Annualized returns in Australia hold up despite drought but dip in Q3 2019

The annualized return to the end of September 2019 was 14.37% but continuing drought means that income returns are especially likely to fall further in upcoming quarters.

Farmland returns in Australia for the year to the end of September 2019 were up on the same period 12 months earlier, despite continuing drought conditions.

The latest figures compiled by the National Council of Real Estate Investment Fiduciaries in its Australian Farmland Index, show that farm income returns on an annualized basis hit 14.37 percent at the end of Q3 2019, up from 12.75 percent a year earlier.

Annualized farm income return at the end of Q3 2019 stood at 6.01 percent, while the annualized appreciation return was 8.00 percent. Both figures were up on the corresponding values for the same period a year earlier, which stood at 5.06 percent and 7.49 percent, respectively.

Returns fell significantly on a quarterly basis, however, from a total return of 4.35 percent in Q2 2019 to 2.46 percent in Q3 2019, reflecting the immediate difficulties investors are facing during the drought. The Q3 figure comprised 2.09 percent in income return and just 0.37 percent appreciation return across all farmland.

Returns for annual cropping and livestock enterprises had been “markedly” affected by weather conditions, Argyle Capital Partners said in commentary on the index findings, although reduced income from these types of farms has been offset by capital appreciation of more than 11 percent in the past 12 months.

Permanent cropping enterprises have seen income increase, bolstered by free trade agreements, continuing demand from Asia for premium Australian produce, gaps in supply resulting from the US-China trade war that Australian producers have been able to fill, and a weak Australian dollar.

The outlook for the coming months is uncertain, though, with no firm signs that weather conditions will significantly improve on Australia’s east coast in the short term.

“A vast section of eastern and southern Australia’s prime farmland has now experienced record-low aggregate rainfall totals. Consequently, annual cropping programs were curtailed in 2019 and will likely impact income returns for those enterprises several quarters through 2020 as there will be reduced crops harvested in the months ahead,” Argyle Capital Partners said.

“Livestock enterprises through 2019 required either destocking [or] supplementary feeding at great expense, or both.”

On permanent cropping, the firm said: “Permanent farmland operations are typically irrigated farms. The prolonged drought has dramatically impacted the availability of irrigation water across the entire eastern half of Australia in 2019-20. Irrigated farms face the prospect of purchasing very expensive water for their 2019-20 irrigation requirements. It is anticipated this added expense may impact income returns for permanent cropping enterprises in some quarters.”

The 50 properties that make up the Australian Farmland Index have a combined value of A$1.1 billion ($744 million; €675 million), up from A$594 million when it was launched in 2015. It is heavily weighted to permanent crops, which represent more than A$800 million of the index’s value.

The total annualized return since inception in March 2015 is 13.98 percent, with 6.14 percent annualized income return and 7.54 percent appreciation return.

Contributors to the index include AAG Investment Management, Argyle Capital Partners, goFARM Australia, Gunn Agri Partners, Hancock Agricultural Investment Group, Laguna Bay Pastoral Company, and Rural Funds Management.