Agribusiness springs back

Sitting in his office in Colac, in Victoria’s Western District, livestock and rural property broker Michael Stewart has never had it so good. While vast stretches of Australia from West Queensland to not-so-far-away central Victoria are still waiting for the drought to break, Stewart's territory – the rich pasture lands that stretch from Colac across to Mt Gambier in South Australia – are thriving.

“We’ve got about 30,000 hectares in orders. Mind you, by the time this goes to print that could be 40,000. That’s genuine, qualified demand,” Stewart says. Considering that the average commercial farm in the area is little larger than 1000 hectares, that’s a lot of land.

The fourth-generation manager of the Colac-based Charles Stewart & Company has seen a surge of investor enquiries since the middle of last year. “Interest has come from a combination of Australian-owned companies, international companies and individuals from Melbourne and other capital cities.”

A few years ago the term “agricultural investment opportunity” would raise eyebrows. Thoughts of drought, a demographic flight from the bush, emu farm schemes and low commodity prices meant investment in this sector was often tax-driven and invariably speculative.

Yet the bush is certainly back. Despite a bearish sharemarket, tougher credit conditions and an increasingly moribund economic outlook, pundits are saying that Australia’s agribusiness sector – particularly in “rain safe” territories such as Stewart's – are set to benefit from not only a soft commodities super-cycle but a wave of investor interest: This will be a concept pleasingly familiar for those who have benefited from the mineral resources.

A hungry world

With the growth of the middle class and urbanisation of emerging markets – especially those of China and India – Western-style tastes are now demanding a greater variety of vegetables, dairy products, meat, fish and processed foods.

China’s food price inflation is indeed at critical levels and at the opening of the country’s annual session of parliament on March 5, Chinese Premier Wen Jiabao said his government’s top priority is to halt the rise of basic goods prices.

General population increase and urbanisation in other developing economies, such as India and South-East Asia, will also keep food demand growing strongly. In its March quarter report, ABARE, the Federal Government's leading agricultural research agency, credits Asian emerging markets as the key driver for Australia’s strong soft commodities outlook, despite a general easing of the global economy.

Climate change is another driver. Although the increased risk of drought or long-term adverse weather patterns could significantly hurt prospects in some parts of Australia, other areas will enjoy increased rainfall.

Investing in the trend

In the end, successful agricultural investment comes down to good management of the best land: “Good multi-use land, able to support different types of crop or livestock, will always have good value,” says valuer and agricultural economist Sam Paton.

A Eureka Report article last year discussed the surge in international buyers for Australia’s relatively cheap rural property (see Magnetic south). Despite recent rising prices, the international market for both income-producing agricultural properties and capital-gains oriented “lifestyle” properties is still hot in 2008.

Rabobank’s internationally distributed Australian Agriculture in Focus report is believed to be contributing to a new wave of overseas interest. “2008 could be a year to remember for Australian agriculture,” the world’s biggest agribusiness lender says.

Paton adds: “Australia offers stable politics, a strong quarantine environment and tax laws that are friendly to property development.”

Wealthy British investors, like one London merchant banker Paton advised, have been eyeing Australian farm property to avoid paying UK death duties. British law exempts foreign farmland from inheritance tax.

“Even though land values are very high at the moment, canny people around the world are investing in Australian land,” Paton says. Such canny people include those placing orders with Michael Stewart’s brokerage.

Demand driven

So who's investing? “Demand is driven by concern of where people are going to park their bucks, but also optimism as far as the agricultural economic outlook for the foreseeable future,” Stewart says.

“Australia, in my opinion, is set to become the food bowl of Asia, particularly China. We’re looking at land values that have gone through the roof but I think it’ll continue, based on demand from Asia. They’re saying that by the year 2020, by the way China is going, and by the way their appetite is developing for wheat, that they could consume potentially the world’s supply of wheat.”

Demand in China for meat and dairy products is also bullish, Stewart says. “I really think Australia's agricultural sector is set to go to another level. We talk to some of these people who enquire and end up selling property to and they say that in their opinion that good Australian agricultural land is still some of the cheapest in the world.”

But Stewart says land in the Western District is not only cheap, but valuable. “We’ve seen dramatic rises in the level of land values in this part of the world over the past five years. The area is so versatile.

“Apart from last year, being the worst drought in 100 years, we don’t know what a drought is. In time gone by, in the 1982 and 1967 droughts, some of the farmers in this part of the world had one of the best seasons they could ever remember, because we’re in such a secure rainfall belt.”

Many items on the menu

Owning a farm directly may appeal to some, but ASX-listed companies offer exposure to production margins and commodity price changes with the advantage of liquidity and a lower price hurdle. Companies range from the poorly performing Australian Agricultural Company, which herds beef cattle across seven million hectares of Queensland and the Northern Territory, to the highly successful Warrnambool Cheese and Butter Factory, which produces dairy products in south-west Victoria.

One of the more recent agricultural companies to list on the ASX is PrimeAg Australia, which is notable for its exposure to a diverse range of commodities in cropping and livestock (for a more detailed profile, see Soft commodities, hard sell). Headed by prominent businessmen Peter Corish and former Woolworths supremo Roger Corbett, PrimeAg was established to take advantage of soaring commodities prices and select good land, some with attached water entitlements.

Other listed companies in the sector include Tassal Group, producers of Tasmanian salmon, and Select Harvest, an integrated almond grower. The wheat distributors, ABB Grain, AWB and Graincorp are also prominent, although their price/earnings ratios reflect poor crops in recent years with high price outlooks. More companies are tipped to list, including dairy conglomerate Fonterra, which could become New Zealand’s largest listed company.

