Pricing of New Zealand dairy farmland

Purpose - The purpose of this paper is to investigate the relationship between dairy farmland prices and farmland rental incomes in New Zealand from 1982 to 2009. Design/methodology/approach - Using the net cash income received under a 50/50 share‐milking agreement to proxy the net cash rent, the paper attempts to explore the prices and rental incomes relationship using the present value model and then apply them in a pool regression model to show how farmers formulate their price bids. Findings - Results show that over the long‐term dairy farmland price growth tends to be in line with rental growth. However, there is substantially higher growth in land prices in relation to the rental growth since 2002. Moreover, the risk premium placed by farmland owners on future rental cash flows since 2002 appears substantially below the historical average. The research further shows that farmers nowadays place more emphasis on the current season's payout than historical incomes in their price bids. Practical implications - As a consequence the recent high land prices will be extremely sensitive to a permanent change to the low interest rate environment and future growth of dairy income. A policy recommendation is also highlighted. Originality/value - The results of this paper indicates that the rapid price appreciation for New Zealand dairy farmland since 2000s might give rise to bubbles.