WITH recent reporting of the substantial acquisitions by Canadian, US, Chinese, Qatari, Singaporean, British and Dutch interests, one could be forgiven for believing that virtually everything of value has been snapped up already, and Australia is just someone else’s farm.
Driven from both the 'loony left', the 'loony right' and the paradox of the right wing agrarian socialist, I would suggest the noise is a long way from the truth: foreign investment in farmland is not just a good thing; it’s a historical fact and a boon for the farm sector.
Over the last 30 years to the 30th June 2010, the top 25 per cent of farmers in Australia have done very well. They have achieved a compound annual growth rate (CAGR) of 9.8pc with volatility of about a third of that of the All Ord’s Accumulation index – which returned a CAGR of 11.1pc.
The last 12 months have not been good for the All Ords – but they have been generally excellent for farming. Over the last five years, the Australian Agribusiness Group (AAG) – for whom I work – has achieved an average annual return of 9.4pc for its investors in farmland – about three times better than the average return delivered by Australia’s super funds – 3.4pc.
Farmland is not just negatively correlated to equities, it buffers a portfolio against the effects of inflation, it reduces portfolio risk and it smooths returns.
These are facts, not conjecture. This is why international investors, already long in agriculture in places like South America, the USA and central and eastern Europe are looking to safe, predictable first world agriculture in Australia.
Overlaying their concerns over financial instability which will take many years to correct, are the macro factors impacting demand and supply for agri commodities, such as population growth, wealth and dietary change, urbanisation, water shortages, declining R & D expenditures, biofuel demand, under scale and undercapitalised farms to name a few.
There is also the inescapable fact that “if you don’t eat, you will die” – which is a vital personal and regime motivator. The impact is that serious investors are making allocations to the security of what one US hedge fund manager calls “gold with a coupon” – farmland.
Australian super funds are ridiculously under invested in the Australian farmland space. The best estimate of the total invested by Australian super funds in Australian farmland is around $500m – that’s about 0.04pc of the roughly $1.3 trillion of funds under management.
One pension fund in the USA has about $2b invested in world agriculture (about $350m invested in Australia) – out of their $450 billion funds under management.
Historically (or hysterically) speaking
The idea of stopping foreign investment in Australia is a bit rich – coming from a generally white, privileged asset owning class.
Australia has already seen wave after wave of foreign investment. The English and Scots… then Americans (beef and cotton), South Americans (cotton, beef, crops), New Zealanders (dairy and more recently dairy processing)… more recently more Brits (pastoral beef), more Americans (cropping, timber), Canadians (timberland, wheat, barley), Singaporeans (almonds), Germans (mixed farming), Qataris (grazing and cropping), Chinese (sugar milling, mixed processed foods), Japanese (beer), Philippine investors (beer)… These are just a few of the nationalities taking a stake in “our farmland”.
The noise however is not really emotive until it becomes borderline xenophobic: for some reason, Canadian, British, American and New Zealand investment in Australian farmland is considered “OK” – but Chinese and Qatari investment is “opportunistic”, “overvalued”, “strategic” and “dangerous”.
The purchase of around 250,000 hectares (that’s over 600,000 acres) of timberland by a Canadian pension fund raised barely a ripple – but 15,000 hectares of farmland by Qatar in Western Victoria was called a “land grab”.
There is a fine line between historical appreciation and hysterical jingoism: isn’t the real point what is actually being done with this land?
The realities of foreign investment in farmland
When the left and right wing agrarian socialists rail against foreign investment in farmland, pointing out a few facts won’t convince them, but it may encourage them think. Here are a few realities:
Farming is not “single use” like mining. Sensible and commercial land owners (and professional investors are both these) want long term returns, and invest in productivity. You get one hit at a mine: you can farm for ever from well managed land. They can’t take it away: whoever owns the farmland, they can only take the produce away, not the actual land. Compare that to mining. Farming is sustainable – and it can even be green. Yes, trees can grow on farms, and they can even grow again. Soil can capture carbon…there is a massive amount of work being done by progressive farmers (including foreigners) to support sustainable and profitable agriculture. See also point one above. Foreign investment usually demands better returns, higher degrees of professionalism and more consistent return on investment: that all creates jobs – better paying jobs, and skills that can be transferred to other farms. “They will take the produce back to their countries and Australians will starve”. Australia is the number one exporter of wool, the number two exporter of beef and lamb, the number four exporter of wheat, number five in cotton, sugar, barley… foreign investors take a position in commodities that Australia has a competitive and sustainable advantage in, and where there is a surplus for export. These “foreigners” already take (buy) our produce… is anyone sensibly suggesting that we should not export to them? If these investors took the produce at “farm gate” and not at the “wholesale” level – who misses out on a cut? Maybe the export agent – unless the importer is not already dealing directly.
“There will be no family farms left”. Some foreign investors don’t buy land and run it themselves. They lease it to family farmers for a fixed rental return. Those farmers in turn get scale, better machinery utilisation, a known cost structure at less than the cost of borrowing. Not only that, but they make a better return on capital employed than borrowing to buy land. If “foreign investment” is not welcome for farmland – what next? Billions are invested in the shares of Australian companies, in mining, food processing, manufacturing… should this stop too? How far do you wind the clock back – till we only had British Empire sourced investment? It’s a nonsense with the commercial equivalency of a Hugo Chavez policy.
In the absence of a real alternative, foreign cash is the only viable option. In many cases, foreign cash simply cannot compete with family farms for sales in the $1 to $5m range. But in the range of $20m plus, “family farmers” are rarely seen. What is seen is the highly professional, corporatised family owned farming business, successfully competing head to head with all comers.
Where are the Australian Investors?
There are some professional and institutional investors in Australian farmland. They are dwarfed by the current level of foreign investment. Superannuation funds in particular have relied on advice from asset consultants who either don’t understand this space, don’t want to understand this space or have undertaken sloppy, superficial and out-dated research into the opportunity.
It beggars belief that international pension funds can invest billions into this sector, but the local fund managers remain unconvinced. It beggars belief that an average return of 3.4pc over the last five years can be seen as reasonable whilst an investment in farmland is considered to be risky.
It beggars belief that an asset class which is fundamental to human existence can be seen as “alternative” and that a tangible asset with real cash returns cannot be seen as warranting investment to protect the superannuation savings of 15 million Australians.
There is no doubt that Australian fund managers will wake up to the opportunity at their doorstep. They will come to the collective (and therefore safe) view that farmland is the place to be, and direct significant allocations of capital to chasing the diminished pool of quality assets.
That in turn will drive up land prices in key regions and in turn pressure cash yields… which will then validate the thesis that agriculture doesn’t offer good returns.
Meanwhile, some of those prescient foreign investors will have sold out and made significant capital gains, paid their taxes and will be sitting back waiting for the inevitable swing back to a buyers’ market.
But the smart money always has an allocation to agriculture – diversified, well managed, locally engaged and extremely successful. Because it’s real and because if you don’t eat, you will die.
Marcus Elgin is the Executive Chairman of Australian Agribusiness Group, which buys and manages farmland for domestic and international individuals and institutions.
Email a friend