Invest in Australian Agriculture
Farming and associated rural services contribute up to 12% of Australian GDP as a result of world leading farm management expertise, and a vast amount of prime arable land. Agriculture plays an important role within both the Australian and the world economy.
There are unique features of Australia’s position in the global environment, meaning a significant opportunity lies in the ownership of Australian agricultural land. These features include:
- Low Geopolitical Risk – Australia has respect for property rights,
transparent and stable trade policies, good governance, and a stable democracy. All of these factors mean that there is very low geopolitical risk for investors in Australia.
- Innovative Research and Development (R&D) – Agricultural R&D is a crucial contributor to agricultural productivity growth4. In Australia $1.5 billion is invested annually in agricultural and rural R&D. This has driven a 2.8% per annum productivity growth over the past three decades and has resulted in Australian farmers using technology and practices that are leading edge and well adapted to their environment.
- Available Scale – With a sparse population, Australia lends itself to large scale farming. Large scale agricultural enterprises deliver more food at a lower cost, meaning that it remains competitive. Large scale farming also enables more efficient investment opportunities as investment fees are amortised over a larger area.
- Proximity to Asia – Asia is the most populated region in the world. In the future, it is expected to be home to the majority of the world’s middle class. Yet in Asia many countries have limited capacity to produce and supply food to consumers. Australia’s proximity to Asia and current market links mean that it is well positioned to be a significant supplier of food to this growing market.
- Excellent Port Infrastructure – Australia has excellent port infrastructure with a capacity to export large volumes of produce efficiently. The large scale ports are also supported by established road and rail infrastructure.
- Clean and Green – Consumers prefer products that are good for them (clean), and good for the environment (green). With strong regulatory standards and widespread uptake of conservation farming principles, Australian produce has established a clean, green image in overseas markets.
These unique aspects of Australia help mitigate risk for global agricultural investors.
A Structural Shift
Australian agriculture is undergoing a structural shift, as smaller farms are aggregated with larger-scale operations and fewer young people take over the family farm . This has been occurring over the past 30 years and is likely to increase over the next decade, with as many as half of Australia’s farming work force potentially looking to retire, allowing a new generation of professional farmers to emerge.
This is creating demand for capital to allow professional farmers to expand their farming area in order to achieve a critical mass and operational efficiencies.
It has been estimated that $400 billion will be needed to support this structural shift in farm ownership over the next 40 years, as ageing farmers make way for the next generation of agriculture.
New Sources of Capital
Historically, family farmers have been by far the largest source of investment in agriculture, with on-farm investment three times as large as all other sources of investment combined. However farmers face significant challenges in raising sufficient capital to fund growth. At present there are few external sources of equity capital available to Australian farmers. Australian investors have traditionally overlooked agriculture as an investment option due to perceptions of the industry as having a high degree of volatility of earnings . However, with its low volatility correlation to other asset classes, agriculture provides significant opportunity for portfolio diversification, as shown in Figure 17. Raising sufficient capital to fund growth is particularly important for high performing farmers who have the potential to drive substantial productivity improvements on less efficient neighbouring farms, but have insufficient capital to purchase additional land assets independently. This type of farmer is suited to working with agricultural investors.
This need for new capital in Australian agriculture provides a very timely opportunity for investors in the Australian Farmland Investment Fund.
New Ownership Models
Facilitating external investment in agriculture can occur through adoption of new farm ownership and operations structures. Australia currently has limited alternative agricultural land ownership and management structures in place to attract capital from beyond the farm gate. The FarmInvest Australia investment model provides a conduit to achieve this. It enables investment at the primary level for agriculture – productive agricultural land.
The FarmInvest Australia model brings together the capital of investors with the operational experience of professional farmers. The leasing of agricultural land is an increasingly popular form of land tenure in the UK, Europe and the USA. Notwithstanding its recent growth, leasing in Australia is an under-represented method of land access when compared to the UK and USA, where leasing is much more common as indicated in Figure 18.
Despite this historic background, leasing is becoming a popular form of land tenure within Australia. This is due to the benefit that can be achieved via economies of scale being available to farmers looking to grow their business coupled with the stability and flexibility it can provide land owners. With agricultural land being an illiquid asset, owners have begun realising the income stream and other benefits that leasing can provide.
Some reasons for the growing number of leasing arrangements in Australia include:
- Farms have to expand to survive – Leasing provides operators with an avenue to expand the scale of their operation which, coupled with investment in efficient machinery allows a reduced cost of production to be achieved. This provides these farm businesses with a mechanism to improve economies of scale.
- Restricted access to capital – Small to medium scale family run operations have been under strain from increasing levels of farm debt. This limits borrowing capacity to purchase more land, leaving leasing as a more practical option to expand.
- Ageing population – A proportion of farming residents are older and can no longer manage the operational aspect of running a farming enterprise. This presents a timing opportunity to acquire agricultural land as farming residents will be seeking capital to facilitate the retirement from full time farming.