A correction in the pricing of farmland appears increasingly likely.
The Reserve Bank of New Zealand has warned of the possibility "of a sharp decline in farm values" and Errol Saunders , the managing director Canterbury-based Ford Baker Valuation, said a 10% contraction would not surprise him, due to stable prices, an increase in farms for sale and a longer time to sell them.
Fuelled initially by demand for dairy land and latterly by a resurgence in the fortunes of the cropping sector, land prices reached unprecedented levels, with $55,000 a ha paid for some of the premium farms.
Mr Saunders said prices for those same farms could ease to between $40,000 and $50,000 a ha in the next year.
Grazing land prices peaked at between $600 to $800 a stock unit, not the $1000 a stock unit some were expecting, he said.
Mr Saunders said in an interview that buyers were now more cautious given the presence of a number of negative factors: the credit crunch, a fall in product prices, especially dairy, the emissions trading scheme and more farms on the market.
"We now have a volume market.
"Buyers are just taking stock and hesitating."
The gap in expectation between buyers and sellers was widening as a result, he said.
Farms that previously commanded premium prices would be hardest hit, he said, as purchasers started questioning the price.
There was also some nervousness about the ability of Fonterra to pay the $6.60 a kg of milk solids forecast for this season given the global slowdown.
Despite those concerns, Mr Saunders said land remained a good investment and was unlikely to follow residential property into a slump.
The Reserve Bank hinted that export demand and receipts could be affected by the slowing world economy, although primary sector exporters have told the Otago Daily Times they remained confident with their forecasts.
The International Monetary Fund has forecast advanced economies to record negative growth in 2009, with global growth next year picked to fall from 5% to 2.2%.
While advanced economies were feeling the credit crunch, the Reserve Bank said developing nations were also affected.
"In addition to slower export growth to advanced economies and lower commodity prices, emerging markets are also being affected by global de-leveraging."
Against this looming period of uncertainty, rural debt has grown 50% in two years, from $30 billion in September 2006 to $34 billion a year later and $42 billion in September this year, a trend the bank describes as "extremely robust".
Rising farm values and generally firm returns have underpinned that borrowing.
"However, the strength of commodity prices is not assured, particularly given challenging global economic conditions, and the possibility of a sharp decline in farm values cannot be discounted."
Even though the exchange rate was falling and would help exporters, the Reserve Bank noted dairy prices had also fallen significantly.
It said agricultural lending had become "a riskier component of bank balance sheets that should be managed carefully".
The Real Estate Institute of New Zealand rural spokesman Peter McDonald said a lack of finance was preventing some sales being completed, but despite that the national median price of farm sales in the three months to October was $1.5 million, compared to $1.3 million from August to October 2007.
Fewer farms sold between August and October this year: 390 compared to 582 in the same period last year and 470 in 2006.
