Deep Dive: Ag investment opportunities in far-north Australia

Last year Bruce Connolly oversaw the harvest of one of the first commercial cotton crops in Australia’s Northern Territory for 15 years.

Based at Tipperary Station, more than a two-hour drive south of Darwin in the far north of the country, Connolly and his team grew 50 ha of irrigated cotton and 10 ha of dryland cotton.

The trial went so well that the team expanded its planting to 300 ha this year: 200 ha of dryland cotton and 100 ha of irrigation. Across the NT, Connolly estimates that cotton plantings have grown from the 75 ha or so produced by him and others in 2019 to around 750 ha in 2020, a tenfold increase.

“So far this season the cotton crop is behaving as, or better than, expected. The rain-grown area is approximately one meter tall with excellent plant structure and fruit placement. The later-planted supplementary irrigated crop is slightly shorter and growing strongly,” Connolly says, Tipperary’s farm manager.

“We suffered a late start to the wet season but have been receiving good rainfall through February and March. Therefore, irrigations have been few to date, although this will change as the dry season approaches. As always, it’s very hard to determine a yield at this growth stage, but the crop is well placed to perform if the wet season finishes off with an average between now and the end of April.”

Both trial crops have seen Connolly plant genetically modified Bollgard 3, a variety that has also been used in trials in the Ord region of Western Australia. It is modified for pest resistance, helping to overcome one of the barriers that has prevented the growth of cotton at any scale in the NT since the 1970s.

Yields from the trial crop weren’t as high as those in the southern states, Connolly says, but he is hopeful they will increase as more crops are planted – and, crucially, they used much less “applied water” than a similar crop in the south thanks to the higher levels of rainfall in the north.

“Both trials [last year] were successful because the cotton grew, and we achieved seven bales per ha on the irrigated crop and three bales per ha on the dryland crop, despite a very tough wet season that saw half the amount of average annual rainfall,” he says. For comparison, the cotton industry across Australia achieved yields of 7.3 bales per ha in 2018 and 10 bales per ha in 2019, according to statistics from Cotton Australia.

It’s still early days, then. But Connolly and others sense an opportunity to increase cotton production, especially when a lack of water security and high water prices in the southern states are factored into the equation.

And it’s not just cotton that has investors interested in the opportunities that northern Australia presents for agriculture.

Researching the north

The combination of drought in Australia’s eastern states, along with high water prices in the Murray-Darling Basin and increasing demand from investors (both domestic and overseas) to deploy capital into agriculture, has led the Australian government to consider ways to tap the potential of northern Australia.

It established the Cooperative Research Centre for Developing Northern Australia in 2015 with A$75 million ($49 million; €43 million) funding over 10 years.

One of the CRCNA’s three initial focus areas was food, agriculture and aquaculture, and as part of its work, commissioned PwC six months ago to analyze the agricultural investment environment in northern Australia and identify potential investors.

The report identified a few competitive advantages held by northern Australia, including its proximity to Asia, its production capability and capacity to expand, and its status as a “unique” part of the global tropics, with Australia the leading advanced economy in the tropical zone.

Tellingly, though, in consultations with investors the same barriers to investment were cited in multiple conversations. Among others these included: adverse weather conditions; a lack of supporting infrastructure for agriculture; the cost of freight over long distances; insufficient data; and a lack of a coordinated approach.

“Whilst there’s vast amounts of land and water available in northern Australia, the climatic conditions are quite challenging, and investors being able to access granular data around land, soil and water is pretty important in terms of understanding what’s available and how an investment can work best for them,” says Sean O’Meara, PwC’s Northern Australia Infrastructure Advisory lead partner and a co-author of the Northern Australia Agriculture Investor Identifier Report.

“When we looked at specific project cases, you very quickly find there’s very limited data available.”

These barriers to investment all require different solutions to overcome them, some of which will be driven by the governments of the three jurisdictions in the region (Western Australia, the NT and Queensland), while others require investors to take a more active role.

“There certainly is an opportunity for some better co-ordination across the jurisdictions and also between the layers of government within those jurisdictions. There’s a lot of people involved in the investment attraction space doing a lot of good work, but there is a degree of disjointedness,” O’Meara says.

“And understandably, there’s competition between the three jurisdictions [as investment destinations], so there are some inherent challenges from that perspective as well.”

