Go Long Agriculture?

Apparently Larry Fink, the Blackrock CEO, once said “go long agriculture and water and go to the beach”. In this article I have considered whether his statement can be confirmed by historical results for Australian agriculture.

I have considered what returns one could have earned over a 15 year period from investing in agricultural land in Australia and compared those returns with the average returns that one could have earned over a similar period by investing in the major asset classes of listed securities.
Why over 15 years? Rather than doing the comparison over 10 years – to align with Mr. Fink’s apparent statement – I have used a period of 15 years to satisfy proponents of investments in listed securities. I suspect they would probably protest a comparison over the past 10 years, because that would start near the top of the market before the 2007 market crash. On the other hand proponents of investing in agriculture would probably protest a comparison over a shorter period, as it would commence at or near the bottom of the market and end well into a bullish market for listed securities. A 15 year period includes a peak and a trough and so is more appropriate.
Why agricultural land? I don’t know whether Mr. Fink’s comment related to investments in agricultural land only or also in the associated farming operations. These asset classes have very different risk profiles – so one would ordinarily expect them to command very different returns. With a view to keeping the comparison a simple exercise, I have only considered investments in agricultural land.
Why listed securities across the major asset classes? If one does not invest in agriculture, where does one invest? Most Mom and Pop investors would probably buy residential property (as a home and possibly also as an investment property) and through their compulsory superannuation contributions invest in industry and other large managed funds, which in turn invest mostly in ‘top-end’ listed securities. If they have surplus capital to invest, I gather many would invest it (directly or indirectly) in ‘top-end’ listed securities. In this case, where we are looking at the alternatives to investing in ‘agriculture’, it would probably be more appropriate to make the comparison against investments in listed securities. And since there is more than one major asset class it is probably also appropriate to make the comparison against all the major asset classes.
The performance of listed securities
Let us first consider the performance of the major asset classes. In this case I sourced data from the Vanguard Index Chart which at the time of writing was showing figures up to 30 April 2017. (http://insights.vanguard.com.au/VolatilityIndexChart/ui/retail.html) However since I was only able to find agricultural land values to June 2016, I have undertaken the comparison over the same 15 year period, from 1 July 2001 to 30 June 2016.
The investment returns for each of the major asset classes were as follows: Australian shares (S&P/ASX All Ordinaries Accumulation Index) 7.4% pa*; International shares (MSCVI World ex-Australia Net Total Return Index) 2.1% pa; US shares (S&P 500 Total Return Index) 3.1% pa; Australian Property (S&P/ASX Listed Property Trust Accumulation Index) 7.3% pa; International Property (UBS Global Real Estate Investors Index ex Australia (net dividends) 8.0% pa; Cash (UBS Warburg Australia Bank Bill Accumulation Index) 4.7% pa; Australian Bonds (UBS Warburg Australia Composite Bond Accumulation Index) 6.4% pa; and International Bonds (Hedged) (Barclays Capital Global Treasury Index – AUD hedged) 7.8% pa. (These returns do not take into account fees, transaction costs or tax and are quoted in nominal AUD dollars – i.e. inflation has not been taken into account.)

*Since Australian shares enjoy the benefit of franking credits the return for Australian Shares should be changed to a pre-tax equivalent. A rough estimate would add about 1.5%, resulting in the return being increased to 8.9% pa.

The performance of agricultural land
Now let’s take a look at the performance of investments in Australian land. In this case the data is sourced from the Australian Bureau of Agricultural and Resource Economics and Sciences (“ABARES”), an organisation within the Australian Government’s Department of Agriculture and Water Resources. For the purpose of this exercise I considered the average values (in AUD per hectare) of broadacre land across 11 arbitrarily selected regions – one in Tasmania and two in each of NSW, QLD, SA, VIC and WA.
As these figures relate to land values only it is appropriate to also include rental income in the analysis. Not being able to find suitable historical rental yields I assumed the same rental yield for each year and as I understand rental yields have in recent times generally ranged between 3% and 6%, I have assumed a reasonably conservative rental yield of 4.0% of the prior year’s value.
The results for the 15 years to June 2016 were as follows: NSW Riverina 10.7% pa; NSW Tablelands 15.1% pa; QLD West and South-West 14.9% pa; QLD Eastern Darling Downs 10.8% pa; SA Murray Lands & Yorke Peninsula 14.1% pa; SA South East 17.5% pa; Tasmania 14.9% pa; VIC Wimmera 11.0% pa; VIC Central North 11.4% pa; WA South West Coastal 11.7% pa and WA Central & South Wheat Belt 11.7% pa.
The comparison:
The returns from investing in agricultural land ranged from a low of 10.7% per annum to a high of 17.5% per annum, with a simple average return over the various asset classes of 13.1% per annum. These are more than double the returns from investing in the major asset classes, which ranged from a low of 2.1% per annum to a high of 8.0% per annum, with a simple average return over the various asset classes of 5.9% per annum.
Future prospects:
While the comparison concluded that the ‘industry ‘ returns from investing in broadacre land over the past 15 years would have produced much higher returns than one would have achieved by investing in the major asset classes of listed securities, what will the future hold?
I am certainly not qualified to make any prediction as to the performance of the major asset classes over the short, medium or long term. I am however cautiously optimistic in predicting respectable growth in the values of Australian agricultural land over the medium to long term. The reason for this bold statement lies in the fundamental factors driving a prediction for strong growth in demand over supply continuing and probably strengthening well into the future.
On the one hand an enormous increase in global demand for protein is projected – due to a combination of increases in world population, increased urbanisation and higher disposable incomes. To put this into perspective the world population is increasing at an astonishing rate of about 1.1 million people a week. That’s 57 million more people needing food every year – more than double, 2.4 times, the size of Australia’s population added every year. On the other hand, the supply of arable land around the world is shrinking. About 25 per cent of the world’s agricultural land area is already highly degraded and the balance faces pressure from urbanization, from industrial, environmental or recreational uses as well as from the growing numbers of subsistence farmers in the developing countries. These predictions of strong demand for food against a shrinking supply of land should translate into long term increases in the price of broadacre agricultural land in Australia.
The opportunity
Rogers Morris is of the view that long term investments in Australian agriculture are likely to deliver above market expected returns-for-risk. It also believes its investment strategy will not only deliver above market returns on investment but will also meet the institutional investor market’s environmental, social and governance criteria.
Rogers Morris is accordingly establishing a managed fund to invest in suitable agricultural land across Australia, convert that land to ‘organic’ classification and to ensure its use complies with ethically sound farming practices. It has in this regard ‘teamed up’ with Monta Flora Agriculture, a well-established South Australian farming business that brings a wealth of relevant agricultural knowledge, skills and experience.
As Rogers Morris sees enormous potential for its managed fund it would also be pleased to welcome further investors.
Thanks for your interest