Investing in Australian Agriculture - Farm & Resource Management
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Australian Business Forum helps Australian SMEs and businesses to understand the Chinese market and refine their China strategy. http://abf.events/ ABOUT THE PRESENTATION BELOW Australian Farm and Resource Management Pty Ltd is a specialist agricultural asset management company, catering to foreign investors looking to acquire medium to large-scale Australian agricultural farms and agricultural businesses. Agricultural investments provide an opportunity to realise stable, reliable and attractive returns, with comparatively low risk over the medium to long term, relative to other asset classes. Originally presented by Australian Farm and Resource Management at the Australia-China BusinessWeek 2015 Sydney
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Investing in Australian Agriculture - Farm & Resource Management
- 1. Investing in Australian Agriculture
- 4. Australia’s annual GDP growth rate
- 5. Global real estate transparency index 2014
- 8. Government debt as a percent of GDP
- 12. Farm Business Terms of Trade
- 18. Cumulative cash returns 2002- 2012
- 19. Return & volatility comparison
- 21. Sharp ratio caparison over 5 & 32 years
- 22. Correlation of Ag vs. other
Editor's Notes
- Who is AFARM? Australian Farm and Resource Management (AFARM), is a specialist agricultural asset management company, catering to foreign investors looking to acquire medium to large-scale Australian agricultural farms and agricultural businesses. AFARM advises and assists clients to source, secure premium Australian farm land and and manage a wide variety of agricultural businesses enterprises on their behalf. In the next 15 minutes I am going to discuss and attempt to show you that Agricultural investments provide an opportunity to realise stable, reliable and attractive returns, with comparatively low risk over the medium to long term, relative to other asset classes. It is becoming increasingly obvious that Australian agriculture is attracting growing investor attention, offering a high level of ownership security, coupled with internationally low farmland prices in a reliable and profitable sector. But before I tackle the discussion around the investment fundamentals of the agriculture sector, I’d like to touch on a number of macroeconomic factors that make Australia an attractive investment destination.
- Australia’s supports a robust economy, skilled workforce, strong governance, and investment-friendly business environment, making this country one of the world’s top destinations for foreign investment. Unsurprisingly, FDI inflows (Foreign Direct Investment), (as a % of GDP) is more than twice the OECD average. Australia has a AAA Sovereign Bond rating from the worlds three major agencies Moody’s, Standard and Poor's and Fitch. Here we can see a comparison of our standing inline with our major Asian trading partners.
- Australia offers a highly skilled workforce – one of the most educated in the world, with almost 40% of the population holding a tertiary qualification, and just under 2% of the population holding a doctorate (ranking us ninth in the OECD). Business friendly environment – According to the World Bank “Doing Business Report 2013”, Australia was the the fourth easiest place in the world to do business. As a result more than 18,000 foreign companies are registered in Australia, including 18 of the top 20 Global Fortune 500 and 8 of the top10 Fortune 100. Australia’s economy continues to perform well off the back of 26 consecutive years of uninterrupted GDP growth. In 2008, during the Global Financial Crisis (GFC) Australia was rated as the world’s most resilient economy, as published by the Institute for Management Development (IMD).
- For those of you wondering what happened over the next four to five years, well we still remain reasonably constant.
- Australia supports a highly transparent and secure real estate market. Rated by Jones Lang LaSalle Global Real Estate Transparency Index, in 2014 as the third most secure market in the world to buy and own real estate
- The outlook for the Australian economy remains buoyant as it continues to benefit from emerging market demand. With 3 people per square kilometer, Australia has one of the lowest population densities and highest per capita natural resource reserves of any nation in the world. As a comparison China has a population density of 141 people / km2, and India’s population density is 372 people / km2 With a number of other emerging markets at our doorstep, Australia is well positioned to take advantage of rising demand from these economies.
- Australia has one of the highest GDP per capita rankings in the world, compared to most other large economies.
- Our Government debt to GDP Ratio at less than 10% lower than most other large Western economies.
- Finally on the macro economic sphere, Australia also boosts an unemployment rate of 6% (July 2015), again amongst the lowest of many Western economies.