Targeting Latin America

Austrade, the Australian federal government’s trade promotion agency, is one of those organizations working on helping to attract investment to the region. It co-designed the CRCNA research project that PwC was commissioned to carry out.

It has identified three main areas of potential expansion for the sector in northern Australia: broadacre cropping, horticulture and aquaculture. There is also potential for development of timber assets, but the agency hasn’t fully investigated that sector yet.

Austrade senior investment specialist – agribusiness and food Anne Maree Weston tells Agri Investor: “We believe that the key to unlocking the potential in the north lies, in part, with the forging of effective partnerships, joint ventures and collaborations.”

These would involve foreign investors, northern Australian agribusinesses and indigenous businesses, companies based in southern Australia with expertise in areas like broadacre cropping, and other champions for the agriculture sector or northern Australia, as well as the region’s governments.

Weston says that fostering collaboration will help unlock investment, particularly from overseas, as it can reduce the risk exposure that any one party has to take on.

“We know there are domestic investors that have already been trialing and producing cotton and other crops for some years,” she says. “But given the risk profile of our clients, we encourage them not to just do it alone, but to tap into that Australian expertise that’s already in the north, and that’s in the southern producing areas with a long history of growing cotton and all sorts of grains.”

This is where PwC’s investor identification work comes in. A major part of the research project saw the consultant develop an investor typology, assessing a list of 283 potential investors based on the size of their typical investments, what their drivers are for investing in certain types of assets, whether they are active or passive investors, whether they are motivated by social impact, and what models of investment they have historically used (unit trusts, joint ventures, sale-and-leaseback arrangements and so on).

With this list, PwC then identified a list of countries to target over the short and long term, with states on the short-term target list for investment in northern Australia including Argentina, Brazil, Canada, China, Hong Kong, Japan, Singapore, South Africa, South Korea, the UK, the US and Vietnam.

Investors from some of those countries have already been active in the region, as seen by UK investor Guy Hands’ buy-out of Consolidated Pastoral Company and the entry of Vietnam’s Clean Agriculture and Investment Tourism into the market, with the purchase of three cattle stations from the CPC portfolio last year.

The report singles out Brazil and Argentina as having investors that are looking to expand in Australia who would be less afraid of the challenges posed by the north.

“The interest we’ve had from the Brazilian market has been enough to keep us busy,” Weston says. “The Brazilians are aligned with the opportunity – they’re not as put off by the risks around the climate and remoteness.

“Even though their climate is much more consistent, they operate in very remote locations with relatively less developed infrastructure compared to other destinations. Many of them are also large family companies with third-generation leaders, who have a track record in greenfield developments.”

Others, like the Canadians, have been very active in other parts of Australia without venturing too far north yet.

“We see a lot of the South Americans acting as potential frontier investors, those family farming groups who want to expand their geographies and are used to operating in a frontier environment,” says Ross Franklin, a PwC partner and co-author of the report.

“But others like the Canadian pension funds have very long-term horizons, so they may still be willing to take on some of those frontier-like opportunities in the region – but the more established investors will generally be looking for a lower risk profile alongside brownfield opportunities.”

Domestic investors

Australian investors have a big role to play in this, too, all sides insist.

One Australian consultant told Agri Investor they were “really keen” to do more deals in the region but the environment wasn’t quite right yet, with more supporting infrastructure needed. Real estate agents have also said that they are seeing more interest in opportunities in the north, although the deals don’t necessarily always materialize.

Austrade works with foreign investors, but Weston says she is seeing “growing interest” from domestic investors as well.

“This includes northern pastoral companies looking to diversify and southern producers looking to transfer their experience and know-how into the northern environment, to create new agricultural sub-sectors for the north. We encourage our foreign clients to engage and partner with both northern and southern-based agricultural producers and agribusinesses,” she says.

A new reality in some parts of southern Australia where both land and water prices are rising could also cause attentions to shift north, PwC’s Franklin says.

“We definitely need to be focusing on investment from southern Australia. In areas where there are issues around water availability or land availability, does that constrain the ability to grow? Those investors can come to the north and put their skills to good use in a slightly different environment.”

The tyranny of distance

Cotton is definitely one of the sectors that is feeling the squeeze in the Murray-Darling Basin, with Cotton Australia’s statistics laying bare just how difficult it is for the sector to operate during times of drought when irrigation water prices are high.

