HOW high can they go?
That has been the talk of WA's rural property market for quite some time as land prices across the State have seen a steep rise in the past three years.
Data from Rural Bank's land values report on 2019's land values (2020 values are yet to be released) indicated that WA's farmland values rose by 28 per cent in 12 months, and 25pc from 2019 to 2017.
Across the country, land price growth has been more consistent over about 10 years by an estimated 66pc.
But how long can this growth continue for and is it likely the market could be in a bubble that is at risk of bursting?
According to Rabobank senior agricultural analyst Wes Lefroy, that is not likely to happen due to the dynamics of three factors which have been driving the market: strong commodity prices, farm productivity and low interest rates.
"In theory the price of land should be equal to the value that you can extract from that land, so essentially increases in land price should match the productivity of the land," Mr Lefroy said.
In collaboration with Digital Agriculture Services, which used satellite imagery to determine productivity, Rabobank analysed cropping land values and found that 87 per cent of variation in land prices was driven by those three factors.
"The cost of funding remains at the lowest point on record, the Rabobank Commodity Price index remains at its highest point on record and production levels in 2020 were well-above average," Mr Lefroy said.
"Over the past six years nationally, these fundamentals have been the most supportive they have been over the past 30 years"
If a decline in prices were to occur, Mr Lefroy said at least two of the three factors would need to be unsupportive for a period of at least two years.
"This shows that agricultural land is definitely a resilient asset, which is what has attracted a lot of investors into agriculture, because it can wear headwinds quite well," he said.
"We only really see sudden, big movements in land prices when there's a sustained shock to the underlying fundamentals."
With several record prices being reported by rural property agents across the State in the past selling season, is WA farmland beyond its productivity?
Mr Lefroy said looking at productivity alone, there were some areas where the price of land has outweighed the price of productivity.
But in such a competitive market, where buyers are prepared to pay a premium for reasons other than productivity, determining whether land is overpriced is complicated.
"Neighbouring family farmers can be willing to pay a 30-40pc premium because they can then extract economies of scale, or if looking through the lens of a whole farm, you might not be able to quantify that value because you can't use the remainder of the assets to extract value from that, therefore there's no economies of scale," he said.
"There's also lifestyle factors, like people will pay a premium to live in a certain area and there's those who purchase from a succession point of view, so the factors might not always be financial."
Areas where cropping productivity has been reflective in those particular markets.
For example, Mr Lefroy said the Esperance and South Coast region had a "massive increase in the price of productivity from 2016-2019" and during 2019 that region saw land values grow by 57pc, as per Rural Bank's land values report.
The Kojonup area has gained a lot of attention in the past few years as being a particularly strong market.
It's a region that was once dominated by sheep and wool production but there has been a general shift towards more cropping.
Mr Lefroy said while some farmers might have leant towards cropping due to a decline in long-term rainfall, others have specialised more in cropping who perhaps would have previously grown crops for livestock feed.
"This has allowed them to become better at growing crops and I think that outweighs farmers in having to adapt crops to grazing country," he said.
"Back then there wasn't a lot of investment in increasing crop yields, whereas now that we are seeing a bigger focus on cropping and farmers invest in more things like machinery and making their farms more efficient for growing crops and also agronomic skills have improved."
Also, the degree of which the three contributing factors (interest rates, commodity prices and productivity) have influenced land prices is varied and has changed over time.
Since 1997 to 2019 Mr Lefroy said the influence of interest rates had decreased from 64pc to 40pc, the impact of grain prices had risen from 16pc to 25pc and productivity influence on land prices had increased from 18pc to 32pc, which he said was mainly due to economies of scale, cropping specialisation and agronomic advances.
