INVESTING IN AGRICULTURE

Agriculture - an attractive investment

Three key factors in any investment are the investment return, investment risk and liquidity.  MyFarm believes that pastoral agriculture; namely dairy and sheep & beef farming provide the opportunity for double digit investment returns at a low level of risk.  However, an investment in agriculture has limited liquidity; an investment horizon of five to ten years is normal and it can take three to nine months to sell a farm shareholding or the farm itself.

Investment Returns

There is a positive earnings outlook for pastoral farming:

• An investment in an average farm has earned between 10 – 12% per annum over the past ten years, competitive with any alternative investment in the sharemarket or commercial property.

• As a sector, Agriculture has increased its contribution to the NZ economy from 12% to 17% of GDP in the past ten years (“Contribution of the land-based primary industries to NZs economic growth”, June 03, MAF).
• The sector includes some of NZ’s largest companies, including Fonterra.  Investments in co-op companies can only be achieved through farm ownership.
• The sector is experiencing growth.  Demand for NZ’s protein products is expected to grow by 2.7% per annum (i.e. double by 2042), driven by a growing world population (about 50% more people by 2050) and a new emerging middle class, particularly from Asia and India (Prof. R Thomson, University of Illinois; McKinsey Consulting). 
• There are new demands for agricultural products; rising energy prices mean that crops grown for animal feed or as staple foods are being converted into crops for processing into bio-fuels.
• Whilst there are good prospects for increased demand, supply potential is constrained, with only 15% more land available for development into agriculture or horticulture.
• World trade reform in agriculture, although slow and lacking ambition, will benefit NZ more than any other nation.
• The sector is well supported by research and development – over the next 10 years productivity improvements will deliver increased milksolids production, increased production of lamb per hectare whilst also delivering reduced environmental impacts.  This productivity growth will underpin increasing profitability and land values.

Investment Risk

Anyone reading the newspaper would think that farming is beset by risk; floods, droughts, falling commodity prices and a rising exchange rate.  Yet property selection can minimise the majority of the climatic risks and product prices are relatively stable.

The reality is that an investment in pastoral farming is in a blue-chip, tangible asset with multiple uses.  Whilst all asset prices go up and down, a good farm, with a plan for increasing productivity will, over the medium term, appreciate in value and minimise investment risk.

Liquidity

Investing in a farm business is a medium to long term (5 – 10 year) investment and as such, would be considered by most as a safe but ‘illiquid’ investment.  The key reasons for this are that:

• Purchasing a farm incurs some transaction and establishment costs that will take more than one year to recoup
• Cashflow from a farming investment normally takes at least 18 months to become positive
• A quality farm purchase will usually be followed by a period of development and intensification.  Whilst there are investment benefits from this process, the increased production and resulting increased capital value will normally take between three and five years to eventuate.
• A sale process for either shares or the whole farm business will normally take a three to six month period.

To maximise liquidity ensure that the equity partnership has purchased good quality assets and are using good professional services that can assist with a share sale process.