This trend reversed abruptly in 2009 when the reality of decreased milk payouts and the global financial crisis hit the dairy sector hard.
Bank lending to dairy farmers escalated over this time, from $11 billion in 2003 to $30 billion last year, and some highly geared farmers were caught in very tight financial situations.
Income dropped, land values decreased, followed by a number of bank-encouraged sales.
Since then, farmland prices have lifted slowly and sales volumes are now higher than in 2009. But this summer's drought has been a major setback for dairy industry profitability.
Dealing with too little or too much rain is a constant challenge for farmers, but the problem becomes that much greater when product prices are also at low levels.
In 2007/2008 many parts of the country were affected by a similar widespread and severe drought running from December until mid to late April.
In that season dairy farmers received a record payout and were able to buy in additional feed. This year the record payout is missing, making farm operating decisions more difficult, and many farmers will have increased seasonal finance limits to operate their business.
And climate change is just one of the risks farmers must now assess.
Regional councils are placing greater restrictions on land use and increasing compliance costs.
A restriction on carrying capacity or fertiliser inputs, for example, would have a significant impact on land value - an impact that is likely to be at least proportional to the decrease in earning potential.
In recent years there has also been more volatility in milk payout prices.
In the 2008/09 season the initial milk payout forecast was $7 a kilogram of milksolids and the final payout was $5.14. In August last year the forecast milk price for the current season was revised down to $5.25 - but this has just been increased to $5.80.
The cost of Fonterra shareholding under the Trading Among Farmers (TAF) scheme adds more complexity to farm purchase decisions. The value of the land plus shares is likely to remain the same - but there is now less certainty around share value, making land pricing more difficult.
The Fonterra fair share price pre-TAF was $4.52.
Fonterra Shareholders' Fund units are now trading at around $7, which is likely to put downward pressure on the price of land.
When considering an investment it is critical to look carefully at the downside risk. People easily forget this in the buoyant years and continue with an expectation that increases in the value of land will cover the bad years.
But the market is cyclical and farm-land price decreases do occur every 10 or so years.
While valuers, bankers and farmers will all look to the market to determine a fair price for land, it really is sound practice to back this up with an assessment of the land's value based on income using a capitalisation rate that reflects the risk of the business.
Historically dairy farmers have accepted a return on investment of about 3 to 6 per cent. The risks, complexities and challenges of farming are now greater than ever before so the capitalisation rates used should be at the top end of this range.
Recent research by Michael Lawrence, an honours student at Massey University, showed that if this income approach had been used over the boom period until 2008 we wouldn't have seen the necessary correction in land prices in 2009. And that would have meant much less stress on farming businesses.
Iona McCarthy is the agricommerce programme director at Massey University, and a lecturer within the School of Economics and Finance.
