When a wealthy person thinks about investing in farmland, they usually picture operating a farm and all the excitement and disappointment that goes with that investment. Producing your own crops or raising cattle has a certain primal appeal which is why rich people often buy vineyards or small cattle breeding operations. If the driver behind such an investment decision is an emotional one, we fully understand it.
However, if the driver for your investment is purely to capture the best return, the correct farmland investment strategy is buying and leasing.
Farmland Investment Yields
The average return (EBIT earnings before interest and tax) across the Australian farming industry is about 6.5%. The top quartile reaches 10.5%, whilst the lowest quartile is only 2.5%.
If a foreign investor wants to start their own farming operation, they usually employs a farm management company. The farm management company hires workers and contractors, who do the actual work. All these additional layers of costs make it nearly impossible to beat or even reach the average of 6.5%. On top of this, there is much more work and due diligence involved from the side of the investor. Additionally, they have to stomach the yearly volatility of the returns which comes hand in hand with farming in Australia.
Farmland as an alternative investment asset class
The much simpler approach is to buy a farm and lease it to a successful neighbor for a yearly lease in the range of 4.5% to 5.2%.
Over the years we have trialed various farming models. This includes share-farming agreements, (where we received 25% of the harvest proceeds) and employing farm management companies to run the farms on the investors behalf.
We now have 10 years of data and the obvious conclusion we have come to is that if you want to maximise your returns, the right strategy is to buy and lease farmland.
Farmland Investment Pricing
Farmland pricing is quite efficient within a region, but there can be large price differences over larger distances.
Currently farmland in Western Australia is valued roughly only half the price of land in NSW. This is based on the dollar amount you have to spend to buy the area of land, which produces one ton of wheat.
The wheat belt of NSW had a few profitable years. Farmers rebuilt their equity. Once financial freedom increases the natural tendency of farming families is to buy more land.
Western Australia is influenced by different weather patterns. After some average years they have now had one of their best years in 2018. We expect cashed up farmers will bid up prices for farmland in WA over the coming years.
Australia is the same size as the USA. Different regions across Australia experience different cycles. The astute investor will always be able to find and capture undervalued farmland somewhere.