Super investments in agriculture taking off

  • Agriculture investment in Australia should be a slam-dunk
  • Pension funds are beginning to consider agriculture investments
  • Consider the farm and the farm supply chain

Warren Buffet bought a 400 acre farm in 1996 and did quite well out of it. We are not saying run out and buy one to be like Warren, but this asset class might be worth a look and Australian superannuation funds are getting in on the farming game.

Stephen Anthony, Chief Economist at Industry Super Australia, says they are comfortable investing in agriculture because there are numerous options and the returns have been promising.

For retail investors, Stephen advises looking for partners who have a winning track record and consider ag funds both here and overseas.

Stephen Anthony tells Alan Kohler when considering agricultural assets, it’s important to look at the farm and the farm supply chain.


You’ve done a discussion paper on investing in Australian agriculture. What was the purpose of that?

It’s largely our trustees at Industry Super asking the question, what are we doing in agriculture and perhaps why aren’t we doing more, given that agriculture should be a slam-dunk comparative advantage for Australia. The answer to the first part of that is, well, we’re doing something. We’ve invested about $1.6 billion, this is industry funds, in the sector through time. That’s about 0.3% of our funds under management.

I understand that world’s best practice in this particular area is possibly around 0.5% invest in the domestic economy.

What do we mean by world’s best practice? Do you mean world average?

Yeah. In the past, pension funds, for example, have been somewhat reluctant to invest in real assets. Gradually, there’ve been pioneers in various asset classes. For example, infrastructure and property. The people, especially in North America, that are experts in farm, say that you probably want to allocate around 0.5% domestically and 0.5% internationally to the sector.

Do you mean investing in actual farms or are we talking about agricultural-based securities?

Either. It could be directly through farms or the supply chain, or it can be indirectly through some sort of agricultural fund.

As you say, it should be a slam-dunk for Australia. That’s the second part of your statement. But is it a good performing investment asset?

It is a little hard to ascertain that. We don’t have what you would call audit quality data available to assess the performance of the sectors, all the different commodities in agriculture. What we’ve got is more a broad-acre voluntary survey conducted by ABARES (Australian Bureau of Agricultural and Resource Economics and Sciences).

If you filter through that on farm size, you find that the large farms, the farms that institutions would invest in, the returns look quite respectable – in excess of 6% through time – 6% to 10%, that sort of thing. That looks reasonable. Anecdotally, we understand that a lot of the large family farm offices do a lot better than that, although we can’t really prove that.

You say in the discussion paper that historically, average broad-acre farms returns have been quite poor, around 1% to 3%.

That’s right. For the average, that’s exactly right. That reality and the fact that there have been some notable failures in the sector, at least perceived failures, in terms of institutions going into agriculture, you find that trustees are somewhat haunted by the asset class. They don’t really understand it, and they’ve heard bad things about it, and they have in their mind the soldier/settler farmer who’s struggling out there in the back blocks. In the absence of better information, they just stick with their preconceived notion.

You say that it may be possible to get returns in excess of 10% and you quote the example of Warren Buffett, who bought a 400 acre farm in 1996 and did quite well out of it. Do you think that there is a case for individual investors like Warren Buffett to buy farms?

Well, yes. If you think your way through the investment. If you think about it as firstly a property, and then as an agri-business, and you think about the potential for long-term returns there. The capital gains on your property plus the income that you might get, for example, leasing out the property. Usually you can find a way to make these things work.

What about the liquidity of the investment?

It depends on the scale that you go into the investment. It also depends on how the investment is operated, so what model that you put in place to operate it. It is true to say that the ag space is inherently riskier here in Australia than it is, for example, in North America, with a possible exception of California. But on the flipside of that, you’re paying less for the land that you buy in the first place. So it should be possible, through time, to manage return.

Your question about cash flow, that’s another issue. We would think that cash flow is in part determined by the kind of leverage you go into with the way you set up the balance sheet for the farm asset, and a bunch of other factors. You certainly need deep pockets if you’re going to do this right.

What sort of advice would you have for individual investors who are looking at going into agriculture? How do you think they should approach it?

I think they should partner with people who’ve made money in the past. Whether that’s ag funds based here in Australia or overseas, or whether that’s large family-based operators. It seems to me that the historical lesson that comes through agriculture is that people who try to set up from scratch and who don’t know the asset class get wiped out.

Really, it does seem that there are operators who make quite a good living out of agriculture and have been doing it for a long time. It’s bringing those operators to a new level of scale that may create an opportunity for institutions and individual investors.

How do you go about finding those funds?

There’s a range of agricultural asset advisories that can be contacted. If you do a little bit of homework, the information can be provided. Perhaps if you read our paper, too, we list a bunch of funds and experts who’ve helped us draft this thing up. These people would be great resources if people are looking to invest.

 

Great. Well, thanks very much for that, Stephen.

Thanks for the opportunity, Alan.

 

Read the report Driving super fund investment in agriculture here