Investors turn to ag sector
Farm Weekly | 24 September 2020
"The agriculture or farmland asset class within our wider organisation has been very much a star performer during this pandemic so far," says Westchester Group Australia's CEO (Photo: Westchester Group)
Investors turn to ag sector
by Mollie Tracey
WHILE COVID-19 has brought challenges to the agricultural industry, it's clear that the sector has remained relatively unscathed compared to others that have ground to a halt.
Investors have been watching the agricultural sector closely and its resilience has further cemented their beliefs that the industry is a profitable asset class with longevity.
Farm Weekly spoke to some investors, both Australian and overseas-based companies that operate in WA, on how COVID-19 has affected their business in the past few months and going forward.
COVID-19 might lead to farm business profits:
Westchester Group Australia chief executive officer Matt Bull said the pandemic has highlighted the notion that agriculture is an essential industry and by being more appreciated, should eventually lead to more capital growth in the sector.
"We are hopeful that despite the challenges we are all facing at the moment, the efforts of farmers being able to keep producing and providing food to the world, will be much more appreciated post-COVID-19," Mr Bull said.
"If there is more appreciation for this essential industry and more value placed on the produce, then farming businesses should become more profitable and we should see as a result, more capital investment and more growth.
"This in theory should create more jobs and assist with the massive task of climbing out of this recession and rebuilding certain economies."
Westchester is a United States-based company and its assets in WA are geared towards broadacre farmland with a buy and lease model.
Mr Bull said that while there was no doubt the pandemic would have an impact on global and local economies, including agriculture to some extent, he remained positive about the sector particularly given the strength that has remained with land values.
"The agriculture or farmland asset class within our wider organisation has been very much a star performer during this pandemic so far," he said.
"As expected, it has been providing diversification benefits for the investors and stakeholders within these portfolios."
So far the drought in the Eastern States has had more of an impact on the company's decision-making compared to COVID-19.
"At a local farmgate level, it has been business as usual for our portfolios in Australia," Mr Bull said.
"Our investment and growth plans/strategy won't change.
"The recent drought had more of an impact on our decision-making processes and how we assess and manage risk."
Being based in the US, Mr Bull said historically colleagues had travelled globally but this stopped earlier this year.
Although a disruption, the company has adapted and reinforced its grassroots approach.
"This supported local decision-making as we have already prided ourselves on the 'boots-on-the-ground' approach," he said.
"It is times like this that we are reminded of the importance of local management and expertise and the need to empower and trust those in the field.
"With questions over the extent of future business travel, this local strength and building further on that puts us in an excellent position for the future."
The strong rural property market across Australia has been consistent with the value of Westchester's asset portfolio, with Mr Bull saying some recent property sales had led to further asset appreciation in the first half of 2020.
He attributed this to low interest rates, particularly for farming families, while the low Australian dollar had made Australian farmland attractive to foreign investors.
"We expect values to continue to be quite stable in the next few years, with high quality properties likely to remain in demand and achieving strong prices," Mr Bull said.
However, he noted that the desire to expand for both farming families and corporate businesses was dependent on multiple factors, such as the season outcome, production, markets and farm business profitability.
"If we end up with a big harvest and strong commodity prices (across several sectors) this year, then we could certainly experience further capital appreciation in certain regions of Australia over the next 12 months," he said.
"A lack of spring rain, a wet harvest and/or a major frost event could have the opposite effect."
Alterra growing its investments
Australian Securities Exchange-listed company Alterra, which is an agricultural land and water asset manager and developer, this year shifted its focus to avocado production.
Managing director Oliver Barnes said the company was fortunate that the pandemic was yet to have an impact on its asset portfolio.
"Our most recent assets in the South West region are progressing ahead smoothly," Mr Barnes said.
"Discussions with our local partners have revealed that there has also been an increased appetite for healthy whole foods during the pandemic.
"This is a positive sign for the horticulture industry, especially permanent tree crops."
In May Alterra announced the sale of part of its Dandaragan property, Dambadgee Springs, to a local farmer for $3.1 million.
Alterra has since focused on its South West avocado project and has partnered with the Casotti Group.
Mr Barnes said that by fostering local partnerships, it has been able to enter a sector that hadn't always been a scalable asset for investors.
"These partnerships have enabled Alterra to tap into the local generational knowledge required to operate successful large-scale agricultural developments and unlock a wider pipeline of opportunities faster than expected," he said.
