goFARM Australia founder and managing director Liam Lenaghan has said that embracing natural capital should be “business as usual” for farmland asset managers and the practice of sustainable farming is “not something new”.
Speaking at The Australian’s Global Food Forum in Melbourne this week on a panel with fellow asset managers and investors, Lenaghan acknowledged that sustainability in agriculture was important and valuable while commenting on the concept of natural capital.
“Most good operators do all these things already,” said Lenaghan. Perhaps it’s the measuring and reporting of it that needs to be improved to communicate to customers and the community that this is how we go about it – but it’s not something new for ourselves or for businesses that conduct themselves in a sustainable manner.”
Nuveen Natural Capital head of APAC and Africa Kristina Hermanson was speaking on the same panel and said that investors from Europe and Japan are particularly focused on the carbon intensity of their investments, and are attracted by agriculture’s potential to sequester carbon.
Hermanson said: “On the demand side, many of our investors – particularly in Japan and Europe – are very focused on the carbon intensity of their investments, [asking] lots of questions around biodiversity, nature-positive climates. We have not only countries but corporations making net-zero carbon commitments [with] millions of acres going into sustainable agriculture programs.
“On the supply side, I think we have great opportunities in our farming landscapes to have not only a really productive core farming system, but also add biodiversity and carbon sequestration. So we’re positive on natural capital in particular in Australia.
“For attracting international or Australian superfund capital, I think what helps a lot is ecosystem services opportunities – so, the biodiversity markets, the carbon markets, and export opportunities [that can be leveraged] across the whole value chain to the end product.”
On performance of farmland investments over the past several years, Lenaghan said returns had been “brilliant”.
“There’s been a lot of money made in recent years, and beyond that too, in owning land and water. It feels like its priced millimeter-perfect now. We’ve had three consecutive years of record commodity prices and production. That’s built balance sheets and delivered profitability, [which combined with] plentiful and cheap capital has really fuelled the boom,” he said.
“But I think we’re now heading into some challenging times, with forecasts of drought, rising interest rates and a big step back in commodity values. I think the A-class and B-class assets will start to stratify.”
Return of China
Lenaghan said it was still a good time to be an investor in agriculture but that goFARM was more “cautious” now.
“There are some big headwinds on land value, but there is also the emergence of societal expectations around land management and stewardship, biodiversity, and carbon. There will be assets that continue to perform but there will be assets that go backwards from here.”
Hermanson agreed that returns had been “very, very strong” in Australia in recent years, as well as in other jurisdictions like the US and Brazil, but said that Nuveen Natural Capital expects the acceleration in farmland value growth to “start to slow”.
David Williams, managing director of corporate advisory firm Kidder Williams, also speaking on the panel, said he saw “heavy demand” for Australian agriculture from North American institutions, citing interest from Canadian pension funds and US-based university endowments.
“One of the other bright spots we’re seeing is that the Chinese are back,” he said. “The door from the Foreign Investment Review Board is slightly ajar [for them] so I think we’re going to see a fair bit more of that in the next six months.”
On foreign investment, Lenaghan added: “As an Australian-owned business investing Australian capital, we like the FIRB process [because] it gives us a competitive advantage. On the flip side, it’s well-documented the capital gap that exists [between] the level of investment in Australian agriculture today to what it needs to be for the industry to realize its full potential.
“There doesn’t seem to be the capacity or the will domestically to make that commitment, so I think it’s prudent that we divide that up [..] with foreign investors.”