Talking Point: New index will take the guesswork out of buying farm businesses
JAN DAVIS, Mercury
WE’VE been hearing a lot lately about growing interest in Australian farm land. The proof of the pudding is always in the eating – and the fact that many wallets have been opening demonstrates that buyers are recognising the value inherent in well-performing agribusinesses.
Management consulting company BDO has been looking at the key investor groups which have a particular focus on Australia’s food and agribusiness industry. They’ve identified that there are several different groups in the market – all with slightly different motivators.
Trade buyers always have an eye for a strategic purchase. Australian farmers have been buying out their neighbours to create larger-scale enterprises. Indeed, over the 30-year period to 2011, there was a 40 per cent decline in the number of Australian farm businesses, while area farmed actually increased.
Institutional investors, such as super funds, have been slow to recognise the value in agribusiness. However, in the current investment environment, the returns offered by agriculture are increasingly compelling. This is particularly so when taking into account the key drivers of food security, the growing middle class in Asia and changing diets.
High net-worth individuals are also buying the agricultural investment story – literally! Cases in point include London billionaire Joe Lewis taking control of AACo, and Gina Rinehart’s bid for Kidman.
And then there’s the Asian buyers, whose interest in Australian agriculture is primarily motivated by strong commercial fundamentals and opportunities for growth.
Until recently, investors across all these sectors have had to rely on patchy information and their own research to determine value when considering purchase of agribusinesses. With farms, a key guide has been the underpinning land value. As we saw last week, that has delivered solid returns over many years.
But how can a potential investor assess the worth of a business beyond land value?
One of the factors that has limited wider investors interest has been the difficulty in getting access to reliable, timely and relevant information on how the sector performs on basic business measures; and how performance compares to other possible investments.
Well, that’s all about to change.
The Australian Farmland Property Index was launched recently at the Australian Farm Institute Roundtable Conference.
For the first time in the history of Australian agriculture, investors will have available a regularly updated Index which provides a measure of the investment returns being generated by the sector. This will enable investors to compare the sector’s performance against that of other asset classes.
The Index is based on the National Council of Real Estate Investment Fiduciaries (NCREIF) index which has been available for North American agricultural investors since 1990. From a starting base of US$350 million, the NCREIF index now reports US$7.8 billion from 729 properties. It also provides the Timberland index which reports on assets valued at US$24.2 billion.
The index will use the same basic methodology as that used for the US, but with some small tweaks to reflect differences in the Australian agriculture sector.
In the initial stages, it will be based on a portfolio of corporate farms that together total more than A$827 million in total asset value. The quarterly performance of these businesses is then aggregated into a single index. Of course, there are strict rules around participation in order to preserve the confidentiality of those participating.
The baseline index has been calculated for the financial year ending 30 June 2016. It shows an impressive average return of 23.9 per cent across the portfolio. This figure was made up of an 8.3 per cent increase in income; and 14.6 per cent from capital appreciation.
Over time, the number of participants is expected to increase. This will enable provision of more detail across different locations. It may also provide other data, for example the returns from buying and leasing farms to Australian farmers to manage as compared with returns achieved by investors who choose to manage their own properties.
In launching the Index, the Executive Director of the Australian Farm Institute, Mick Keogh, said that the institute is supportive of the Index “as it will provide and indicator of the performance of the Australian agricultural sector on a regular basis, and will help and encourage investors to include the sector as an important component of a balanced investment portfolio.”
This is an important development for the agribusiness sector. The more information business owners and investors have, the better positioned they are to be drive increased efficiencies and be competitive in an increasingly benchmark global market place.