Analysis: Foreign investors in
Australian farms; rash or prescient?
Published: Monday, 19 Nov 2012 | 7:28 PM
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CANBERRA/SYDNEY (Reuters) - For all the
willing buyers seeking tracts of
Australian farm land, local investors
are not among them. They wonder what all
the fuss is about.
Years of weak and volatile returns and
some of the harshest weather on earth
suggest a wave of foreign interest in
Australia's farms and agricultural
assets is on a fool's errand.
"Overseas investors are too dumb to
realise that they are not going to make
money out of Australia agriculture,"
said David Leyonhjelm, an Australia-
based agriculture consultant at Baron
Strategic Services.
He may have a point.
Australian farms' return on capital has
seldom exceeded more than 2 percent in a
year on average during the past decade,
excluding changes in land values,
according to government research bureau
ABARES. That is less than half the
return on stocks and less than a third
compared with bonds, figures from
Russell Investments suggest.
Although farm returns are volatile
anyway - owing to the vagaries of the
weather - the unpredictability of
Australian earnings is much greater than
in the United States.
In the past 30 years, Australia's net
farm income has experienced annual drops
of more than 40 percent on five
occasions compared to just once in the
United States, data from ABARES and the
U.S. Department of Agriculture shows.
Including capital appreciation,
Australian farm returns have been
outstripped by Africa and Brazil.
Australian farm debt has risen some 8
percent a year since 2001, almost double
the pace of U.S. farm debt.
Even when it comes to the weather,
Australia seems worse off.
It has the lowest and most variable
rainfall patterns of any inhabited
continent, due largely to the El Nino-
Southern Oscillation climate pattern
that periodically bakes much of the
country in hot, dry weather and
intersperses it with flooding rains.
"In recent history, Australia has seen
more volatility in agricultural farm
output than other major agricultural
producers," said Michael Creed,
agribusiness economist at National
Australia Bank. "In the past 20 years
alone, we've had a drought that lasted a
decade and when the drought broke, it
broke in massive way."
Despite the weak and volatile returns,
the explosion of the middle classes in
Asia is attracting more offshore
investors looking beyond immediate
returns to an expected long-term surge
in demand for high-quality food.
The UN Food and Agriculture Organisation
says the world needs to boost food
output by 70 percent by 2050 to meet
demand, a sobering statistic for highly
populated countries such as China, where
a major tenet of the Communist Party is
guaranteeing food security for its 1.3
billion people.
Chinese investors have been involved in
a number of high-profile farm deals,
including the purchase of the country's
biggest cotton farm, the 1,000 sq km
(390 sq miles) Cubbie Station.
Chinese entities are also in the running
for a large dairy operation in Tasmania
and a big irrigation project in Western
Australia.
U.S. firm Archer Daniels Midland <ADM.N>
last month made a $2.8 billion bid for
Australia's last major independent grain
handling company, GrainCorp <GNC.AX>,
spurring a 40 percent jump in its share
price.
Australia lacks comprehensive data on
foreign ownership but the government
says the vast majority of farms are
locally owned and that has not changed
much over the past 30 years. But spurred
by a number of high-profile foreign
deals, the issue has become politically
sensitive as the sector struggles to
attract much-needed investment at home.
Despite local skepticism at the
prospects for Australia's farming
sector, the increase in offshore
interest comes at a time when returns
have seldom been better and adds to
other evidence suggesting the foreign
investment may not be mistimed after
all.
Helped by generous rains and strong
global prices, Australian farmers may
have enjoyed the best year in decades in
2011/12.
"For the first time in more than 30
years, all states and all industries are
expected to record positive farm
business profits and rates of return,"
ABARES said in its 2011/12 annual crop
and livestock farm performance report.
Average farm cash income jumped to
A$117,3000 in 2010/11 from just A$59,470
the previous year, it said. This year is
forecast to remain a strong A$116,000 -
almost 40 percent above its real, long-
term average.
GrainCorp, the target of Archer Daniels,
last week posted a record profit of
A$205 million, boosted by a bumper crop.
