Farm or shares? The difference in value over ten years
WHAT’S the better investment? The farm, or shares in the companies to which that farm supplies produce? PETER HEMPHILL seeks the answer.
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JUST imagine. It’s 2006 and you have $5 million burning a hole in your pocket and a yearning to invest in agriculture.
What to do? Go for a portfolio of shares in agricultural companies or invest in a farm?
What would that investment be worth 10 years on, leaving aside the more complicated issue of annual returns from that initial investment?
DecisionAg undertook a hypothetical exercise of investing $500,000 in each of 10 stocks available in 2006 and seeing where they ended up. That investment was then compared with farm property value changes over the past decade.
In 2006, the Australian Stock Exchange’s All Ordinaries Index was in a buoyant, or bull, market. From 2003 to November, 2006, share prices had generally risen by about 75 per cent, with the Australian Stock Exchange’s indicator, the All Ordinaries Index, hitting 5300 points.
By early 2006, the rising stockmarket was looking good. But there were fewer agricultural stocks on the ASX a decade ago than there are today.
AWB Limited was one of the more prominent stocks. The major grain company was listed on the ASX five years earlier and was sitting pretty at the start of 2006 at about $6 a share. But revelations of illegal transport payments to Iraq’s Saddam Hussein regime, and the subsequent Cole Inquiry, brought the company undone and its share price was trashed by year’s end.
It would have been a brave investor who pumped money into AWB at the time, given the reputational damage and talk of deregulation of wheat exports. More likely, an investor would have chosen premium agricultural stocks such as grain marketers ABB Grain or GrainCorp; walnut, pastoral and cropping company Webster Limited; pastoral houses such as Ruralco Holdings or Elders (then known as Futuris Corporation); chemical manufacturer Nufarm; fertiliser company Incitec Pivot; sugar producer CSR; Namoi Cotton; dairy manufacturer Warrnambool Cheese and Butter; almond producer and processor Select Harvests; and egg producer Farm Pride Foods.
Of these stocks, DecisionAg chose to invest in all but Elders and ABB Grain. Elders changed from Futuris to Elders in 2009 and was complicated by the issuing of extra shares. ABB Grain was sold to Canadian grain company Viterra that same year, and is no longer listed on the ASX.
While the pastoral and grain industries have been the mainstay of agriculture in Australia, the standout performer in terms of share price gains over the past 10 years has been egg producer Farm Pride Foods. Farm Pride’s shares have increased six-fold in the past two years, rising from 30 cents mid last year to $1.80 a share on a very limited turnover.
Paul Jensz, director of corporate analyst and equity provider firm Pac Partners, says 20 years ago the egg industry had too many egg producers but this has been whittled down to three major companies, of which Farm Pride Foods is the major player in Victoria. Mr Jensz says egg producers have had to become larger to commit capital to overcome regulatory changes forced on the industry.
“We are also seeing these companies focusing on return-on-investment principals, rather than chasing market share,” he says.
Incitec Pivot Limited and Warrnambool Cheese and Butter have also been solid performers, more than doubling in price over the past decade. WCB is now an untradeable stock after Canadian dairy company Saputo beat off hot competition in January, 2014, to buy nearly 90 per cent of the Allansford company’s shares.
DecisionAg’s analysis shows that if an investor had plied $500,000 into shares in each of the 10 companies in October 2006, and retained them, the $5 million initial investment would be worth $9.34 million today.
That’s a rise of 87 per cent over the 10 years, or an average 8.7 per cent annually. The appreciation in value might have been much higher except for the global financial crisis hitting markets in early 2009, wiping trillions of dollars off the value of shares around the world.
The GFC impact is borne out by the All Ordinaries Index over that period. After peaking at 6873 points on November 1, 2007, it sunk to a low of 3111 points within 16 months as turmoil on world stockmarkets and economies hit hard. It is now sitting at about 5555 points — only slightly higher than where it was 10 years ago.
So would investors have been better off putting their money into a farm? Not according to the Australian Farmland Values survey conducted by the Adelaide and Bendigo Bank’s Rural Bank. The report shows the median price of Australian farmland grew annually by an average 3.2 per cent over the past 10 years — or about a third the rate of the capital growth of the stockmarket. The analysis tracks the median price of farmland in dollars a hectare by eliminating, where possible, metropolitan and small block sales, along with compulsory acquisitions.
The AFV analysis used actual farm sales reported to state government agencies and compares the median price of one year to previous years.
According to Rural Bank’s Jonathan Creese, there are many variables that contribute to the value of a farm. These include, but are not limited to: rainfall, location, proximity to ports, soil types, productivity, interest rates, commodity prices, the performance of the wider economy and the life stages of the vendor and buyer. “It is pretty hard to pinpoint to one specific factor which causes a movement in prices in a particular year,” Creese says.
He says the global financial crisis of 2008-09 would have affected farm values, but to a much lesser extent than the impact on the share market.
“There is no doubt the global financial crisis had some impact on farm values,” he says.
“You can see that in the trend: in the lead-up (to the GFC), farm values accelerated similar to the stockmarket and commodity prices.
“When the GFC came, we did see a bit of a dip but not like the collapse in commodity prices or the stockmarket.”
