A good model for future farmland value trends
It's been an uncertain year for farmland values. There have been plenty of buyers worried prices will rise again, while sellers have held back, fearing the icy fingers of recession will nip farmland prices. So where now? Ian Ashbridge reports on new forecasting model.
Savills' head of research Ian Bailey emphasises the amount of historical data underpinning the firm's new economic model. “Looking at things over five or six years isn't good enough - you need a robust base if you're going to make any credible forecasts.”
The objective was simple enough - to predict, as accurately as possible, where farmland values might go in the next few years. And the outcome is a forecasting tool which is built on 35 years of data. “We have derived a robust model from extensive statistical analysis which provides a good fit with historical land values and provides a firm base for our forecasts,” he says.
“Everything we could brainstorm, all the possible variable that might have a bearing on land values, have been included - everything from wheat prices, farm incomes and house prices to national GDP, exchange rates, oil and gold values and population density.”
Each of these variables was then tested through logical analysis and correlation and regression studies, two established statistical methodologies for comparing variables.
Correlation tests how closely a single variable taken in isolation - like wheat price - relates to the average land price over 35 years, where +1 is a perfect fit and -1 is a complete divergence. “For example, feed wheat yield holds a very positive correlation to land values at a value of 0.82. So we can establish there is a positive link between average land prices and the profitability of arable farming.”
Regression analysis compares one or more independent variables over the longer term - in this case back to 1975. Savills has used data on land prices from its own sales combined with DEFRA's land price series, which was halted in 2005.
Factors influencing land trends
- Total Income From Farming
- Wheat prices
- Wheat yields
- Farm support
- Prime country house values
The outcome of the historical section is impressive. The results of Savills' economic model fit eerily well with the average price for all types of farmland in Great Britain over the last 35 years.
“The model makes no adjustments for low supply of land or supply constraints,” says Mr Bailey. Although on manipulating supply, it isn't as powerful a factor on prices as one might think. And there has only been one year in the last decade when supply was significantly restricted - 2005, when the Single Payment Scheme was introduced and it was clear that land occupation and the establishment of entitlements would be essential to secure support.”
FARMING INCOME
The model uses information on Total Income from Farming up to 2008 and includes DEFRA's estimates for 2009 and 2010 (just over £4bn in 2008-2009, falling back below £4bn in 2010). For the purposes of forecasting, it has supposed TIFF remains at about the same level through to 2013. “It's difficult to accurately predict this, particularly given the effect of the value of the euro on the single farm payment this year. Exchange rates will continue to be an important factor going forward.”
WHEAT PRICES
Although it might not seem like it, wheat prices have risen steadily over the last decade - albeit with a few peaks and troughs - and Savills has reckoned on the underlying trend continuing. To stay in line with the trend, the model assumes wheat prices climb by £10/t each year from £110/t in 2010.
WHEAT YIELDS
Although it might not seem like it, wheat prices have risen steadily over the last decade - albeit with a few peaks and troughs - and Savills has reckoned on the underlying trend continuing. To stay in line with the trend, the model assumes wheat prices climb by £10/t each year from £110/t in 2010.
SINGLE PAYMENT SCHEME
“The effect of the single payment this year has been significantly enhanced by the weakness of sterling against the euro. We don't expect any major changes to the single payment system until the next round of Common Agricultural Policy reform in 2012, and it's likely that some support will be shifted away from direct farm aid. For the purposes of the model, we've assumed the value of the single payment will reduce by about 10% each year.
COUNTRY HOUSES
The farmland price model is also influenced by Savills' prime country house index. “There is a strong correlation between the two, but the farmland price model refers only to land and farm buildings - it doesn't include any residential property capital.”
Savills residential property research forecasts prime country house values to slip in 2010 by 1%, recovering to 5% growth in 2011 and rising by 6-9% a year until 2015.
Farmers Weekly, 18 Dec 2009