Ahead of the Royal Highland Show, the annual showcase of Scotland's rural and agricultural industries, CKD Galbraith's head of Farm Sales Simon Brown comments on the farmland market.
"Although low commodity prices have created a certain amount of uncertainty in the agricultural business world, there is still a strong local demand for farms which are placed on the open market either for whole farms or for parts of the bare land element.
"The desire for expansion within the local farming communities is driven by a number of factors which include natural business expansion due to good performance allowing fixed costs to be spread and increasing the working farming acreage for profitable enterprises.
"Where structures have changed, for example where further family members have been brought into a farming enterprise, there will be a need to increase the business size and profits to sustain the increased number of family members now dependent on the business for income.
"Early deals this year in Fife, Perthshire and the Scottish Borders have shown that there is still a good demand for high quality land which runs contrary to the general opinion that farmland prices are falling and that farmland investors are waiting to see whether they will be able to pick up land at reduced prices.
"Most good farms are still attracting interest and resulting in competitive bidding at closing dates.
A tale of two halves
"Further west where the dairy industry dominates, it is a tale of two halves with those on good contracts able to make significant profits which can be re-invested in land, livestock and machinery, whilst those on poorer contracts are having to tighten their belts and save costs where possible.
"Recent economic forecast for the UK and worldwide show a lacklustre performance with a distinct lack of momentum in the global economy.
"Whilst this uncertainty prevails, there will continue to be an unwillingness to invest in equities and other investment vehicles until growth forecasts improve.
"With this background of uncertainty farmland is still seen as a stable strategic investment capable of providing a small but consistent return and is therefore a good medium to long term investment.
"Land also provides a useful strategic investment for tax planning purposes for those taking advantage of inheritance tax relief and capital gains tax rollover relief.
"With the recent large increases in grant aid for commercial forestry creation we have witnessed a strong rise in demand for bare land in the uplands which is capable of being afforested.
Low interest rates reducing pressure on farm businesses
"For those looking for business expansion opportunities this may be the time to consider selling hill ground for forestry planting and taking the opportunity to move to farms with better quality grassland where output per acre and the improved quality of stock carried may provide the opportunity for increased returns.
"The farms coming up for sale are being offered to the market for a number of reasons with the main focus being those considering retirement, restructuring of businesses or those intending to re-invest the proceeds of farm sale in other investment class opportunities.
"Current low interest rates have reduced pressure on farm businesses capable of showing that they are able to service their borrowing and produce acceptable profits but for those businesses that are over-extended, there is a certain amount of pressure to sell off some land in order to reduce their gearing.
"Whilst the current short term outlook for farming businesses is poor compared to the returns produced in the period 2010 to 2013, the banks report that they are very willing to help support profitable businesses which are able to show good levels of loan serviceability; a proven track record and realistic but positive forward cashflows."