- Lets briefly examine Australian Agriculture. Here we have a measure, of Labour Productivity over 20 years, (i.e. change or increase in gross value, per hour worked) After just over two centuries of working in a relatively challenging environment, Australian farmers have arguably become some of the most efficient in the world, as a measure of factor productivity. Their achievements have largely been facilitated by a long-term commitment to agricultural research and development by the Australian government. With significant increase in real terms in Australian public investment into agricultural R&D, over the past 50 years, from AU$131 million in 1952 to just over 566 million today. As a result, this has allowed Australian farmers to enjoy significant ongoing gains in productivity and farm incomes. Here we can see, that farm labour productivity growth has been particularly impressive, having almost doubled over a 15 years period, compared to a drop of over a third of other resource sectors. This has been driven, primarily by the adoption of improved farming technologies and the increasing size of farms allowing greater economies of scale.
- Total Factor Productivity, over a 30 year period has seen an average increase of 1.6 % annually. This productivity gain reflects a long-term annual decline of inputs, averaging 0.6%, - coupled with an increase in outputs, averaging 0.8% per year.
- Australian farm productivity has shown a long-term positive growth, continuously exceeding the declining “term of trade”, typically seen by farmers around the world. As a result, the gross value of Australian farm output has displayed a long-term upward trend, one of the key indicators of farm financial performance.
- Investing in Australian Agriculture. Australian Agricultural investments have been, until recently, largely under-utilized as a form of investment diversification by institutional and sophisticated investors. This could be largely attributed to media reports of the plight of farmers “dealing with constant droughts, floods, natural disasters and financial hardship”, creating a negative image around agriculture in general. Here I have a comparison of broad acre farm performance measured as average annual returns. For ease of comparison, the different broad acre industry sectors, have been segregated as follows: (1) Wheat and other crops; (2) Mixed crops and livestock; (3) Sheep; (4) Beef; (5) Sheep and beef; (6) Dairy; and finally; (7) All broadacre, which is a catch-all for all of the above excluding dairy. The All Broadacre and dairy farms are responsible for managing over 90% of agricultural land in Australia, and accounts for an estimated 55% of the total value of gross agricultural production. For the remainder of this discussion, I have also splits each Agricutural sector into subsections of performance: Top 25%, and; The rest. Our view is, professionally managed farmland, well-resourced with capital and knowledge, whether family or corporate owned, ought to be represented in the Top 25% grouping. Currenetly this group is overwhelmingly family owned and operated. Furthermore, the top 25% should be the target market for corporate and foreign investor. This chart illustrates both the capital returns and the cash returns for the Top 25% of all Agricultural sectors over a 32 year period. As can be seen, average annual returns across all sectors have remained good, with “wheat and other crops” being the standout performer at 15.2% average return per annum, with a large component of that coming from the cash return. Average annual return from the dairy sector came in second best at 13%, with the major component of that also coming from the cash return. Looking at the All Broadacre category, the result is less robust, although still creditable, with an average annual return of 11.3%, over 32 years.
- This chart illustrates the progressive success of Top 25% of agricultural in contrast to ‘The Rest’, over the 32 year analysis period. It is clear that the Top 25% of farmers performed comprehensively better than ‘The Rest’ , with cumulative cash returns, climbing steadily, despite the impact of seasonal events and price volatility. Furthermore, ABARES the Australian Bureau of Agricultural and Resource Economics and Science predicts that increasing rates of new investment by the Top 25% is likely to support continued productivity gains and improve real farm cash returns over the long term.
- Here we segregate the All Broadacre category by financial performance, comparing the Top 25% to the ‘ The Rest’ - by definition, the Top 25% produce higher returns, however it is interesting to note that capital growth is remarkably similar for the best and worse performers (4.9% and 5.2%,Respectively;). This indicates that cash returns do not, of themselves dictate land prices. This information may provide considerable scope for astute land buyers the opportunity to generate strong cash returns
- Capital Returns Until recently Australian average rural land values have risen consistently for a period of 17 years displaying an annual average increase of 8.8%. Despite this impressive performance, Australian farm assets remain comparatively inexpensive compared to other markets around the world. Here we can see a comparison of rural land values, in US$, around the world based on a unit of annual production for a tonne of wheat. The average Australian rural land price has been calculated at US$950 per tonne of annual wheat produced. This value represents less than half that of our major competing export nations such as: United States at US$2,400 / tonne annual production of wheat; New Zealand at US$2,500 / tonne annual production of wheat; United Kingdom at US$2,575 / tonne annual production of wheat; Brazil at US$2,400 / tonne annual production of wheat
- How Does Agriculture Compare to Other Asset Classes? Overall returns are derived from two sources: capital growth and dividends or operational income, cash returns. A price index, such as the All Ordinaries Index, is a measure of changes in the underlying capital value. An accumulation index is a total returns index, taking into account both capital growth and annual distributions. Accumulation indices assume the dividends are reinvested back into the underlying assets. Changes in the capital value of a set of agricultural investments could be compared to a price index. When you add the income or dividends from farming operations, an accumulation index is created. For the purposes of this discussion, and to align Top 25% Agribusiness with other investment options, we have assumed that the cash returns from farming operations are reinvested in the underlying capital (property), but in reality this does not always occur. Here we have used the annual returns data from each comparative investment sector to assess the growth in value of $1,000 over 32 years, to produce an index for each asset class. The Compound Annual Growth Rate CAGR Assuming $1000 was invested on 30th June 1980, then; The All Ordinaries CAGR is 10.6%; International shares CAGR is 10.2%. Australian listed property CAGR is 10.1%. Agriculture had a CAGR of 9.5%. While bonds and cash came in after this.
