AAM: We’re investing for a sustainable legacy

This article is sponsored by AAM Investment Group.

What is AAM Investment Group’s approach to investing in agriculture, and how does it align with your investors’ ESG objectives?

We actively invest in agricultural assets and businesses, not only to operate them, but to improve them for the future. We ensure all investments meet our mandate: that we will only invest in them if we can enhance their productivity, efficiency and sustainability. We see this as investing for a sustainable legacy, with sustainability defined as something that creates perpetual improvements. Investments also need to be economically feasible – they are never a one-off for us, but rather a continual progression.

At AAM, we focus on creating a risk-managed outcome through geographic diversity and investing in different commodity supply chains. This allows us to create more sustainable, uncorrelated income returns, as well as giving investors an appropriate exposure to capital growth.

How does mitigating carbon emissions fit into your sustainability strategy?

When people talk about sustainability in agriculture, carbon is probably the most confusing element. Plants need carbon, particularly carbon dioxide, to produce oxygen – so people are mostly focused on how to create and improve biomass production and biodiversity.

However, the conversation needs to include soil health and organic matter, not just carbon.
The sector has unfairly received a bad rap for its emissions. However, the focus on carbon emissions produced by fossil fuels that have been stored somewhere for millions of years is a vastly different situation to the cyclical nature of carbon and methane emissions generated by agriculture.

Carbon and methane are recycled through the process of creating food, and monumental improvements can be achieved through putting organic matter into soil with water retention, as it improves soil fertility. The most materially influential factor on carbon storage in soil is linked to rainfall. If it doesn’t rain for an extended period of time and a drought forms, the root biomass under the ground naturally shrinks – and therefore your natural carbon storage declines even where changes in management have been applied.

Carbon on its own should not be the ultimate assessment tool for how well a farm enterprise is performing on sustainability. Instead, it should be about how energy efficiency is created and a measurement of energy input versus food energy output. Soil carbon needs a very long-term view so that it can be normalized against variable rainfall. It is dangerous to apply any form of short-term thinking.

As an industry, we all need to responsibly consider the food and crops we grow, our production systems and supply chains, relative to our environmental impacts.

Has the pandemic helped to make the case for sustainable ag investment?

Absolutely. The past two years have demonstrated how uncorrelated our sector is to the rest of the investment market. During that time, mainstream agricultural assets and food products have generally moved in a positive direction while other types of assets often have not.

While not specific to the pandemic, the terrible events occurring in Ukraine now are showing how volatile other asset classes can be and how sensitive they are to world events.

At AAM, we’re applying technology to our assets and operating them sustainably to ensure we are producing more while using less – and that effectively insulates AAM’s investments from wider volatility. For example, the price of gas required for AAM’s poultry sheds is directly linked to the global oil price. By investing more than $5 million in renewable energy innovation, we now use approximately 40 per cent less gas within those assets than when we bought them. At the same time, we are cutting electricity grid demand by more than 70 percent and reducing total greenhouse gas emissions by 62 percent. This means the input cost of fuel does not affect AAM’s poultry operations as much as it might have without a sustainable investment strategy. This is only the first stage for these assets on the sustainable food production journey.

There is a fundamental misunderstanding among many potential investors about how volatile agriculture is as an asset class. When you operate assets at scale and smartly, they are actually less volatile than many other asset classes. Adding sustainable management practices to the mix helps enhance that performance further.

Can you give an example of where technology has transformed an asset?

Firstly, it’s critical that we use technology to improve efficiency. Technology gives us a level of objectivity and the data never lies.

The Southern Cross Poultry Fund in South Australia comprises 11 poultry farms across 90 large sheds and is now home to a 1.4MW solar and 2.28MWh battery installation. In particular, our Riverlands free range complex is running on renewable energy 65 per cent of the time, with batteries on five of the seven farms. In the 18 months since installation, this project has saved our investors more than A$1 million ($720,000; €650,000).

We’ve structured an arrangement so that the farms are linked to the wholesale energy market, allowing us to arbitrage electricity costs in line with our infrastructure. We have developed an integrated energy management system that uses an algorithm to determine whether the site is drawing power from our solar assets, our batteries, or from generator power – and in periods of negative pricing, we are actually paid to consume power. We could not find a product on the market that would achieve this for us, so we put together a team of engineers and designers and built it in-house.

This is something AAM will look to make available to other large power users in the industry, because it’s not just about great sustainability outcomes for us – this technology can be applied to any other large agriculture asset to help reduce overall power demand.

This is an illustration of why a narrow focus on soil carbon can be confusing, too. Of course, managing soil is important, but so is producing 26 million kg of chicken per year while creating 65 percent less emissions, within two-and-a-half years from taking control of the farms.

How do you share learnings across your portfolio?

A good example of this is in the waste product generated by AAM’s poultry assets. The chickens spend their life cycles producing waste, and the removal of this was previously a large cost for the business. We have invested in improving our processes, such as developing composting infrastructure and value-adding, to turn the waste into a pelletized organic soil fertilizer, which we sell and use on AAM’s portfolio of assets, including our organic beef, sheep and cropping farms.

We have turned what was once considered completely diverse and separate investments in different commodity supply chains, into an integrated operation that shares resources to improve overall sustainability outcomes. That diversity helps us to manage risk and produces a compound benefit as the assets work together to produce a better collective outcome.

Does it cost more to carry out these measures?

Every one of these initiatives has a payback of five years or less, meaning they have met the fundamental investment targets you would expect to apply in a similar capital investment situation. However, I have to emphasize that it is the scale of AAM’s operations that has allowed us to achieve this outcome.

As an industry, agriculture needs to improve sharing best practice in sustainability initiatives and collaborate on environmental and social impact issues, because fragmentation creates disadvantages for enterprises to hit sustainability outcomes. The more we subdivide things, the harder these outcomes are to achieve, and large-scale investors like us have a big role to play in helping the whole sector do better.

If carbon is not the only metric, what others do you use to assess sustainability on your investments?

AAM is using the United Nations’ Sustainable Development Goals to identify opportunities in our operations to create a sustainable, positive impact and drive better long-term outcomes under the three pillars of our own sustainability framework – Planet, People and Prosperity. For AAM, sustainability is about being there for the long term and leaving an asset in better condition for the next generation than it was when we started. If an investment doesn’t have a positive outcome under those three pillars, we simply won’t invest.

AAM invests in rural and regional Australia, in both businesses and farmland assets. We’re focused on tangible outcomes and what it means for people in those communities. As a company, we also look at how we can encourage more people to live regionally and support them to thrive and prosper. The money AAM invests provides somewhere between a five and nine-times multiplier effect on overall economic activity within a given region.
In Australia, the average age of a farmer is nearly 60 – so not only is succession planning a huge challenge, but so too is maintaining the population and growth to support regional infrastructure and services.

AAM’s Sunshine Farms aggregation of five properties in New South Wales is an example of how we can make a difference. In this case, we brought in six young families to run those assets, which meant 19 additional children in the region are attending schools. This had both direct and indirect impacts: it created a more sustainable local school, it meant a bus service became viable again because there were more people there to use it, and it resulted in an extra schoolteacher in the local public school system.

Over the past two generations, as a country, Australia hasn’t actively and sustainably managed succession planning very well. We need to encourage young rural families to stay living in their communities and keep them in the local workforce with a visible career path. The inflow of capital investment will bring back opportunities for people to establish careers in this amazing sector.