MIRA and QIC maintain cattle herds amid ‘difficult decisions’ during drought

Macquarie Infrastructure and Real Assets and Queensland Investment Corporation have managed to maintain cattle herd sizes despite challenges posed by drought, the pair said at a conference in Sydney.

Jock Whittle, chief executive of MIRA’s Paraway Pastoral Company, and Tom Murphy, head of agriculture and regional investment strategy at QIC, told Citi’s annual Australian and New Zealand Investment Conference last week that diversification in their large livestock portfolios had helped cope with the dry conditions. They added that a strong outlook for beef demand convinced them to maintain their herds.

“It’s a difficult decision as to whether you give your animals supplementary feed and position yourself for after the drought [or reduce herd size],” said Whittle, who is responsible for MIRA’s large-scale sheep and cattle operations across northern Australia, New South Wales and Victoria.

“We’ve certainly taken a position to try and maintain as much of our productive capacity as we possibly can, because the external signals we see in the marketplace are incredibly strong in demand for beef and sheep meat.”

QIC owns the North Australian Pastoral Company, which operates 14 properties across approximately 6 million hectares concentrated primarily in western and northern Queensland and the Northern Territory, some of the areas hardest-hit by the drought.

“Given the spread of our properties with very little in the southern states, we’re used to drought, including bad droughts over long periods of time. But this has been a marked event, particularly in the Barkly Tableland and up around the NT and Queensland border,” Murphy said.

“We’ve been able to maintain our herd numbers, which is very fortunate, but you have seen an effect in terms of increased feed costs. We own a feedlot – that’s a great resource during the drought, but the increase in the price of wheat and those input commodities has been significantly higher, and that’s where it hits you in this period.”

Murphy added that if the drought continued on for another year, there would be a “real impact” on breeding numbers which would affect long-term profitability.

Both Murphy and Whittle said the extreme flooding seen in northern Queensland in February 2019 had not affected their portfolios too badly, with minimal losses and some positive effects.

“We definitely suffered some damage from those north Queensland floods but another part of our portfolio got a good deal of beneficial flooding that has assisted us greatly this year,” Whittle said. “We don’t like to say it in many forums but the floods were probably a net positive for us in 2019.”

On returns, Whittle said MIRA’s Queensland cattle operations had achieved returns of around 3-5 percent annually over the last nine years, excluding gains from land value appreciation. When questioned about the level of returns that investors can expect from agriculture without relying on capital appreciation, he said that appreciation generally requires underlying earnings from the on-farm operation to support it, but that there is sometimes a lag in seeing this in practice.

“What is different about agricultural land versus other asset classes is that the value of the asset does not follow short-term earnings,” he said. “So you see situations like right now, where land has continued to appreciate in NSW in the last 24 months despite the fact that earnings have definitely been compromised. That shows there is a bunch of market participants taking a longer-term view about the future productivity of that land.”

Murphy said that institutional investors in agriculture could generally expect to see returns of 10-12 percent over a given period of time, with a roughly 50-50 split between cash yield and capital appreciation. He also criticised short-term private equity models for ag investment.

“The particular problem with investments in agriculture when you look at some of the private equity models applied in the last 20-30 years are that they tend to be five- to seven-year terms. It’s our belief that the longer-term open structures are the only way to invest in agriculture over time,” he said.