Like every other fund manager, Macquarie Infrastructure and Real Assets saw questions from investors increase as the covid-19 downturn took hold, as LPs tried to assess where the biggest risks lay in their portfolios.

And like most other ag fund managers, MIRA found that its investments in the sector were continuing to perform well in comparison to other asset classes, providing one less headache for LPs.

Liz O’Leary, MIRA head of agriculture

“Early when it became evident this was a global pandemic, we found formal and informal communication with our investors increased as they, quite rightly, sought to understand what their exposure and risk profiles looked like across their portfolio,” MIRA head of agriculture Liz O’Leary tells Agri Investor in an exclusive interview.

“As we moved through that early fact-finding stage, it became clear that, particularly for investments like ours with a long-term focus and modest levels of leverage, along with the strong production environment in Australia and strong commodity prices, meant that their exposure with us did not warrant any attention beyond the usual levels.

“I can only presume that was very good news for them.”

O’Leary says that MIRA’s assets have performed well throughout the disruption brought about by coronavirus so far. The widespread drop in values of most other asset types has helped to reinforce the thesis behind investing in agriculture: that it is non-correlated to other sectors of the economy thanks to the essential service it provides, and that real assets like farmland can be an important diversifier in any balanced portfolio.

“We would consider ourselves to have moved through at least this first phase of the pandemic. What comes in the future none of us know, but at least we feel well prepared.”

Showing resilience

Agri Investor is speaking to O’Leary by phone as covid-19 restrictions remain in place, although the situation in Australia with regards to working in offices and meeting face-to-face is notably looser than in most other nations thanks to lower levels of the virus.

O’Leary, who joined Macquarie more than 16 years ago, says that performance across its agricultural portfolio has been “very good” overall, with a broad basket of commodities across livestock, annual cropping and permanent cropping helping to give it the diversity that comes with scale.

“There are opportunities to optimize portfolio composition”

The firm closed fundraising in 2019 for its third agriculture fund, a 15-year closed-end fund focused on cropping, after hitting its A$1 billion ($690 million; €610 million) hard-cap. That fund is now around halfway deployed, O’Leary says, and covid-19 won’t slow down its appetite for further property purchases.

“We’ve got a history of continuous presence in the transaction environment, even in those funds that are closed or deployed, because there are opportunities to optimize portfolio composition. We’ve been present in both the livestock and grains and perennials transaction markets pretty well constantly over the last five years, and I can’t see that changing.”

Across MIRA’s portfolio, beef has been a “standout performer” in recent months thanks to supply dynamics as Australia’s east coast emerges from drought leading to high prices, coupled with sustained global demand for Australian meat.

MIRA’s cereal growers on the east coast, along with farmers in that sector in general, have a “little spring in their step” thanks to a wet start to the year, she says. “Seeding was just a joy to observe after some really tough years of sowing dry, so planting with a solid moisture profile and strong seasonal conditions on the horizon was a real positive.”

The firm’s portfolio included significant barley-growing assets, a sector that has taken a major blow after the commodity’s main export market, China, imposed tariffs of around 80 percent on the crop. China accounted for around 57 percent of Australia’s barley exports in 2018-19, according to the Department of Foreign Affairs and Trade, or A$591 million of the A$1.04 billion total.

“We’ve taken the step that I think most barley producers have, particularly over in the west [of Australia], to change our cropping plans and alter our mix, which was timely. We look eagerly to new market developments, but also sincerely hope that the issues with our bilateral barley trade with China can be resolved,” O’Leary says.

Is she concerned that the trade dispute, which has also pulled in some beef processing facilities, could bleed over into other commodities that MIRA is involved with?

“We’re seeing sufficient market activity for all of our other commodities – so right now, we feel confident in our position and in our commodity mix. We retain a long-term, positive view of these markets.”

Capital growth

As well as strong tailwinds for most of the commodities that MIRA (and other Australian farmers) is producing, capital growth has remained strong for farmland itself, despite the triple whammy of drought, bushfires and now coronavirus.