Name	ASX	Price*	52 week low	52 week high	P/E
Australian Agricultural Company	AAC	$2.92	$2.35	$3.60	194.7
ABB Grain	ABB	$8.80	$6.78	$9.65	179.6
AWB	AWB	$2.38	$2.02	$4.38	34.5
Futuris Corporation	FCL	$1.75	$1.75	$2.83	13.5
GrainCorp	GNC	$11.85	$8.85	$14.12	-
Gunns	GNS	$2.94	$2.68	$3.93	13.1
Great Southern	GTP	$1.46	$1.45	$3.04	6.4
Incitec Pivot	IPL	$133.90	$43.67	$174.01	32.9
Nufarm	NUF	$15.52	$11.80	$17.52	18.6
PrimeAg Australia	PAG	$1.57	$1.55	$1.89	-
Ridley Corporation	RIC	$1.04	$0.98	$1.33	13.2
Select Harvests	SHV	$6.60	$6.57	$11.81	10.8
Tassal Group	TGR	$2.25	$2.10	$4.44	16.7
Timbercorp	TIM	$1.10	$0.80	$2.32	4.8
* Close on Monday 17 March 2008

Currently there is no ASX classification that allows investors to track the sector, but the Commonwealth Bank has launched an Agribusiness index to plug the gap (see Agri stocks flourish for more). The CBA’s index consists of 15 equities, including indirect but rural focused stocks such as fertiliser giant Nufarm Pivot, grain handler AWB and rural conglomerate Futuris Corporation. The index also includes forestry groups, which may not produce food, but for which many of the same macro-economic pressures apply. Compared to the ASX 200 since December 31 last year, which effectively dropped 18% to March 14, CBA’s Agri index surged ahead to add 12% in value.

Here come the fund managers

With a strong macro-economic outlook and high hurdle rates for investment it is no surprise that specialist fund managers are arriving on the scene.

The traditional fund managers in agriculture are managed investment schemes (MIS), with listed plantation operators such as Timbercorp and Great Southern predominant (see Why I invest in trees, and Why I don't invest in trees). But although there are tax advantages in investing in agribusinesses, newer funds are keen to be differentiated from the MIS industry, which has seen more than its share of shonky operators.

“This is nothing like those schemes,” laughs Craig Swanger, head of alternative assets for Macquarie Global Investments, when describing one new fund being reviewed by the bank.

The unlisted Australian Primary Producers Diversified Agricultural Group this week opened an offer to raise up to $150 million (the offer for a minimum of $20,000 in stapled securities closes on April 14). Marketed by Australian Primary Producers, the fund focuses on specific operations where synergies can be created and risks spread.

“People want exposure to farms, rather than commodity funds; exposure to real farming profits, rather than commodity price movements,” Swanger says.

Headed by ex-Macquarie banker Andrew Skidmore, APP’s fund has been two years in the works. “We’re a closed fund. We’re not walk in, walk out. We’ve spent the better part of two years reviewing who the best operators are and we want to keep these people in the business. You don’t want to lose their expertise,” Skidmore says.

APP’s focus is existing businesses with strong track records. Their prospectus lists two major investments – Moore Park, a large piggery in the NSW Riverina, and Angle Dairy, one of the biggest operators in Australia, where 2000 cows are milked three times a day.

Skidmore says tax incentives are not built in. “Tax incentives would illegitimise what we’re doing and that would certainly scare off investors. We’re not relying on deductions and we’re very keen to differentiate ourselves on that basis.”

He does admit, however, that this new style of fund would not have been popular not too long ago. “Even six months ago it would have been hard to get traction, but people are now looking for alternative investments given the market’s volatility.”

The unlisted Macquarie Pastoral Fund has a similar long-term agenda, although its mandate is limited to livestock production. Launched in mid-2007 after a successful fund raising it may have come slightly early to the party, but prospects look good for 2008. The fund announced this week that it was increasing its landholdings along the eastern seaboard to capitalise on expected improvements in conditions.

"While 2007 had presented some challenging agricultural conditions in some parts of Australia, the prospects of higher rainfall throughout 2008 were already materialising with good falls already experienced so far this year in eastern Australia," according to Macquarie Pastoral director Tim Hornibrook.

Beyond the retail and private wealth markets, institutional fund managers are also warming to agribusiness. Frank Delahunty of the Australian Farms Fund has a background of introducing superannuation funds to agriculture and is currently seeking to raise $200 million for investments across cropping, horticulture and livestock and, like APP, Delahunty has been working on creating a new fund for several years.

“It certainly takes time. A year and a half ago there wasn’t the interest, but macro changes over the past six to eight months mean that now a lot of funds are talking about agriculture.”

Unlike overseas investors – who form the majority of Macquarie Pastoral’s investors, for instance – Australian super funds are relatively latecomers to the agriculture game.

“There are super funds in America that have been in Australian agriculture over the past six years, but Australian funds have been slower.”

Not everyone is sold on the merits of going through the fund managers. “Smart investors tend to buy properties with scale and spend money on the right advice,” Paton says.

“Direct investment is always better than the trusts, because those investment vehicles have to outsource all their expertise and they still want to take a large margin off the top.”

Indeed, the emerging boom in agricultural funds could be a repeat of the 1980s, when groups such as Kerry Packer’s Consolidated Pastoral paid top dollar for vast areas across Australia.

Individual investors should do their homework before deciding on a method of investing in soft commodities, and business fundamentals apply on a case-by-case basis regardless of wider macro-economic trends. Either way however, it looks like it will be a bumper year for agriculture.