Commodities Surge, Farmland Investment company for Canola & Lamb

Is it possible to have a perfect season for growing crops? Many people would say not. However, what has occurred in Western Australia over the last 12 months is as close to the perfect season you could have. As you would recall, the past couple of seasons have been quite dry in WA. In 2021, it was a different story, and unlike NSW, the rain stopped just before harvest allowing grain growers to harvest a near perfect crop of high quality grain.

Western Australia has been cut off from the rest of the world now for two years. The state and international borders have been closed to all visitors due to the pandemic. This has not had a negative affect on the state and last year the state posted a budget result with a $5 billion surplus. Western Australia is the only state in Australia not running a deficit. This is mainly due to the huge royalties the Government collects from the mining sector (particularly the iron ore industry).

Western Australia also exports most of it’s agricultural produce. With only a small population (with over 90% of the state living in Perth), Western Australia is truly a mega commodities state.

Harvesting on Big Pond

Rainfall impact on Farmland Investment

As mentioned in previous reports, our farms are based in south west Western Australia which has a predominately winter based rainfall. Occasionally, it can become too wet in winter causing damage to crops. Our two farms, Big Pond and Bella Vista, probably did get a little too wet during winter causing damage to crops. Because Bella Vista is predominately used for livestock production for this reason, it’s not such a problem. However, the crops on Big Pond were negatively affected by too much rainfall.

However, Glen Idol and The Grange experienced their best harvests in decades. Gross margins of over $1000 a hectare were common place and at this level, farmers are making huge profits.

The below table is the rainfall for Jacup which is the small town near Big Pond. It shows how after a series of dry seasons, 2021 was a year to remember.

Insert table

Commodities Surge

This year’s stand out performer was canola. A dry year in Canada (the worlds largest canola producer) meant there was a shortage of canola which pushed prices higher.

Australian canola growers were in a perfect position to take advantage of this situation. With many growers producing their highest yielding crops ever (averaging 3 tonnes to the hectare or better), record gross margins were blown out of the water. Some growers recorded gross margins over $3,000 a hectare. At these levels, farming is very profitable.

Wheat yields were also excellent with many growers averaging 6 tonnes to the hectare which would be double the historical average. Unfortunately, most of the wheat was downgraded to feed quality due to rain at harvest. However, even feed wheat prices are at good levels resulting in many growers achieving gross margins of around $1,500 a hectare.

On the livestock side of the equation, sheep and lamb prices remained solid. At around $8 a kilo, meat production is very profitable.

The below graph shows that the beef price has steadily increased over the last 3 years

Cattle Prices per Kg

Lamb Prices – Farmland Investment

Sale of Glen Idol Farmland

Late in 2021 we were approached by an agent regarding a corporate investor who was looking to acquire a holding in the Pingrup area. We were not particularly looking to sell Glen Idol, but thought the opportunity to take advantage of the very strong market was too good to pass up. We entered into a period of negotiation and ended up arriving at a price of $8,920,000. We believe this is an excellent result given we only purchased the property in 2018 for $4,000,000. The market in Western Australia has jumped in the last six months due to the excellent season. The purchasers of Glen Idol are a well known Australian cropping entity called Warakirri. They are one of the largest cropping entities in the country and are funded by pension money

We do not anticipate selling any more farms in the near term.

Farmland Financials

We did not adjust price assumptions for our farms last year. Western Australia is still cut off from the rest of the world. Based on the Glen Idol sale we are now increasing price estimates for our three remaining farms by 70%.  This is still conservative in light of the achieved price of Glen Idol. Our accountant will calculate a share price based on these numbers.

A price increase from $4 million to $8.92 million within three and a half years equals a yearly appreciation of about 25.5%. Additionally, we received 5% lease payment. Together this adds to about 30% per annum. This extremely high return from a low risk farmland investment convinced us to accept the offer from the buyer.

Besides the yearly interest on your shareholder loan we will amortize a part of these loans. The debt linked to the Glen Idol farm is about $3 million. This will be paid back to the investors together with the interest. Once we receive the annual financial report, the company will pay a dividend to shareholders. This can be expected in early August.  It will be a significant payment of about 80% of the nominal value of $1 per share.

Silo bag full of grain on Big Pond

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