The global agricultural investment spotlight has moved ‘down under’ and is fixed firmly on the Australian dairy farm sector. Long overlooked as the ‘poor cousin’ of the agricultural sector, Australian dairy is now coming of age. Cattle stations, broad-acre cropping properties, wool and lamb-producing grazing properties and permanent row crops like citrus and almond orchards have been the darlings of the investment community as institutional money has flowed into the great southern land. But in recent months the focus is increasingly on the nation’s dairy farms – and for good reasons.
Located on the best arable land, access to huge and growing markets, consistent cash turnover and consistent capital growth that historically produces 6%+ returns, have institutions with their rulers out. The Asian food boom underpins the rising tide that is the Australian dairy sector. Recent market research from Euromonitor International shows that by 2020 China will overtake the United States as the world’s largest dairy market, and more than 60% of all new dairy sales in the next five years are expected to be generated in the Asia Pacific region. All that’s happening right in Australia’s backyard where Australian dairy products are in high demand. Such is the growing demand for agricultural commodities from Asia that farming is now firmly entrenched as Australia’s biggest contributor to the nation’s GDP – and the fastest growing sector with a 23% growth in the 2 year period of 2016 / 17.
Australia exports 50% of its dairy production and it has capacity to increase production to meet demand. Many view an investment in Australian dairy farms as a proxy investment in the Asian food boom – with little of the risk. While China is the largest and most exciting market for Australian dairy, the nation’s processors have extensive footholds in the other booming regional markets including Indonesia, Japan, Thailand, Korea and Vietnam. As these markets grow, demands are being made of Australia to increase supply – and the dairy industry is set to respond.
The industry hangs its hat on an international reputation for being clean, green and ethically produced; proximity to market and competitive pricing through a low cost-base farming system. While the thematic makes sense, getting set in the dairy industry has always had some hurdles. Scale has always been a large dissuader with the average acquisition size, including cows and plant & equipment, between AUD4 – 7million. For institutions looking to place decent bets, that’s simply too small. However there are now an increasing number of aggregations of dairy farms that make the due diligence and ticket size meaningful. Secondly, finding an experienced management team to aggregate and then manage such a portfolio has also been difficult. Dairying is the most demanding of all agricultural industries. Twice-a-day milking every day of the year is gruelling work and experienced management teams have been hard to find. That too is changing. Thirdly, for some years it was a lonely place for institutional investors with only a handful taking the plunge. The opportunity for liquidity was often in question, given a paucity of players in the game with big balance sheets and access to big chequebooks.
Over time that too has slowly changed with up to 20 institutions now actively invested in the sector, including European, Australian and north American pension funds, US endowment funds, Asian SPVs and many family offices. Leading the charge are North American and European pension funds with ‘over-the-horizon’ investment mandates and the patience to ride through the inevitable seasonal fluctuations that are the hallmarks of agricultural investment. Canadian giant PSP Investments has recently acquired 4 farms in Tasmania; US pension fund-backed Laguna Bay Pastoral Company has made a foray into the industry building a portfolio of 10 farms milking 10,000 cows; Thai food group Dutch Mill is another with farms and a factory purchase; Singapore-based Milltrust is also another recent entrant. Existing investors include Australian superannuation giants Telstra Super and Vision Super. The large international institutional investors have for decades watched the value accretion of farmland in the UK, Europe and the better farming states in North America.
Recent surveys now show that Australia is the investment hotspot with returns from Australia’s top farming properties now almost three times higher than those from comparable farm operations in the United States – according to the latest farmland index compiled by the National Council of Real Estate Investment Fiduciaries. While the third quarter saw a seasonal dip in returns for Australia, the index shows that the total return for the full year to September reached 16.95 per cent, much higher than the 6.15 per cent reported over the same period by the NCREIF US Farmland Index. The high level return was driven by income returns of 6.30 per cent and capital gains of 10.23 per cent.
While this year’s results have been driven by some anomalous events, the 20 year spread on farmland growth by Rural Bank’s Australian Farmland Values index shows a 6% annual capital growth. For those willing to trade the cycle, returns can be very attractive, with farmland in the state of Victoria recording a 16.5% valuation increase in 2016.
Australian dairy land prices are also inexpensive when compared with similar land in Europe, US or even New Zealand – for the moment. For example the best dairy farmland in Australia trades at AUD10,000 per acre (GBP5700pa), while there’s plenty of excellent dairying country available at circa AUD5000 per acre(GBP2850pa). By contrast, in New Zealand the better dairy land is at NZD30,000 per acre (GBP15,900pa).