It said the takeover bid failed to
reflect the promise of the business.
Some analysts say a global rush for
agricultural land is just beginning,
driven by increasing concerns over long-
term food and water security. With the
availability of suitable farmland
shrinking and productivity gains slowing
when populations are growing and diets
changing, supply/demand dynamics are
likely to be favorable over the next 40
years, an ANZ report says.
Another study, by real estate company
Savills <SVS.L>, identifies Australia as
having some of the lowest land costs for
wheat production in the world and
highlights the appreciation in farmland
values since 2002.
Shandong Ruyi Group, which bought Cubbie
Station, is taking the long view,
company adviser Ian Smith said.
"They are not dictated by the short term
and they also have a proud track record
of maximizing the assets over the longer
term," he said.
Underscoring the gap between the short
and the long view, Laguna Bay Pastoral
Co, an agricultural investment fund
advised by U.S. commodities trader Jim
Rogers, was forced to seek investors
offshore because of a lack of interest
in Australia.
"We were presented to most local funds.
Most Australian local pension funds
don't have agriculture assets
allocation," Laguna founder Tim McGavin
told Reuters.
"We have been forced to market to
overseas just because the general lack
of understanding and interest in
agriculture."
Laguna secured its main seed funding
from U.S.-based Global Endowment
Management, and now aims to buy and
privatize PrimeAg Australia Ltd
<PAG.AX>, an investor in rural property
and water assets.
Australia's vast pension funds industry,
sitting on $1.4 trillion and looking for
long-term diversified assets, has
largely shied away from the sector. Even
The Future Fund, Australia's $80 billion
sovereign wealth fund, has no direct
exposure to the country's agricultural
sector.
Still, Pauline Vamos, the chief
executive of the Association of
Superannuation Funds of Australia, said
interest in farm assets is picking up
after some ill-conceived and poorly
managed project had put off local
investors.
"You've had cotton farms built in the
middle of the desert, you've had timber
plantations built miles from any
infrastructure - these schemes were
never going to make any money," she
said.
Australian farms; rash or prescient?
Published: Monday, 19 Nov 2012 | 7:28 PM
ET Text Size Twitter
11
0
Share
CANBERRA/SYDNEY (Reuters) - For all the
willing buyers seeking tracts of
Australian farm land, local investors
are not among them. They wonder what all
the fuss is about.
Years of weak and volatile returns and
some of the harshest weather on earth
suggest a wave of foreign interest in
Australia's farms and agricultural
assets is on a fool's errand.
"Overseas investors are too dumb to
realise that they are not going to make
money out of Australia agriculture,"
said David Leyonhjelm, an Australia-
based agriculture consultant at Baron
Strategic Services.
He may have a point.
Australian farms' return on capital has
seldom exceeded more than 2 percent in a
year on average during the past decade,
excluding changes in land values,
according to government research bureau
ABARES. That is less than half the
return on stocks and less than a third
compared with bonds, figures from
Russell Investments suggest.
Although farm returns are volatile
anyway - owing to the vagaries of the
weather - the unpredictability of
Australian earnings is much greater than
in the United States.
In the past 30 years, Australia's net
farm income has experienced annual drops
of more than 40 percent on five
occasions compared to just once in the
United States, data from ABARES and the
U.S. Department of Agriculture shows.
Including capital appreciation,
Australian farm returns have been
outstripped by Africa and Brazil.
Australian farm debt has risen some 8
percent a year since 2001, almost double
the pace of U.S. farm debt.
Even when it comes to the weather,
Australia seems worse off.
It has the lowest and most variable
rainfall patterns of any inhabited
continent, due largely to the El Nino-
Southern Oscillation climate pattern
that periodically bakes much of the
country in hot, dry weather and
intersperses it with flooding rains.
"In recent history, Australia has seen
more volatility in agricultural farm
output than other major agricultural
producers," said Michael Creed,
agribusiness economist at National
Australia Bank. "In the past 20 years
alone, we've had a drought that lasted a
decade and when the drought broke, it
broke in massive way."
