Australian Farm Index: Attracting new investment to agriculture

A burgeoning financial index is giving ag investors a better view of the sector.

The arrival of the Asian food boom has shone a light on how little we know about Australian farm performance.

IT’S COMING, it’s coming, it’s coming. In fact, it’s here. The food boom, the dining boom. Asia’s deli –call it what you will.

We’ve been talking, watching and reading about the imminent arrival of the Asian Century, and the surge it will give Australian agriculture, for years now. But if the numbers that matter most count for anything, it has actually arrived.

In 2016-17 Australia’s economy grew by 1.9 per cent of gross domestic product. No big deal, you say. But delve into the figures and you find agricultural production, at $62.8 billion, provided more than a quarter of that growth, making it the single biggest contributor.

And dive even further and you will discover that the agriculture, forestry and fishing sector grew a staggering 23 per cent during the year. That is almost unheard of, putting it miles ahead of the other 18 sectors measured to determine GDP growth.

The next best — professional, scientific and technical services — grew by 8 per cent.

Getting the picture now? Agriculture is big business — and getting bigger. And consider that the smart money is on agriculture being a $100 billion sector in a little over a decade and we are now talking big bikkies. So you’d think agriculture would be swamped by institutional investors looking to grab a slice of the pie. Err, no.

The superannuation industry, the biggest and most influential investor going around, invests a miserly 0.3 per cent of its total capital pool in Australian agriculture.

The reason super funds are cautious, according to Industry Super Australia, is because “meaningful and independent data is not available for experts to compare agricultural performance”.

“Faced with the scarcity of data, superannuation fund trustees find it difficult to justify investing member savings in agriculture, especially when it is so much easier to benchmark more conventional investment options in terms of their risk-return characteristics,” a recent ISA report says.

The key to attracting investment is to provide solid information on a farm’s performance.

For a sector that should be fighting off investors, agriculture is not telling its financial story.

The Government’s Australian Bureau of Agricultural and Resource Economics and Sciences each year dutifully trots out performance data from a survey of farms. But potential investors say ABARES’ reports just doesn’t cut it. The data is outdated by the time it is released — 12 months old — the corporate farms and family operations surveyed treat wage costs differently, responses are voluntary, the performance data can’t be audited and there is no independent oversight of sample responses.

So there is not so much a gap in the agriculture investment data market, as a gaping hole.

Attempting to fill that hole is the Australian Farm Index, which is slowly, but surely, providing a credible performance indicator.

Championed by former Warakirri Agriculture Trust and Sustainable Agriculture Fund manager Frank Delahunty, the Australian Farm Index has shown Australian farms returned 16-18 per cent over the past year.

THE Australian Farm Index is styled on a highly regarded index developed in the US by the National Council of Real Estate Investment Fiduciaries. NCREIF began a quarterly index for industrial, office and retail properties in 1977 and later added apartment and hotel data. It now includes nearly 7200 properties valued at about A$680 billion.

In 1990, NCREIF established a farmland index, with an initial database of properties valued at about A$445 million. Over the past three decades, the NCREIF Farmland Index has expanded to report on the financial data of 705 farms valued at A$10.2 billion.

NCREIF has just seven big farm investors providing data for the index. On average, each holds about 100 properties. These asset managers represent pension funds, real estate investment trusts and institutional investors.

NCREIF president Dan Dierking says each of the seven farm investors pay annual fees to fund the index.

Dierking says big farm managers wanting to subscribe to the index to compare their properties’ performance can’t pick or choose whether they submit their own data or not. The council’s rules state subscribers with farmland under management must submit their data to get that of others. He says it helps to add integrity to the index.

NCREIF farmland committee chairman Anatole Pevnec says the index is widely quoted in the US as a benchmark for farm performance, allowing investors to understand how farming operations fit into their broader asset allocation.

“Pension funds in the United States have become better educated about farmland. Farmland has increasingly become either an explicit allocation, or part of a more clearly defined real asset allocation,” Pevnec says.

“The low correlation of farmland to most other major asset classes, coupled with the strong performance that farmland exhibited through the global financial crisis of 2008, has garnered significant investor interest in the asset class.”

The US data is vast enough for NCREIF to divide it into permanent and annual crops and subdivide even further into eight geographical regions of the US. There are also permanent crop performance indices for almonds, apples, citrus, wine grapes, pistachios and others.

Dierking says the US Farmland Index covers grain and tree crops, but not livestock operations.

NCREIF data shows US farmland provided a total return — comprising both income and capital returns — of 6.6 per cent for the 12 months to June 30 this year. By comparison, the total return for commercial and industrial property was 7 per cent. But both were blown away by the S & P 500 Index — an American stock market index of the 500 largest companies — which returned 17.9 per cent for the year.

