Reaping the wealth

The mining company buying spree is likely to reduce the amount of farming land that is available. Photo: Nic Walker

According to the Australian Bureau of Agriculture and Resource Economics and Sciences (ABARES), farmers in all states and industries will make a profit this year for the first time in more than 30 years, as a result of the wettest two-year period on record. ABARES is predicting that agriculture exports should climb by 9.4 per cent to $35.5 billion this financial year.

Wealthy farmers should benefit from two seemingly irreversible trends in the global economy: the rise of the developing world and the weakening of much of the developed world, especially Europe. The rise of the developing world can be expected to make a major contribution to demand. According to ABARES, by 2050 there will be about 9 billion people in the world but they will be eating as much food as 13 billion people at today’s nutritional levels. ABARES estimates that to meet such an increase in global demand, global food output will have to double over the next four decades.

“I truly believe Australia will be one of the food bowls of Asia as [the region] grows dramatically,” the executive chairman of media company Aegis Pacific and Rich 200 member, Harold Mitchell, says. “I can see it as a great investment over time. There will be a dramatic ramping-up because of the explosion of wealth in Asia and Australia is uniquely placed because of its proximity.”

Such long-term trends appear to make agriculture, like energy, one of the best one-way bets in the investment pantheon. Moreover, economic weakness in Europe, where heavy agriculture subsidies distort markets, is also likely to benefit Australian farmers. According to asset managers BNY Mellon, Europe’s debt travails may give rural land values in Australia a boost. Australia’s low level of subsidies should be an incentive to invest.

But the prospects may not be as rosy as they seem, at least in the short term. For one thing, international investors are not flooding in to buy. According to a report by the Australian Bureau of Statistics, levels of overseas ownership last year had changed little since 1983-84.

Most primary sector investment goes into the resources sector. The ABS report says foreign investment expenditure totalled $139.5 billion in 2009-10. Fifty eight per cent of that went into mineral exploration and development compared with only 1.6 per cent ($2.3 billion) for agriculture.

The ABS claims 99 per cent of agricultural businesses are Australian-owned. But the founder of the newsletter StockAnalysis, Peter Strachan, says this figure is misleading because a sale has to be about $30 million for it to be recorded by the ABS.

“You have to be buying up a big chunk of land to show up in the register,” he says. “Foreigners now own about 30 per cent of the dairy industry. Seventy per cent of the sugar industry is foreign owned.”

There are some signs that foreign investment is intensifying. China’s third-richest man, Zong Qinghou, the chairman of Hangzhou Wahaha Group, is planning to spend up to $220 million on dairy farms in Western Australia. His first investment play is expected to be announced next month. Ho Myoung Farm, which is part of the Young An Group from Korea, has bought 500,000 hectares in the Orana region of NSW. Global agriculture giant Cargill has put almost $40 million into a local company that owns the prized Billabong Station in the Eurongilly Valley, near Wagga Wagga, NSW.

The mining boom is pushing up farm prices. In 2010, almost two-thirds of farmland sold was acquired by miners and the trend is continuing. The Indian miner Adani bought a 125,000 hectare property, Moray Downs, for $110 million to dig up about 60 million tonnes of coal a year, to be shipped to power-hungry India to generate electricity. The mining company buying spree is likely to reduce the amount of farming land that is available.

Acquisitions are coming from some surprising local sources, perhaps due to a lack of other investment options. The sharemarket has performed poorly compared with most Western sharemarkets in the past two years and residential property looks weak. According to Deutsche Bank, the S&P/ASX 200 is 10 per cent lower it was both a year ago and two years ago. It is at its August 2009 level. That has prompted some wealthy investors to diversify into agriculture. Mitchell has 600,000 hectares in Yougawall, with a partner, that runs 22,000 head of cattle, bought for about $4 million. Flight Centre co-founder Graham Turner is one of the top wagyu beef producers in the country.

For the most part, the nation’s biggest farming families stand to benefit from improving asset values. The top 10 richest farming families have combined wealth of $5.6 billion.

Before the drought broke in 2011, agriculture had not been faring well. According to the 2009-10 Agricultural Resource Management Survey (ARMS) published by the ABS, the number of businesses undertaking agricultural activity had fallen to a total of 134,000 businesses, a drop of 1 per cent on the previous year. The area involved in farming in 2009-10 had fallen to 399 million hectares, down by more than one-tenth from the 2001 level.

Recovering from a long drought takes time and the transition requires farmers to manage volatility. There are signs of higher prices. In the past year, beef and wool have risen by 11 per cent and 19 per cent respectively, although lamb prices have fallen by 18 per cent. But this does not necessarily mean the good times are back.

Dan Hastie owns with his brother grazing properties in Upper Gascoyne and Watheroo, in Western Australia. He says some farm operators who are well established and carry little or no debt are doing well but survival is a struggle for most farmers. Hastie works as a plantation manager for the Perth-based forestry company Carbon Conscious to ensure a stable income.

“Even for the guys who are not carrying much debt it is not an easy environment,” says Hastie.

“You can’t walk into the likes of Harvey Norman and take out an interest free purchase because you are not able to show them good enough (financials).”

Hastie says that although the drought has broken, its impact lingers. “Although we have had a good season, we have had to offload stock because of the previous poor seasons. [In pastoral businesses] there is a lot of money tied up in finding cattle and shipping it to market.”

“You are often sending cattle off the station just to meet bills. There is no real ability to hold off (on marketing decisions).”

He says imbalances are difficult to manage. “There is more feed up there (on our farms) than there are animals at the moment.”

Agriculture wealth is mainly private; there are very few public companies offering investors access to the sector.

Strachan says a history of poor management and poor returns is to blame. “[Investors] are not stupid,” he says. “I don’t know that a listed vehicle is the best way to do it.”

Mitchell says investors tend to be too short-term to develop an understanding of agriculture investment. “It is not easy to understand; it is very long term,” he says. “The psychology of the market tends to be short term and it is not a short-term thing. We have very low debt. That is a secret of agriculture.”

• Tweet