Despite the weak and volatile returns,
the explosion of the middle classes in
Asia is attracting more offshore
investors looking beyond immediate
returns to an expected long-term surge
in demand for high-quality food.
The UN Food and Agriculture Organisation
says the world needs to boost food
output by 70 percent by 2050 to meet
demand, a sobering statistic for highly
populated countries such as China, where
a major tenet of the Communist Party is
guaranteeing food security for its 1.3
billion people.
Chinese investors have been involved in
a number of high-profile farm deals,
including the purchase of the country's
biggest cotton farm, the 1,000 sq km
(390 sq miles) Cubbie Station.
Chinese entities are also in the running
for a large dairy operation in Tasmania
and a big irrigation project in Western
Australia.
U.S. firm Archer Daniels Midland <ADM.N>
last month made a $2.8 billion bid for
Australia's last major independent grain
handling company, GrainCorp <GNC.AX>,
spurring a 40 percent jump in its share
price.
Australia lacks comprehensive data on
foreign ownership but the government
says the vast majority of farms are
locally owned and that has not changed
much over the past 30 years. But spurred
by a number of high-profile foreign
deals, the issue has become politically
sensitive as the sector struggles to
attract much-needed investment at home.
Despite local skepticism at the
prospects for Australia's farming
sector, the increase in offshore
interest comes at a time when returns
have seldom been better and adds to
other evidence suggesting the foreign
investment may not be mistimed after
all.
Helped by generous rains and strong
global prices, Australian farmers may
have enjoyed the best year in decades in
2011/12.
"For the first time in more than 30
years, all states and all industries are
expected to record positive farm
business profits and rates of return,"
ABARES said in its 2011/12 annual crop
and livestock farm performance report.
Average farm cash income jumped to
A$117,3000 in 2010/11 from just A$59,470
the previous year, it said. This year is
forecast to remain a strong A$116,000 -
almost 40 percent above its real, long-
term average.
GrainCorp, the target of Archer Daniels,
last week posted a record profit of
A$205 million, boosted by a bumper crop.
It said the takeover bid failed to
reflect the promise of the business.
Some analysts say a global rush for
agricultural land is just beginning,
driven by increasing concerns over long-
term food and water security. With the
availability of suitable farmland
shrinking and productivity gains slowing
when populations are growing and diets
changing, supply/demand dynamics are
likely to be favorable over the next 40
years, an ANZ report says.
Another study, by real estate company
Savills <SVS.L>, identifies Australia as
having some of the lowest land costs for
wheat production in the world and
highlights the appreciation in farmland
values since 2002.
Shandong Ruyi Group, which bought Cubbie
Station, is taking the long view,
company adviser Ian Smith said.
"They are not dictated by the short term
and they also have a proud track record
of maximizing the assets over the longer
term," he said.
Underscoring the gap between the short
and the long view, Laguna Bay Pastoral
Co, an agricultural investment fund
advised by U.S. commodities trader Jim
Rogers, was forced to seek investors
offshore because of a lack of interest
in Australia.
"We were presented to most local funds.
Most Australian local pension funds
don't have agriculture assets
allocation," Laguna founder Tim McGavin
told Reuters.
"We have been forced to market to
overseas just because the general lack
of understanding and interest in
agriculture."
Laguna secured its main seed funding
from U.S.-based Global Endowment
Management, and now aims to buy and
privatize PrimeAg Australia Ltd
<PAG.AX>, an investor in rural property
and water assets.
Australia's vast pension funds industry,
sitting on $1.4 trillion and looking for
long-term diversified assets, has
largely shied away from the sector. Even
The Future Fund, Australia's $80 billion
sovereign wealth fund, has no direct
exposure to the country's agricultural
sector.
Still, Pauline Vamos, the chief
executive of the Association of
Superannuation Funds of Australia, said
interest in farm assets is picking up
after some ill-conceived and poorly
managed project had put off local
investors.
"You've had cotton farms built in the
middle of the desert, you've had timber
plantations built miles from any
infrastructure - these schemes were
never going to make any money," she
said.
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