Strong income returns underline Australian ag is more than just a land play

At the start of June, a few months into the coronavirus pandemic, Agri Investor reported on analysis from Rabobank that predicted Australian farmland would emerge “largely unscathed” from covid-related disruption, providing a “port in a storm” for investors.

We’re not disputing that prediction here, but the latest figures from the NCREIF Australian Farmland Index show capital returns on farmland dipped in the quarter ending March 2020, on an annualized basis.

In fact, the annualized capital appreciation figure of 5.21 percent was the lowest since March 2016, when it dipped to 0.94 percent. In the intervening period, the capital return has only dropped below 7 percent for a single quarter and reached a high of 11.86 percent in March 2018.

This latest dip was somewhat unexpected, with most market sources reporting in the past few months that demand for land remained strong while on-farm performance remained relatively good in many places, despite the impact of the drought in the eastern states.

One fund manager told us, though, that prices were probably being propped up, at least in part, by continuing low interest rates and a relatively weak Australian dollar, suggesting that a small correction wouldn’t be out of order.

One consultant also told us: “I think land values have moved a long way very quickly and I’ve been getting feedback to say the ROI was becoming challenging at current values.”

Frank Delahunty, coordinator of the Australian Farmland Index, said a few disposals from contributors to the index during the reporting period might help explain the fall. He also cautioned that most annual farm valuations will be more accurately reflected in the next edition of the index, which will cover the period up to the end of the financial year in June 2020.

But he described the figures overall, with a total annualized return of 14.91 percent, as a “good result,” driven by income returns of 9.26 percent that more than offset the fall in capital returns.

While individual farm data isn’t available (and the index’s usual split between annual and permanent crops was also unavailable this quarter because of what data has been submitted), it seems the strong income returns are being driven by the same factors that have kept land prices buoyant for so long – low interest rates and a weak Australian dollar driving export demand for Australian farm products.

As Rural Funds Management chief operating officer Tim Sheridan said in commentary on the index this week: “The late onset of the northern wet season, combined with a historically low national cattle herd, saw tightened supply and further supported farm gate prices, particularly for young cattle and breeding stock.”

It’s also the first time since 2016 that the index’s income return figure has been higher than the capital return figure, which should be a useful argument for ag asset managers trying to convince skeptics that investing in agriculture is more than just a land play.

The pandemic’s final reckoning for agriculture remains to be seen in its entirety, although indications so far point to ag’s ongoing resilience as an asset class.

While the drop in capital returns seen in these figures is worth noting, the strong total return figure (and its relative lack of volatility over the past two years) should not be overlooked either – especially when compared to other asset classes during these turbulent times.

Write to the author at daniel.k@peimedia.com