Agricultural investing for long-term investors

With a global population of seven billion, which is expected to grow to nine billion by 2035, the United Nations expects demand for food to grow 70% by the year 2050.  In addition to population growth, the rise of the middle classes in Asia are changing diets, with greater demand for more high protein foods such as beef, lamb, fish and dairy products.  Further adding to food supply issues, land in many emerging countries is being converted from growing crops into other uses such as housing.

For long term investors, the potential for an agricultural resources boom means investors are looking for opportunities to invest in agriculture assets in Australia and overseas.  Investment projects include investment in livestock (i.e. ownership of sheep and cattle for fattening and on-sale), grain and rice production, aquaculture, dairy herd and poultry investments, land remediation, orchards and cotton production as well as water rights.  Investments can include freehold or leasehold ownership of farming land, ownership of agricultural inventory (i.e. crops, herds etc.) or a combination of both.  Investments can be pooled into a trust or company or involve separate fractional ownership of farming land and crops.  These agricultural investments tend to be more focused on food production with shorter investment time horizons than the longer term forestry, almond and wine investment schemes of the past, which were often based around tax-deferral benefits.

With many farmers being capital constrained due to tighter lending conditions, bringing in third-party investors to fund land and livestock purchases or seasonal capital requirements can represent an attractive partnership opportunity between farmers and investors.  For farmers it can be a less risky proposition than incurring debt from a bank, particularly as weather conditions and fluctuating commodity prices can mean that farm incomes can vary significantly from year to year.

The introduction of professional investors, investment managers and fresh capital can also benefit farm productivity as these professional managers are able to bring new farming techniques and technologies to the farm owners to improve yields and lower production costs.  For example, farms that are capital constrained may not be able to afford the latest crop planting and seeding machinery which uses GPS guidance and mapping systems to plant rows of crops closer together to increase crop yield and reduce planting costs.

Some of Australia’s largest superannuation funds have invested in agriculture and one of the attractions to institutional investors is that exposure to agricultural commodities helps provide a hedge against inflation, in addition to the potential for attractive long term returns that come from agricultural production and land ownership.  As the yields from agricultural land improve with the use of technologies such as genetically-modified crops, drones and robots and better fertilisers, the agricultural land prices rise in value generating capital gains for land owners.

Investing in agriculture is not without its risks and it’s been described as akin to running a factory without a roof – subject to weather patterns including droughts, floods, frosts and plagues as well as fluctuations in prices of both outputs (i.e. produce prices) and farm inputs such as diesel fuel, fertiliser and pesticides, stockfeed and irrigation costs.

            

                                             

 

Important notice

This article is prepared for information purposes only. It does not purport to contain all matters relevant to any particular investment or financial instrument, or to a general investment approach.

This article contains general advice only. It does not take into account your investment objectives, financial situation or particular needs.  You should consider whether this advice is suitable for you and your personal circumstances.

JBWere Ltd (‘JBWere’) and its related entities distributing this article and each of their respective directors, officers and agents (‘JBWere Group’) believe that the information contained in this article is correct and that any estimates, opinions, conclusions or recommendations contained in this article are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of any estimates, opinions, conclusions, recommendations (which may change without notice) or other information contained in this article and, to the maximum extent permitted by law, the JBWere Group disclaims all liability and responsibility for any direct or indirect loss or damage which may be suffered by any recipient through relying on anything contained in or omitted from this article.  JBWere Group may provide investment recommendations, market commentary or trading strategies to clients reflecting opinions that are contrary to the opinions expressed in this article, or that are inconsistent with the recommendations or views expressed in this article.

This article may contain information based on JBWere’s understanding of taxation and other laws. JBWere does not hold itself out as providing professional taxation advice. You should consult with your professional taxation advisor before acting on the information or data contained in this article or contact a financial advisor if you require further assistance.