Farmland investment returns & performance

This time last year we looked back at 2020 and said we would never have a year quite as good………….and then along came 2021. A combination of surging commodity prices, bountiful rainfall, and record low interest rates ensured 2021 has become the new benchmark to which all Australian agricultural seasons will be compared.

The only disappointment was the record amount of rain in November which resulted in the downgrading of much of the east coast wheat crop.

In December 2021 the Department of Agriculture’s Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) forecast the gross value of agricultural production to reach a record $78 billion this financial year.

“The combination of factors leading to this record forecast are unprecedented,” said ABARES economists Andrew Cameron and Charley Xia. “Exceptional seasonal conditions in Australia have been widespread. Production is forecast to increase year on year for every major livestock commodity and almost every major crop commodity – the first time in at least 50 years that production will increase for so many products at once.”

The ‘perfect storm’ for Australian farming has resulted in another large increase in the value of farmland.

Farmland 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

Glenowen Farmland sales result

As you have already been informed, we sold Glenowen in September for a very pleasing price of $10,130’685 which equates to $4,590 an acre. This was a much better result than we anticipated. There were 7 keen parties bidding on the property and in the current bullish climate, they continued to push the price higher and higher. A local farming family were the eventual successful party. There were no corporates bidding on the property – all parties were farming families. The purchase was funded by debt.

We bought Glenowen around ten years ago for $1’200 per acre. The increase in price equates to an IRR (internal rate of return) of about 14% per annum. Additionally, we received 5% lease yield. This brings the total IRR to about 19% per annum over the holding period. We regard this an outstanding result for an unleveraged, low risk investment in real estate.

We believe the gradual selling off of the portfolio remains a sound strategy. It is tempting (when prices are rising strongly) to hold off selling in the hope of higher prices next year. Of course, prices may be higher next year but they may also be lower. Perhaps we have a contrarian view and whilst others are keen to increase debt, we are not afraid to hold cash.

Also, we have recently seen a huge increase in the cost of chemical, fuel, machinery and fertiliser prices. The cost of fertiliser has more than doubled in the last 6 months. If we have even a small increase in interest rates, and not such a great season in 2022, then the current confidence in the agricultural sector could quite quickly erode.  

Photo of bogged harvester during the recent very wet harvest.

Current Seasonal Conditions for farmland

It is hard to believe two years ago, Australia was in the grip of a bushfire crisis. Today, you would be lucky to start a fire even if you wanted to. We are in the middle of a La Nina event which means we are receiving above average rainfall.

Dams are full, summer crops are looking magnificent, and stock feed is plentiful. There is plenty of soil moisture for the 2022 winter crop.

Angus has updated his estimates of current values. These numbers are rather conservative. Our accountant will calculate an updated share price based on these new estimates at the end of the financial year.

Financials for farmland

We will use the current large cash coffers in the following way. End of June we will pay the annual interest on the shareholder loans. Together with this payment we will amortize the shareholder loan linked to Glenowen, which amounts to a bit over 2 million or about 27% of current outstanding loans. After we have paid the corporate tax on the capital gain we will pay out a dividend. The dividend per share will be higher than the nominal $1, which you have paid per share.

The next farm on the selling list is Waverly Park. The lease ends in 2023. We intend to sell the farm at the end of the lease.

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