- Over a much shorter time frame the results are quite different: Top 25% Agri delivered 6.0%. Bonds and cash came in second and third, at 5.2% and 5.3% respectively. The All Ordinaries delivered a mere 1.5%. International shares came fifth delivering -3.8%. Australian listed property came last with at -6.8%. Over this shorter period agriculture is the only asset class that provided a consistent return. This is despite ten years of drought, the Global Financial Crisis and fluctuating commodity prices. Only cash provided a similar level of stability, at a far lower rate of return.
- As we now, sophisticated investors will spread their risk through a range of different asset classes. They will also consider a balance of risk and return of each asset in each class. The highest returning assets are often accompanied by high levels of risk. And a major asset risk, is volatility. This chart compares the volatility of agricultural to the All Ordinaries over a 20-year period, with the All Ordinaries returning a total of 12%. In the same period agriculture provided a 25% return, performing 37% better than the All Ordinaries.
- This chart demonstrates the concepts of risk and returns measured as a standard variation, in each asset class against it’s Compound Annual Growth Rate over 30 and 32 years respectively. The chart shows that while Australian and international equities and listed property, produced higher returns than agriculture over the same period, these asset classes displayed significantly greater risk. It could be argued, that given the risk, investors should demand even higher rates of return from those assets than they have actually delivered.
- The Sharpe Ratio, The Sharpe Ratio can assist in understanding the more optimum assets for investment when considering risk and return together. Put simply, the Sharpe Ratio is a measure of reward to risk. Or more specifically, it is a measure of the risk free rate of return for an asset compared to its volatility. That is, from a risk/reward perspective, the higher the Sharpe Ratio value, the better the investment. A high Sharpe Ratio doesn’t necessarily mean the highest return or the lowest risk; rather it means that that’s the best you could have done when reward and risk were taken together The Sharpe Ratio clearly identifies the 10 year Australian Bonds and 90 day cash as the best performers particularly over the last 32 years. However, agriculture provided the highest risk free rate of return over the last 5 years, whilst returns for the more mainstream asset classes have suffered substantially over this period, probably as a result of the Global Financial Crisis. In fact, agriculture is the only asset class, which improved its performance during this period. (+0.15 when compared between the 5 and 32 year ratio outcomes).
- AGRICULTURES CORRELATION WITH OTHER ASSETS A correlation analysis helps investors choose which asset classes perform in the same way, and to what extent. A positive correlation value means that when returns for one asset class increase, returns for the other tend to also increase. A correlation value of 1 indicates that two particular asset classes are exactly linked. While a negative correlation value means that when returns for one asset class increase, returns for the other tend to decrease. As you can imagine well-performing but negatively correlated assets are the most useful for inclusion in investment portfolios, as they help to smooth overall portfolio returns. Here we can see agriculture shows a weak negative correlation to equities, both Australian and international, and a positive correlation to more stable asset classes and importantly, from a value preservation point-of-view, a positive correlation to inflation. Typically the extent to which risks can be diversified depends on the degree of correlation. Incorporating two asset classes into a portfolio which are negatively correlated will help to smooth out returns of the portfolio as a whole.
- Finally In conclusion, the best performing agricultural assets; provide stability, reliability and attractive returns with comparatively low risk over a medium to long term. And in fact, both international and domestic investors are increasingly recognising this in agricultural investments. Thank you.