy land prices have declined in the past. However, a 10% increase in milksolids (MS) production would improve dairy land prices per ha by 8.7%. The sale of economic dairy farm units in Northland, Bay of Plenty, lower North Island and South Island would force dairy land prices to decline, while farm sales in Auckland region would increase land prices. Individual buyers, and sellers subdividing, would decrease the net sale price. In real terms, the model suggests dairy land values will continue to increase.

4. DISCUSSION

Dairy farm sales between 1990 and 1997 reflected, in number and value, both optimism for future, as well as current, MS prices and interest rates. While total sales peaked in 1992, the price paid per hectare did not peak until 1995. The relatively low prices in 1990-1992 had carried through from the late 1980's when milkfat prices had declined sharply and interest rates were high (Back, 1995) . At this time established farmers with strong equity, and access to improving milk prices and falling interest rates, could expand production on significantly cheaper non-dairying land, especially in Canterbury and Southland, with no requirement to purchase shares in the industry's processing or marketing assets. Nationally the milk supply grew at 5.3%, 2.3%, 12.8%, 0.3% and 8.0% respectively, or a total of 32% between 1990/91 and 1995/95 (LIC, 1996) .

This placed enormous pressure on processing capacity in the traditional as well as the "rediscovered" dairy regions (e.g. Southland had 1026 dairy farms with 20 or more cows in 1950 (Census and Statistics Department, 1953) ). To fund this expansion and to shift the burden of cost to those increasing supply, the requirement to purchase company shares was introduced (initially by Southland in 1994/95, and by all companies from 1997/98). This unbundled some of the industry's processing and marketing value from dairy land values, and contributed, along with lower MS price forecasts, to the decline in dairy land values from ca. 1995.

Three other factors probably had some effect on dairy prices. First, the high log prices in 1992-1994 that had prompted strong investment in land for forestry, thereby underpinning sheep and beef cattle land values, began to abate (MAF Policy, 1995) . Second, horticultural crop (e.g. apples, vegetables) returns were generally poor from ca. 1995 and land demand by this sector was low. Third, the costs of resource consents due to the 1992 Resource Management Act increased, especially for dairy shed effluent disposal (McShane, 1998) .

The productivity (kg MS/ha) of dairy land sold increased every year from 1992, except in 1996. The lower levels of productivity in the 1992-94 period incorporate the effects of conversion of sheep and beef cattle farms to dairying (estimated at 261, 226, 365 and 151 farms, respectively, from the 1994/95 to 1997/98 seasons (NZMWBES, 1995 - 1997) ). The MS per ha of farms sold was 82-100 kg/ha less than the national average for the season concerned, and mirrored the national trend for increased MS output per hectare over the study period (LIC, 1996 ).

Nationally, the proportion of small (<40 ha) dairy farm sales to total sales (12.7% to 18.4%) increased over the study period. The ratio of sales:farms in this size category was 1.77% in 1990, and 2.23% in 1993 (Fairweather, 1997) . Corresponding turnover rates for 40-60 ha farms were 4.29 and 5.49%, and 1.93 and 2.41% for farms >60 ha. In terms of total dairy farm sales:total dairy farms the percentage annual turnover was 2.69, 2.97, 4.04, 3.43, 3.40, 2.80 and 2.88% for each year from 1990. The 1997 data were not available at publication but turnover rates have declined from their 4.04% peak in 1992.

The future of the small dairy farm (<60 ha and 150 cows) was reviewed by Parker (1998) . These farms represented 39% of dairy herds and 24% of the national herd in 1995/96 and were unable to service debt at a MS price of $3.50 kg MS. Limited published data suggests these farms are owned by older farmers (Hughes et al ., 1989) .

Thus, the conditions seem set for many of these farms to exit the industry over the next decade, either through amalgamation with an existing dairy farm or another land-use enterprise. The sales data to 1997 provides some evidence that this is occurring - 27.6% of farms less than 40 ha and 16% in the 40-60 ha category were brought for expansion purposes versus a maximum of 11.5% in the other farm size categories (Appendix B) . More of the small farms were purchased by individuals and partnerships than other forms of ownership. While partnerships dominated buyer type in all farm size categories, company farms were most prevalent in the >120 ha category. This is consistent with the growth of corporate dairy farm businesses, such as Tasman Agriculture, during the study period.

Regional variation in land prices between years reflected both productivity and the number of sales (Appendix A) . Land prices were highest, but not necessarily more consistent in the dominant dairying regions: Auckland (CV = 22.4 %), Waikato (CV = 23.1%) and Taranaki (CV = 25.4 %) versus Wanganui/Wellington (CV = 16.6%). The greatest variability in dairy sales prices between years was in the South Island regions where a small number of farms changed hands each year.

5. CONCLUSIONS

REFERENCES

Back , S.P., A model of dairy farm profitability and factors influencing dairy farm investment. Unpublished MAgrSc.Thesis, Massey University, Palmerston North, 1995.

Besley , D.A., E. Kuh and R.C. Welch, Regression Diagnostics . John Wiley and Sons, New York, 1980.

Fairweather , J.R., Implications and impacts of land use change. AERU Discussion Paper No. 145, Lincoln University: 11-30, (1997).

Hargreaves , B.V. and I.A. McCarthy, Real estate cycles - a rural perspective. Proceedings of the 1994 National Seminar, New Zealand Society of Farm Management : 23-38 (1994).

Hughes , J.H., W.J. Parker, and F.M. Anderson, Survey of MCDC suppliers. Research Report, Department of Agricultural and Horticultural Systems Management, Massey University, Palmerston North, 1989.

Kilsby , S., J. Gardner and W.J. Parker, Variance in budget and actual expenditure for dairy farm conversions. Primary Industry Management 1 : 33-36, 1998.

LIC , Dairy Statistics 1995-96. Livestock Improvement Corporation, Hamilton, 1996.

Lincoln University , Financial Budget Manual, Lincln University, Canterbury, 1990 to 1997.

MAF Policy , Situation and outlook for New Zealand Agriculture. MAF Policy, Wellington, 1995.

McShane , O., Land use control under the Resource Management Act. Ministry of Environment, Wellington, 1998.

NZDB , Annual Report 1996/97 . New Zealand Dairy Board, Wellington, 1997.

NZMWBES . Annual Report . New Zealand Meat and Wool Boards' Economic Service, Wellington, various issues.

Parker , W.J., The future of the small New Zealand dairy farm. Dairy Farming Annual , Massey University 50: 43-56 (1998).

Appendix A : Statistics for dairy economic units (means).

Appendix B: Buyer and seller type by farm size.