By Stirling Tavener – February 2017
The increasingly popular phrase ‘from mining boom to dining room’ is proving to be a self-fulfilling prophesy, although agricultural GDP is unlikely to ever reach the value of mining GDP. The contraction of the Australian mining industry has seen government focus shifting to the agricultural sector in the form of the Australian Agricultural White Paper and the North Australian White paper.
The demand for agricultural farmland will continue to grow due to the projected world food production requirements over the next 20 years. The world needs to produce more food in the next 10yrs than it has in the last 10,000yrs.
Land supply is fundamentally limited and production capacity will have to increase, with improvements in management and technology, to continue to produce valuable commodities in perpetuity. In the coming decades this demand for farmland and commodities will exceed any other period in history by a significant margin. Agriculture represents an enormous opportunity for investors, both in terms of the scale of the asset class and the returns agricultural investors are likely to realise in the future1.
Australia has the lowest land prices (on a land cost per unit of production basis) of any major western agricultural economy and its commercial scale farms generate amongst the highest ex-subsidy return on capital (landcommodities.com).
Australian rural land values have on average risen year on year for the 15 years to 2009, where a readjustment due to flooding and the Global Financial Crisis has caused devaluation in most areas. Allowance for wide variations in performance across regions must be accounted for when analysing this result.
Despite these gains, Australian farmland still remains very reasonably priced compared to many other farmland markets. This is true of both of many Western farmland markets and some of the more popular emerging market investment destinations, implying significant scope for further growth in Australian farmland values.
Measured on a land price per unit of production basis, at an average of US$950 per tonne of wheat produced annually, Australian land prices are less than half those of the United States (US$2,400 / tonne annual wheat), New Zealand (US$2,500 / tonne annual wheat), the United Kingdom (US$2,575 / tonne annual wheat) and even Brazil (US$2,400 / tonne annual wheat).
Denmark, for instance, produced a tonne of wheat per $3800 of land value, and Brazil $2400. Though Canada, which can be compared to Australia in landmass and population size, was at $1300. Australia is the most attractive of the developed states at $950 (Savills Research).
Simplified market fundamentals which drive land values are:
- Land supply / demand – Production capacity/return from land – which are affected by new management methods & technologies to lower growing costs and increase outputs
- Food supply / demand – where increased supply puts downward pressure on food prices
- Subsidies significantly affect food price and therefore land values.
Australia has been rated amongst the top three most secure markets in the world to buy and own real estate (Land commodities, 2012). It is difficult to obtain recent figures, however data to 2011 show a slight steady rise in net production value which is in line with rural land assets.
The Australian government reduced the Foreign Investment Review Board (FIRB) threshold of investment in agricultural land from $252 million to $15 million in March 2015, meaning investments greater than AUD$15m require FIRB approval. Foreign landowners have a small number of legislative requirements to comply with and have the same rights as Australian landowners.
Proposed investment in the agriculture, forestry and fishing sector increased by value from $2.9 billion in 2012-13 to $3.4 billion in 2013-14, and the number of proposals decreased from 91 to 58. The two largest source economies of investment by value in the agriculture sector were Canada and Hong Kong ($0.6 billion), followed by the United States ($0.58 billion). Over the five years to 2014, the average level of foreign investment in the sector has been just under $2.6 billion. Investment proposals in this sector are inherently irregular and can be skewed by large transactions with several competing bidders (FIRB Annual Report 2014).
Australian agricultural land is a solid and secure investment and is well priced globally. Foreign companies looking for good long-term capital growth would view Australian rural land as ‘cheap’ compared to other developed nations. If capital does not flow from domestic sources, either private or institutional, then it seems inevitable that the need will be met by foreign capital. Capital flowing into agriculture, has in the past, and will into the future, bring appreciable benefits in the form of jobs and investment in rural and regional economies, as well as innovation and differing perspectives – keys to sustainable agricultural production and with the need to feed a growing world population.
- Savills International Rural Research, 2012