"These partnerships have been key for Alterra in our preparation for a large-scale direct investment into farmland and water, changing investor perspective on operational risk of the asset class and its ability to serve as a safe investment."
Mr Barnes believed the pandemic had changed what a 'safe investment' was for many investors, especially after witnessing the fall of other industries that were up until a few months ago, highly profitable, like aviation.
"There has definitely been a renewed focus on farmland as opposed to commercial and residential real estate," he said.
With projects in the pipeline, Mr Barnes said Alterra would be actively growing its business in the near future.
"We are seeking to advance our development program and prepare for further investment to meet this increased demand," he said.
The company's share price (listed as 1AG) has remained relatively consistent throughout the pandemic and was 0.051 cents per unit at the time of writing.
"If anything, we have seen a demand increase from both our capital partners to gain direct access to this asset class," Mr Barnes said.
"We have seen a large split in pricing on our onscreen trades, with several 1AG shareholders only offering to sell stock if it is at a premium.
"This is a positive for Alterra, signalling that the stock is incredibly undervalued given the demand for farmland and alternative investments."
Ag important for portfolio diversification
Canadian backed-Warakirri Asset Management managing director Jim McKay said the pandemic had put agriculture in the spotlight in the media and with consumers, as well as at the forefront of many conversations the investor has been having with its clients.
"Agricultural investments have shown they can play an important and positive role in a diversified portfolio, offering competitive risk-adjusted returns and low correlation to other traditional asset classes," Mr McKay said.
"In fact, analysis shows that during financial market shock events, agriculture has performed strongly relative to growth assets such as equities and property, highlighting the sector's defensive characteristics."
Mr McKay said Warakirri's capital returns remained resilient in the months of the pandemic and he was positive about future growth.
"We continue to see good prospects for growth going forward as the corporatisation of the sector and scale provide the opportunity for good investment returns," he said.
"The pandemic and its impact on other assets classes has confirmed our view that investment in agriculture not only delivers attractive returns for long-term investors, but also provides significant portfolio diversification benefits.
"Of course our focus remains to continuously enhance our operating capability and knowledge and as a long-term investor, we continue to pursue opportunities that can deliver economic returns."
Business as usual for Rural Funds
Given the nature of Rural Funds Group's (RFF) portfolio - an ASX-listed agricultural real estate investment trust (REIT) that is managed by Rural Funds Management (RFM) and most of the company's assets are leased to agricultural operators, RFM investor relations and marketing general manager James Powell said RFF had been unaffected throughout COVID-19.
"There has been no impact from COVID-19 - that is, no lessees have missed rent payments and rent relief has not been required," Mr Powell said.
"Furthermore, the agricultural sectors in which RFF is invested (almonds, cattle, vineyards, cropping and macadamias) have been beneficiaries of improved seasonal conditions and good commodity prices."
Rural Funds Management also undertakes farming in its own right, such as cattle breeding and backgrounding, horticulture and cropping, which have continued to operate during the pandemic, although on-farm practises were implemented to minimise the transmission of the virus.
Mr Powell said RFF's value had bucked the trend of other REITs declining during COVID-19, which he believed demonstrated the viability of agriculture in investors' eyes.
"Broadly, REITs have declined by around 15 per cent in value in the calendar year to date, but Rural Funds Group has actually increased in value over the same period," he said.
"Investors recognise not only agriculture's potential portfolio diversification benefits in not being correlated to other asset classes, but the benefits in leasing assets to good operators."
RFF's share price (listed as RFF) rose by 14 cents over the 2019/2020 financial year to $1.94 (as at June 30, 2020) and at the time of writing was $2.24 per unit.
Any uncertainty in the industry and economy appears to have not infiltrated RFM, as the group's chief operating officer Tim Sheridan said the pandemic hadn't changed the way RFM manages RFF and it's decision making.
He said RFM's appetite to continue investing in its existing assets is strong and it will continue to pursue further investment and development opportunities.
"We continue to seek to invest in sectors in which Australia has a comparative advantage - sectors which are more likely to withstand seasonal and commodity price volatility," Mr Sheridan said.
"This is an important underlying principle for RFM."
Just last month RFF was contacted to purchase sugar cane properties in Queensland of 5409 hectares for $81.1 million with the intention to develop the land for macadamias.
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