There’s a change sweeping Australian agriculture.
The nation that was “built on the sheep’s back” and has had an enduring relationship with all things farming since white settlement in 1788, is undergoing a systemic shift in its rural industries. Since the British arrived, ‘family farms’ have underpinned the agricultural industry in Australia. But now institutional investors are arriving in droves and families are either exiting, or themselves adopting a more corporate approach to farming.
From the vast cattle stations of the outback to the rolling green hills in the nation’s south east that are home to dairy farms; from the banana and sugar plantations in the continent’s north east to the massive cropping country that sweeps through the heart of the nation – all were once the domain of families. Those farms are now being targeted by corporate investors, lured by the consistent long term gains that seem to outperform many other asset classes, as well as a desire to participate in the rising Asian protein boom.
While drought, fire, floods and varying commodity price cycles all make headline news in the popular press and taint the image of rural Australian life, there’s a growing cabal of savvy investors that understand the underlying opportunity: an opportunity supported by an increasing number of indices that monitor the sector. The Savills Farmland Index has long argued the investment case for agricultural land, with the 2016 version showing Australasian farmland has enjoyed a 13% annualised growth rate since 2002. The NCREIF Australian Farmland Index – which monitors the returns of 57 corporate farms across Australia – recorded a 16.89% total return for the 12 months to the end of March this year. Income returns were 8.06% and capital appreciation accounted for 8.42%. The index is compiled by the National Council of Real Estate Investment Fiduciaries of the US and has been monitoring farm returns since 1990.
Another survey, by Melbourne-based firm Atchison Consultants, showed that investing in agricultural property generates long term values similar to those from commercial property and is a good diversification strategy. Atchison claims an investment in a globally diverse portfolio of agricultural property over a 20+ year spread would have generated a total average annual return of 11.1%. Earnings from operations accounted for 6.4% and capital growth 4.7%. The survey also found that returns from agricultural property have a low correlation with returns from shares, listed property, fixed interest and cash. Not surprisingly, the biggest impacts on agri returns are variability of rainfall and commodity prices, but over the longer term, these smooth out.
Importantly, Australian farms perform with very little help. A recent OECD report shows Australia has the second lowest level of farm subsidy support in the developed world. Only 1.4% of gross Aussie farm income is attributed to subsidies, whereas farmers in some European and Nordic countries receive more than 50% of their income from government support measures. While the Australian returns are impressive enough, improved results can be achieved by targeting sectors at the start of their growth cycle.
While Australia has certainly left the blocks in terms of growth, it is not that far down the track and with plenty of runway left. The growth cycle is being fuelled by dislocated land values when compared with other developed western nations, low levels of debt, excellent aggregation opportunities, scalable investments, low sovereign risk, and a burgeoning local south east Asian neighbourhood. Further, the structural change underway in rural Australia only adds to the opportunity. This change is a once-in-a-lifetime systemic shift – from smaller family-owned and operated farms to large-scale aggregations.
From a good news perspective there are winners on both sides. Many families are exiting their properties with their futures secured after selling to the ‘corporates’. Other families are copying the corporate structure and ramping up operations and along the way building more sustainable, profitable and ultimately saleable businesses. The early stage institutional investors are also now booking big valuation uplifts for their large scale portfolios, with an added bonus the improving operational yields as economies-of-scale come to play. With balance sheet strength the corporates are leading the charge, with the embrace of new technology and genetics further driving productivity increases. That’s getting the processors and distributors excited, as consistency of quality and volume of supply mean it’s possible to confidently target new markets, mainly in Asia.