“Notwithstanding a tough couple of years of drought, many of those strong, long-term family farmers have strengthened balance sheets”

According to figures compiled by the National Council of Real Estate Investment Fiduciaries in its Australian Farmland Index, the lowest that land appreciation returns have been on a rolling annualized basis since Q2 2016 was 6.55 percent, with the most recent annualized return for Q4 2019 coming in at 7.86 percent. These figures are generally much higher than comparable figures seen in the US in recent years.

“I’d put that down to some of the characteristics of farmland investing in Australia, where we’re recognized for high-quality assets and operators, and progressive farming practices. That ensures Australia maintains its place in the top couple of destinations for agriculture investors,” O’Leary says.

Most of this growth in farmland values is still being driven by the sector itself in Australia, though, she says, with institutional and foreign investors still comprising a “relatively small subset” of the total number of investors in the country’s farmland.

“The majority of assets [are] still owned and traded by private owners and family farmers. Notwithstanding a tough couple of years of drought, many of those strong, long-term family farmers have strengthened balance sheets and recognize the incremental impact of growing their own portfolios and farmland footprints, so they continue to underpin the farmland market.”

The coronavirus crisis produced one unexpected wrinkle earlier this year when treasurer Josh Frydenberg tightened foreign investment rules to ensure that all transactions, regardless of sector or value, would be subject to screening by the Foreign Investment Review Board. This was not a problem for MIRA, O’Leary says.

“The agricultural sector is well-versed at managing transactions through FIRB. Unlike other sectors that are now learning the process and how to adapt transaction strategies, we’ve been doing it for years and value the transparency and accountability of the process,” she says.

“Having said that, we must remain conscious of the need for Australia to appear to be, and genuinely be, open for business to high-quality long-term investors, whether they be domestic or foreign. The space needs the right capital for the right reasons and for the right duration.

“We need to be conscious of the consequences of extending approval timeframes and the need for good high-quality investors to feel comfortable that they can compete on a level playing field in an acquisition process.”

Post pandemic

As the first phase of the pandemic appears to have passed in Australia (we speak just before a fresh outbreak of covid-19 cases in Melbourne raised the specter of a second wave), MIRA’s thoughts have begun to turn to what might come next.

Discussions with investors about the role private capital in agriculture can play in making both societies and landscapes more resilient have grown deeper in the past few months, O’Leary says, although they had begun before the coronavirus arrived because of the impact of the drought and bushfires.

“For me, the next piece of the puzzle is around how farmers increase their participation in sophisticated environmental markets”

MIRA’s longevity in the sector, coupled with its scale across multiple geographies within the country and several different commodities, gives it a strong base of evidence to show what is working, and what can benefit both the environment and investment returns, she argues.

“We’re increasingly resolved that we’ve got strong proof points that sustainable farming is mutually beneficial to the environment and to a farmer’s bottom line. We’re seeing it prove out that addressing climate change and being a good farmer do go hand in glove,” O’Leary says.

“For me, the next piece of the puzzle is around how farmers increase their participation in sophisticated environmental markets, and how that will help to catalyze further evolution in farming practices in ways that will both aid the decarbonization story, but also enable more progressive farming practices to be adopted in an economically rational way.”

O’Leary won’t be drawn on specific plans to raise a fourth fund but confirms that the firm is already thinking about a mandate for that fund, whatever form it takes, that will have sustainable and regenerative farming practices baked into it. Agri Investor has heard from market sources that MIRA intends to make sustainable farming a more explicit part of future funds, building on a commitment that it secured from the Clean Energy Finance Corporation for its third fund.

“We’re focused on fulfilling our commitments to investors in Fund III and feel comfortable about the portfolio we’re building there. Then, yes, we’ll come up for air and some of the thematics we’ve talked about will start to influence future fund mandates, for sure,” she says.

O’Leary is keen to stress this sustainable farming theme has only been heightened by the pandemic.

“Hopefully, if covid has taught us one thing in terms of our response, it’s that collaboration within the industry is powerful and maybe we need to go faster and accelerate further on some of these aspirations, as we all get a little more comfortable that pace is important and cadence matters.”