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Published 15 October 2012 11:06, Updated 18 October 2012 00:51
Australian agricultural assets are highly prized by foreign companies but remain out of favour with locals.
Investors are wary because of poor performances by some agricultural companies, due in part to extreme climatic conditions.
The small amount of options on offer for retail investors also limits the sector’s appeal. But commodity price forecasts and a rise in foreign investment suggest that savvy investors should consider increasing their exposure to agriculture as a way of achieving long-term growth.
The sale of Australia’s biggest cotton producer, Cubbie Station, to Chinese interests in September was the latest of several big sales to Asians investors on the lookout for exposure to Australia’s rural sector.
Unlike Cubbie Station, many of the recent sales have related directly to food production.
Chinese-owned Pacific Andes Resources Development acquired 22 per cent of Australian Securities Exchange-listed salmon farmer Tassal Group late last year (its stake is worth about $45 million) and earlier this year, Thailand’s Mitr Phol Sugar completed its acquisition of Queensland’s MSF Sugar in a deal worth at least $310 million.
Cashed-up foreign entities have good reasons for investing. A report by the United Nations Food and Agriculture Organisation suggests that the global population will rise by about 2 billion in the next four decades to reach 9 billion people in 2050.
“Income levels will be many multiples of what they are now,” the report says.
“In order to feed this larger, more urban and richer population, food production (net of food used for biofuels) must increase by 70 per cent.”
Meeting the higher demand won’t be easy. A reduction in cropping land and a rise in the costs of production suggest that soft commodity prices will rise sharply over the long-term.
The Sri Lankan-based International Water Management Institute suggests that global water shortages will be acute by 2030 and this will put further strain on major irrigators. When demand rises and supply falls, prices inevitably rise strongly.
US investor Jim Rogers outlined his view on where the world’s next boom will come from in the Economic Times earlier this year.
A well-regarded financial commentator and a co-founder of hedge funds with billionaire financier George Soros, Rogers is extremely bullish on food. “Agriculture is going to be the big thing in the next 20 years,” he said in May.
“The best thing you can do is to become a farmer, that is where the money is going to be made.
“It has been a disaster for the last 20 years, but farmers are going to be driving [Lamborghinis] in the next 20 years, stockbrokers are going to be driving taxis. The smart ones will learn how to drive tractors so they can work for the smart farmers.
“Anything to do with agriculture – seeds, tractors, fertiliser, water – is going to be extremely profitable over the next 20 years.”
The executive director of the Australian Farm Institute, Mick Keogh, says making money off the land is a difficult game but one that can be highly lucrative.
“The better-performing end of agriculture has consistently returned 10 per cent or better on investment, right through the last drought,” he says.
“The performance of the sector has been very good over the long term but the Australian investment community is used to shorter-term investments, which comes out of their engagement with the sharemarket.”
The high exchange rate, high labour costs (compared with most other countries) and drought conditions have hampered the sector’s financial performance, Keogh says, but a failure to understand the sector has also contributed.
“There is a different risk profile to other investments,” he says.
“There is a very solid return over the long term but quarter-to-quarter results aren’t always predictable.”
Short of starting your own farm, there is a relatively small number of ways to invest in agriculture.
Exchange-traded funds allow for investment in commodities or bundles of commodities, however they can involve high levels of risk.
The sector’s inability to offer steady growth on a quarterly basis means that there aren’t many agricultural companies listed on the ASX.
Farms, even very large ones, are often privately owned. Several of the wealthy families on the BRW Rich 50 Families list own rural assets, including beef farmers the Kidmans (with a net worth of $395 million) and McDonalds ($385 million).
Among those companies open to investors are Australian Agricultural Company, which is in beef production, and PrimeAg, which buys rural property and water entitlements.
Some companies, such as Incitec Pivot, which makes fertilisers among other things, offer indirect exposure to the agricultural sector.
One of the strongest performers over the past year has been GrainCorp. Research analyst at Deutsche BankDominic Rose has a “hold” rating on GrainCorp and notes its attempts to provide more consistency in earnings by broadening its operations away from being a pure grain storage company.
“The grains infrastructure business is inherently volatile, susceptible to drought, extreme weather and pests,” he says.
“Consequently, [GrainCorp] has looked to diversify earnings via acquisitions, firstly into malt processing and now into the edible oils sector.”
GrainCorp, which has a market capitalisation of $2 billion, has recently acquired two edible oil businesses for $472 million. On October 9, its shares closed at $8.88, up 25 per cent over the past 12 months.