Bare farmland prices unchanged in the fourth quarter of 2008 while the price of equipped farms fell. Those are the two main conclusions of Smiths Gore's latest research into the English farmland market.

Smiths Gore is optimistic for the future, especially for bare land prices. It says that the price difference between equipped farms and bare land has halved and that part of the reason for the drop in equipped farm prices was the 'massive' increase in equipped farms marketed between July and September last year

"The market for farms in England continued to split in the final quarter of 2008," says Smiths Gore head of research Dr Jason Beedell. "Bare farmland prices were solid in 4Q2008 while the price of equipped farms fell. This continued the trend from the third quarter of the year. The asking prices of bare farmland rose to an average of £5,700 per acre in 4Q2008, up 2% on the average of £5,500 in 3Q2008 and up 8% since the start of the year. Although some land failed to sell, actual sale prices held up well and did not change significantly from 3Q2008.

"In contrast, the average asking price of equipped farms fell to £6,800, down 8% on the average of £7,400 in 3Q2008 and down 22% since the start of the year."

A significant number of equipped farms were overpriced and failed to sell.  Despite this some farms bucked the trend. "Quality is still key and seems to defy the market everytime.  Some farms are still attracting a huge amount of interest and are selling well," says Giles Wordsworth, Smiths Gore's head of farm agency.

The difference in price between bare land and equipped farms, the ‘equipped premium’, has dropped significantly from an average of £3,800 per acre between 2006 and mid 2008 to £1,800 in 3Q2008 and £1,100 in 4Q2008. Smiths Gore says there are a number of reasons for this significant change in the market:

• Diminished demand for residential farms and from non-farmer buyers. Lesser demand for equipped farms and farms with houses, particularly from non-farmer buyers, compared to bare land. Demand from farmer buyers continues but it was weaker in the second half of 2008 due to lower commodity prices and higher input costs, both of which were compounded by a poor harvest.  There is more optimism from farmer buyers now due to recent drops in the prices of some agricultural inputs.
• Increase in equipped farms being marketed between July and September 2008. There was an exceptional number of farms and land marketed in 3Q2008.  Previously, the greatest amount of land is marketed in the second quarter.  But in 2008, about 70,000 acres was marketed in the third quarter, which is more than double the usual amount, as vendors tried to sell at the top of the market, which was 2Q2008. The influx of land onto the market has been partially responsible for the drop in equipped farm prices since mid 2008.  It has also meant that sales are taking longer to complete as the market has switched to favour the buyer.
• House price falls. The farmland market also adjusted in the second half of 2008 to take account of falls in house prices.  House prices have fallen 19% since their peak in October 2007, according to Nationwide, and the house price falls fed through into the asking prices for farms in the second half of 2008.

"There is already increased interest from buyers in 2009 compared to the end of 2008," says Wordsworth. "Bare land prices have not, to date, been significantly affected by the residential market, the credit crunch or the wider economic downturn.  The reason for this is that many farmers are still optimistic about the core business of farming, although less so than in Spring 2008 before commodity prices fell.  This should not change and lending to farming for agricultural land purchases should continue. Banks and other lenders still view farming as a secure, well capitalised sector although there is evidence that they are making higher charges for loans and mortgages to agriculture.

"We anticipate that there will be fewer sales in spring 2009 as buyers wait for commodity prices to start rising and the £:€ exchange rate will also affect the market.  Although the greater availability of land tends to reduce land prices, we expect bare land prices to continue to rise. Prices for equipped farms may also rise as they return to their long-term upward trend and the residential element of farms is more realistically valued."