Farmland prices and the farming industry’s profitability in Australia

In recent years, the correlation between high farmland prices and the profitability of Australia’s farming industry has been widely debated. While some argue that rising farmland prices can hinder the sector’s profitability, others attribute farmland price surges to robust agricultural seasons spanning various crops and regions, complemented by low interest rates. This study examines the relationship between farmland prices and the farming industry’s profitability, as captured by the rate of return. Utilizing a vector autoregression (VAR) model, we investigate both Australian national and state annual data from 1992 to 2022. Our findings indicate that nationally, farmland prices respond positively to a positive shock in the industry’s profitability, albeit with a time lag. We also find that rising farmland prices indirectly diminish the farming industry’s profitability by increasing production costs. At the state level, our VAR model reveals that farmland prices react positively to profitability shocks within a 2– to 5–year timeframe across most Australian states.