The covid-19 crisis may lead to “significant buying opportunities” for agricultural assets in Australia, with investors wary of business continuity risks and supply chain disruptions.
However, multiple sources told Agri Investor they expect agricultural investments to continue to perform well for the time being.
“If anything will help prove the thesis that agricultural investments are non-correlated to other asset classes, this is it,” said Growth Farms managing director David Sackett. “We’re producing food, and that’s essential.
“The good thing in Australia is that we have very diversified markets for many of our products: with lamb for example, it’s 40 percent domestic, 20 percent to the US, 20 percent to Asia, and 20 percent to [the Middle East and North Africa]. Products like wool and cotton are more concentrated [markets], but they’re not perishable.”
Sackett also felt that land prices would not be directly affected by the crisis, as values are “closely linked to long-term farm profitability and commodity prices”.
Prices for various commodities have held up well. Laguna Bay Pastoral Company CEO Tim McGavin told Agri Investor that he has seen a “spike in demand” for red meat, with China seemingly back in the market as its supply chain begins to move again following a widespread shutdown earlier in the year.
The challenge for some livestock producers in Australia, he said, will be to restock following the drought. Prices for cattle are high – a positive for livestock producers who had to sell stock over the last six to 12 months, but a challenge now when they are trying to rebuild.
“Investors are concerned, but we’ve been able to reassure them that we’re not loaded up with debt and the fundamentals of our assets remain strong,” said McGavin. “There will be long-term questions about demand for certain products at the end of this, depending on the impact of a recession, but it’s too early to tell. The world will look different and things will depend on how much consumption picks up for some types of product.”
Opportunity as well as risk
McGavin was also clear that the crisis will present opportunities for well-run asset managers and for farm operations with strong balance sheets.
“We have some dry powder,” he said. “We’ve not always enjoyed trying to deploy capital over the last four years – land values have been high – so this could act as a big pressure valve release.”
This view was echoed by two other market sources: a fund manager and a consultant, who said that the likeliest buying opportunities would come from institutional investors that might be forced into selling some of their more illiquid assets owing to the sharp drop in equities markets worldwide.
“How long will those institutional investors be willing to stay on their heels? There will be significant buying opportunities in the coming months and it will probably be business as usual after that, and business as usual for others,” the consultant said.
Agri Investor also understands that rural banks in Australia have already significantly tightened the issuing of new loans.
Managers of permanent crops, and fruit and vegetable crops, are more likely to have more concentrated export markets and will be more reliant on on-farm labour, which will create higher risks. However, moves to ensure that agriculture has been labelled an essential industry in Australia could help to assuage the latter fear.
For now, though, the primary focus has been on ensuring business resilience, with staff health and safety a top priority.
“We’ve been ensuring our farm managers develop contingency plans for what would happen in the event that they or staff members have to go into self-isolation, or if there are other restrictions on movement or supply chains,” Sackett said.
“What if your local abattoir gets shut down because there has been an outbreak among staff there? Or what if your key staff have to self-isolate in the middle of harvest time or shearing? It’s about getting the message across that, just because you’re in a rural community, you’re not immune.
“We’re not being prescriptive, though, as the situation is changing so quickly.”