How will dairy farmers impact the land market?

The expansion of the Irish dairy sector has undoubtedly been one of the key drivers in the increase in land prices over recent years, both in terms of land leasing and land purchase.

As farmers expanded their operations, they acquired more land, both for grazing cows and growing winter feed, or for rearing youngstock.

As growth in cow numbers has eased considerably over the last year or two, many people are wondering if the demand for land among dairy farmers is going to continue and what impact could policy or increased regulations have on the sectors’ appetite to take on more ground.

Grass growth

First off, the dairy sector is in great health, which at this time of year is always a good signal for the land price prospects. While the first half of 2024 was difficult for farming, the second half of the year was superb.

Dairy farmers are entering spring 2025 with stock and land in great order, cash in the bank and renewed confidence that this is going to be another high milk price year.

Having said that, the last 24 months have proven to be very turbulent and the sector has been buoyed by high profits in 2022 and rattled by low profits in 2023, tormented by the aforementioned poor weather and frustrated by an unsympathetic Government policy agenda.

The bad weather reduced grass growth which essentially means that most farms are now growing about 1.5t DM/ha or about 12% less grass now than they were three or four years ago. The net result is that land is less productive now than it was in the past.

While eternal optimists will be hoping that 2025 will bring a return to more normal weather and growth rates, others believe lower grass growth is something farmers will have to get used to as the impacts of climate change hit home.

As a result of lower productivity, highly efficient farmers are having to buy in more feed or take on extra land in order to replace the feed that they are no longer growing on their existing acreage.

This is one reason for the increase in the demand for land. It’s almost perverse in the sense that demand for an asset is increasing even though the return from that asset is actually reducing.

Nitrates

Increased regulation is another factor in the demand for land. As part of the nitrates directive, Ireland is obliged to maintain a nitrates action programme which is updated and approved by the European Commission every four years.

Significant changes took place in the current nitrates action programme which is running to the end of 2025. These changes include the introduction of banding (classifying cow nitrogen excretion rates based on milk yield) and a reduction in the overall maximum stocking rate allowed on farms with a nitrates derogation.

This means that for farmers who were close to the limit for nitrates, that is to say at 170kg N/ha, or at 250kg N/ha for those with a derogation, the changes would have tipped them over the limit. As a result affected farmers have either had to reduce cow numbers, export slurry or lease additional land.

These changes were introduced in 2023 and 2024. Now, all eyes are on to see what happens at the end of 2025 when the next nitrates action programme will be introduced. The big fear is that further cuts to the derogation upper limit will take place. If this happens, the demand for land will increase further.

However, it’s important to note that any further cuts to the derogation will be so catastrophic that the affordability of land will come into play. Affordability was a lesser issue when the amount of additional land required has been relatively small. But if a lot of additional land is required just to maintain existing cow numbers, then affordability will be a greater issue.

This is an important point, just because the demand for land will go up in the event of a cut to the derogation, it doesn’t mean the price will. Supply of land may also go up as some existing dairy farmers are likely to exit the sector as the cost of compliance will be just too high.

Also, if the derogation is cut again, the productivity of each hectare reduces because the carrying capacity of the land is reduced. Therefore, the value of land should go down, not up.

The market will ultimately decide the price but with such volatility in milk price and margin, commercially-minded dairy farmers will be hard pressed to justify paying big money for land in fixed rent price scenarios.

Profitability

The other factor affecting the land market is the core profitability of the dairy sector. If the forecasts are right, 2025 is set to be a very profitable year. As we have seen in the past, when sectors are doing well farmers will expand.

If the policy arena settles down and there is certainty over the derogation, then its feasible that a new wave of new entrants to dairy may enter and existing farmers expand.

Volatility in the market also needs to be considered. Are we going to see more examples of fluctuating lease payments in the years ahead? This is where the price per acre will fluctuate based on the performance of the dairy sector. In good years, the price will go up and in bad years, the price will go down.

With increased volatility in the dairy sector, such arrangements may become more necessary. It could benefit both the farmer and the landowner and foster long-term relationships where both parties benefit in the good times and share the pain in the bad times.

There are some floating lease arrangements already in place, but the key thing to remember is that milk price alone is not the key determinant of profit and costs need to be factored in also.

All in all, presuming no changes to the derogation, we would expect to see a stabilisation in the land market from a dairy point of view.

Further cuts to the derogation would be massively distorting, and may not necessarily lead to an increase in the price of land.