But it isn’t always like that. When averaged over the past 10 years, farms comfortably outperformed all other asset classes in the US, including the sharemarket.

With an average return of 12.8 per cent over 10 years, the Farmland Index was double the NCREIF Property Index on 6.4 per cent and well above the S & P 500 Index’s 7.2 per cent.

Data from the organisation shows that since its inception in 1990, the Farmland Index farms averaged a total return on investment of 10.4 per cent.

In 2005, the total return was a massive 33.9 per cent, largely driven by a capital return of 21.74 per cent. In 2004 and 2005, US farmland returns were about 20-21 per cent, meaning high prices were sustained over a three-year period.

Pevnec says this was due to two factors. The first was demand for ethanol fuel pushing up land prices in the corn belt by 36 per cent. “Secondly, the Pacific West, which recorded appreciation of 60 per cent during this time, was driven by growing demand for land for permanent crops, such as almonds, and the resulting conversion and development of annual row crop land into permanent crop land, which has significantly higher production value per acre,” he says.

The data shows good returns for nut farms over a long period. Almond property returns averaged 15.56 per cent since 1990 and for pistachios, it was 28.04 per cent.

The Australian Farm Index is compiled by NCREIF with data provided by Australian farm investors.

At present, there are six big farm investors providing data in Australia: Growth Farms Australia, Blue Sky Agribusiness, goFarm Australia, Rural Funds Management, Australian Agribusiness Group and US firm Hancock Agricultural Investment Group. Collectively, they account for 57 properties valued at nearly $1 billion.

In its infancy, the AFI offers a single index across all farm enterprises, which includes grains, horticultural crops and livestock. By the end of the year index co-ordinator Frank Delahunty hopes to increase the number of properties to an aggregate value of $1.5-$2 billion and eventually wants the AFI to rival the US index. It’s a tough ask but he has been incessantly talking to investment groups to contribute their data. “This is just the starting set of data. Eventually, we’ll get the index to include permanent and annual crop data,” he says.

Delahunty says one criterion set by NCREIF is that data providers must submit independent valuations of their properties once every three years. Most of the AFI data contributors get a property valuation every year as part of completing their audited financial accounts in June. That is shown up in the June quarter AFI reports.

For the September, December and March reports each year, the capital appreciation has ranged between -0.64 per cent and 0.25 per cent. In the June quarter last year capital appreciation was 8.29 per cent, with a similar return expected this June quarter. In the two years of the AFI’s operation, the index has shown returns from Australian agriculture to be 16-18 per cent. US returns were 7.09 per cent in 2016.

Each Australian farm investor providing data pays a $7500 subscriber fee. For that, they get the quarterly Australian Farm Index data plus the US Farmland Index as a comparison. Others, such as banks, property developers or superannuation funds, pay $3000. Delahunty says the index not only allows big farm investors to benchmark themselves against other local property managers but also against US farming operations. But he says the real benefit is in providing information to convince big capital providers such as superannuation funds to invest in agriculture.

“That’s where this index stands up well. The main focus of this is not necessarily pitting one manager against another but comparing agriculture against the other asset classes such as commercial and industrial properties,” he says.

Industry Super Australia chief economist Stephen Anthony says it is in the best interests of the agriculture sector for the government or private industry to provide a performance tool to guide the superannuation industry.

“Clearly, if an index is being developed or already in the market that addresses the limitations of the ABARES survey, than that’s a positive development,” he says.

Equip, a $14 billion superannuation fund, does not have agricultural assets in its portfolio but is interested in the rural sector.

One of the group’s portfolio managers, James Birrell, says while Equip seeks to maximise returns, it does so on a risk-adjusted basis. “In the ‘typical’ Australian’s portfolio, the biggest risk investors face is a fall in the equity market. In a balanced portfolio, it is desirable to hold real assets whose value is independent of the movement in stock and debt markets to protect your capital base,” he says.

Birrell says agricultural farmland may provide that balance. “Putting farmland into a portfolio may improve the risk-adjusted return,” he says. “Having an index just helps us to build a better idea of the risk characteristics if we include an asset like agriculture, be it land or an operating business.”

Delahunty’s dream of building investor respect for the Australian farm index is only in its infancy. That respect, particularly among wealthy superannuation funds, will gain momentum only if more investment managers take an industry-benefit point of view and provide data from more farms covering a range of enterprises.

Australian agriculture needs more credibility — and information — if it is to gain investment to move to its $100 billion dream.