Farm values vary from state to state and even region to region within a state. The AFV report shows Victorian farm values rose 12.6 per cent a year between 2002 and 2007. From 2008 to 2011, they declined by an annual average of 2.9 per cent a year, before rising an average of 5.7 per cent for the next three years.
The report shows NSW farm values grew steadily from 1995 to 2005 at an average 8.9 per cent a year. For the next eight years, growth slowed but fluctuated between being positive and negative. Values declined in 2008, 2011 and 2013. For the past two years, they have averaged growth of 8.7 per cent.
In South Australia, rapid growth in farm values averaging 13.7 per cent occurred from 2003 to 2007, but since 2008, the median price has been relatively stagnant at an average growth of 0.2 per cent a year.
A similar trend appears for Queensland, with strong positive growth averaging 18.7 per cent from 2001 to 2008 before a period of decline to 2013 of -1.8 per cent.
In Western Australia, farm prices experienced strong growth from 2002 to 2005, before generally ending up in the doldrums from 2006 onwards. The AFV report shows last year’s farm price growth in WA hitting 10.6 per cent.
Tasmanian farm values have fluctuated wildly in the past 10 years, with half the years during this period experiencing slightly positive to negative growth interspersed with strong growth of 15-35 per cent.
Rural Bank says forestry investment schemes were behind rising Tasmanian property values before the GFC. The bank says the demise of those schemes since 2009 opened the door for land to return to agricultural production.
Jonathan Creese says the millennium drought was also a factor affecting rural property prices, albeit not in the way most would presume. While the prolonged drought — which ran for much of the first decade of this century — would have been expected to provide a dampener on sales, quite the opposite occurred.
“If you look at that drought, on a dollar basis, farmland values increased,” Creese says. “That tells you farmland values are pretty resilient in the face of environmental shocks such as a drought.”
Creese says farms don’t have the same liquidity as stockmarket investments. “Farming is a long-term investment, unlike stocks,” he says. “There are a lot of reasons why people own farms. It could be lifestyle and the sentimental value if families have been there for a long time.
“If there is a bit of uncertainty in the market, farmers are likely to hold on to their land. That helps to keep values up.”
Compounding an average annual growth rate of 2.9 per cent over the past 10 years, a $5 million farm bought in Victoria in 2006 is now worth $6.65 million.
For NSW, with an average yearly growth rate of 3.3 per cent, a $5 million farm would be worth $6.91 million.
South Australia has a much lower growth rate of 1.7 per cent, so a $5 million farm investment in 2006 would now be valued at $5.91 million. If the same farm was in Tasmania, it would be worth $8.46 million, while in Queensland it would be valued at $7.54 million.
Western Australia has had the lowest average annual growth rate of 0.2 per cent, so a $5 million farm is now worth just $5.1 million. The Northern Territory was excluded due to the low number of farm sales distorting that market.
The shares versus property debate becomes further twisted, though, when focus turns to major properties. Mr Jensz says these premium properties don’t come on to the market often but when they do, they can hold up, or increase their value significantly.
These include the S Kidman & Co cattle empire, which a consortium, including Australia’s richest woman Gina Rinehart and Chinese interests, has bid $365 million.
But there are others that come on to the market more often. The 5800ha Banongill Station at Skipton in western Victoria was bought in 2006 for about $20 million. After another 1080ha was added it recently sold for about $50 million.
The 30,000ha cattle property Glenrock Station, in NSW’s Hunter Valley, last year sold to Chinese interests for $45 million, having previously sold to an investment syndicate for about half that price — $23 million — in 2005.
Jensz says he would have expected the shares to outperform the property market over time. “The equities market is supposed to chase the higher growth opportunities of the market,” Jensz says. “We are starting to get better management and better scale across our listed agribusinesses.
“In the early 2000s, agribusinesses were quite small companies. They are now getting to a larger scale which helps the cost base and productivity gains.
“So over time, equities have outperformed most asset classes if you take a long enough time frame.”
Jensz also says stockmarket shares have advantages over property due to their liquidity. “Investors pay for the liquidity of equities; land cannot be sold so easily,” he says.
Looking to the future, Jensz believes the share equity market will continue to outshine property values.
There are more agricultural companies listing on the ASX each year and some of these have been strong performers. Both winemaker Treasury Wine Estates and dairy manufacturer Bega Cheese have tripled their share prices since listing.
Treasury Wine Estates, which has the Wolf Blass, Penfolds and Rosemount wine brands, demerged from Foster’s Group in mid-2011. Its share price has risen from about $3.50 at listing to more than $11.20 last month. Bega Cheese has seen its share price rise from $1.80 at listing in 2011 to $6.40.
Capilano Honey’s share price has risen tenfold since listing on the ASX in July, 2012 — from $2.10 to $19.36 a share. Infant formula manufacturer Bellamy’s Organic has also seen its stock appreciate in value from about $1 at listing in August 2014 to $12.10 last month.
Mr Jensz says high performing agribusiness companies providing safe, dependable, premium products will become more valued by investors in the future. “At some stage, premium agricultural companies will get a huge re-evaluation (by investors),” he says.
Going by recent history, shares, appear likely to outperform the property sector. And keep an eye open for start-up listed agricultural companies: they appear to outperform the All Ordinaries Index.
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