Agriculture investments in Australia

Australian farmland per hectare is the cheapest in the world to produce a tonne of wheat. Globally, the average increase in the cost of land for production of a tonne of wheat over the past five years was of 8.6% (in USD). Furthermore, farmland values in the region of the Company are undervalued compared to the three-year average value for the wheat belt regions.

Australian farmland

Agriculture Output by State

Australian farmland per hectare is the cheapest in the world to produce a tonne of wheat. Globally, the average increase in the cost of land for production of a tonne of wheat over the past five years was of 8.6% (in USD). Furthermore, farmland values in the region of the Company are undervalued compared to the three year average value for the wheat belt regions.

The Australian grain industry is predominantly family owned. Production focuses on both summer and winter crops, categorized by four types of products: wheat, coarse grains, legumes and oilseeds. Australia’s primary crop is wheat and production accounts for approximately half of the country’s total annual grain production. The largest domestic market for Australian grain is the livestock industry, accounting for 20.4% of Australia’s grain production. In 2016, the grain industry generated $13.5 billion. Driven by growing demand, the grain industry is forecast to generate annual revenue growth of 2.1% per annum over the next five years

Grain Farmland

Australian grain production is predominantly focused in three broad regions; the Northern region, comprising Queensland and northern New South Wales; the Southern region, comprising central and southern New South Wales, Victoria, south-eastern South Australia and Tasmania; the Western region comprising Western Australia.

Grain production by state is shown above. In 2015, the NSW grain industry was valued at $2.85 billion, representing approximately 30% of Australia’s total industry production1. The central and southern cropping regions of NSW are characterised by their diverse range of soil types and dependence on seasonal rainfall.

Some key considerations for investors in the Australian Grain and Agriculture Industry

Farmland Out Performance

Investment in farmland has the potential to generate both capital and operating returns through a combination of appreciation in the land value and the income from the sale of the commodity produced on it. Historically, global agriculture has outperformed traditional asset classes such as equities and bonds on a risk adjusted basis.

Australian agriculture has also historically generated risk adjusted returns greater than these traditional asset classes. Australian agriculture has historically, on average, generated risk-adjusted returns greater than Australian equities and Australian bonds. Analysis of Australian grain farms with gross turnover greater than $1 million shows that these farms outperformed Australian equities, Australian bonds and inflation between 1993 to 2016.

Furthermore, these grain farms exhibited lower volatility than the traditional asset classes, such as equities and bonds, over the same period, producing a more attractive risk/ return profile.

Value of $1'000 invested in farmland in 1992
Value of $1’000 invested in farmland in 1992

Farmland Low Correlation

Global farmland has historically demonstrated low correlation to traditional asset classes, such as equities and bonds, providing diversification benefits to an investment portfolio.

Analysis shows that on average between 1993 to 2016, Australian grain farms demonstrated low correlation to Australian equities and Australian bonds. This suggests that including an Australian grain farms investment in a portfolio may provide diversification benefits.

Returns of selected asset classes
Returns of selected asset classes

Farmland Inflation Hedge

Historically, global farmland has served as an effective inflation hedge. Australian farmland has historically exhibited a positive correlation to inflation. This suggests that Australian grain farms may be an effective hedge against inflation and a capital preservation vehicle.
Real assets, such as farmland, generally perform well during inflationary periods for a number of reasons, including:

  • The permanent and tangible nature of the assets mean the value of these investments tends to rise as inflation rises
  • Agricultural commodities are significant components of the Consumer Price Index. As commodity prices rise with inflation, the profitability and land value of farmland increase and
  • Farmland is a finite resource

Farmland Out Performance

Over the past 20 years, Australian farmland values have generated annual growth of 6.6%, on average. NSW farmland values over the same period have demonstrated average annual growth of 7.0%. In comparison, inflation has averaged 2.8% over the same period. Throughout the Global Financial Crisis, NSW agriculture showed positive growth in land values, unlike other property investment sectors.

Analysis of Australian grain farms with gross turnover greater than $1 million shows that these farms outperformed,on a risk adjusted basis, Australian equities, Australian bonds and inflation between 1993 and 2017. Over the period, Australian grain farms with gross turnover greater than $1million generated annualised returns of 9.60% per annum. In comparison,Australian equities generated an annualised return of 9.50% per annum and Australian bonds generated 6.56% per annum. Furthermore, these grain farms exhibited lower volatility than the traditional asset classes, such as equities and bonds, over the same period, producing a more attractive risk/return profile.

Leave a Reply

Your email address will not be published. Required fields are marked *

Farmland Newsletter