In 2017, farmers planted more than 452,000 ha of cotton across Australia. In 2018 the figure fell to a little over 290,000 ha and last year it plummeted to just 60,000 ha. The last time production was that low was during the Millennium Drought in 2007.

One investor who did not wish to be named said they had considered trying to develop cotton plantings in the north but were not yet willing to take the plunge because of the travel distance involved in transporting the crop to a gin for processing. Combined with lower yields, it would make the investment uneconomic, the investor said.

This is echoed by Tipperary Station’s Bruce Connolly, who acknowledges that the expansion of the cotton industry in the far north is hampered by the “tyranny of distance.”

“There are no processing facilities in the Northern Territory,” Connolly says. “It’s a giant barrier because our closest [usable] facility is nearly 3,500 km away – in the southern regions I don’t think there’d be too many farmers who’d be more than 400-500 km away from their closest processing facility, at the outside.

“Whilst we’re able to achieve some discounts in freight costs by backloading trucks that would otherwise be returning south empty, we’re certainly not across the line and a processing facility in the north would make it that much more profitable.

“A processing facility isn’t cheap – maybe A$12 million through to A$40 million depending on its size. Anyone who’s going to build that would need surety of supply, and even though we were buoyed by our success last year we weren’t up to the yield of the southern regions.

“We have had visits from several ginning companies who have expressed great interest in what is happening with cotton across the entire north. Perhaps we will have an announcement in that area soon which will spur the fledgling industry on to greater efforts.”

Connolly helped to form the first Northern Cotton Growers’ Association in September 2019 to help share knowledge between the NT growers and those from Kununurra in the Ord Valley, where others have been trialing cotton crops in far-north WA. He will serve as NCGA’s inaugural president.

“Production will not increase by the same factor into 2021 [as it did in 2020], but I’m equally sure the area will be expanded on again,” he says.

Initiatives like the NCGA are a perfect example of the kind of collaboration and long-term thinking that is starting to take place around agriculture in northern Australia, and which the CRCNA and Austrade are trying to foster.

“The aim of our research has been to try and provide a clearer picture to decision-makers, whether within government or within investment groups,” O’Meara says. “It can be used by people on both sides of the equation to better understand what some of the hurdles are but also where the opportunities are.”

And the message for investors from Dr Allan Dale, Professor of Tropical Regional Development at James Cook University in Darwin and the CRCNA’s chief scientist, is clear: get involved.

“This is an opportunity to have a stronger debate with the investor community about what they might do to step up,” he says.

“The one thing that’s unambiguous is that there’s absolutely demand for expansive investment and there’s absolutely the resource capacity to take it forward, but it’ll take all parties to step up to the collaborative mark [to make it happen].

“I’d certainly encourage the investment community to think about how we can create the environment where those forward-looking partnerships are more explicit.

“This is a rallying call to say that the way we need to do development in the future needs to be different from the way we did it in the past – less government-centric and more collaborative.”

Northern water

One asset class that has generated very strong returns for investors in recent years in southern Australia is water – but high prices, coupled with increasing concerns about stricter regulation of the market, has meant that there is reason to explore options for water investment outside the Murray-Darling Basin.

“It’s an area we’re spending increasingly large amounts of time on,” says Nick Waters, managing partner at Riparian Capital Partners, an investor in water entitlements and irrigated agriculture assets.

“The region seems to be garnering an increasing amount of attention – at the moment, water is so scarce and expensive, and the climate has been so challenging in the MDB, that investors are looking at the economic unit of land and water in the north and it starts to look more appealing.”

Waters says there are some challenges to overcome before water itself becomes an investable asset class in the north in the same way as it is in the south, though.

“Not all of the water entitlements up there are unbundled from land and there are some risks around changes to regulation because it hasn’t all bedded down,” he says.

In 2018, the Productivity Commission released a report on the reform of Australia’s water resources sector. It criticized Western Australia and the Northern Territory, saying that both jurisdictions needed to modernize their water entitlement regimes to bring themselves more into line with the National Water Initiative’s aims of establishing secure, tradeable water rights that are separate from land.

“There’s a much more investable product, I suppose you could say, in Queensland,” Waters says. “But a lot of those water entitlements are effectively unregulated river harvesting-type licences rather than the regulated rivers and aquifers that we tend to invest in.

“Queensland has a much higher proportion of unregulated water markets [than southern areas], so it’s not straightforward – but you definitely have pockets of quite intriguing value.”