The importance of being nimble

With competition increasing Down Under, we look at how some investors in New South Wales are adding value to their assets.

On Monday, I touched down in Griffith, New South Wales, getting my boots muddy on the 15,000 hectare Gundaline cotton station and visiting some of the water titles in the wider area. These were being replenished in what’s usually a dry region.

Griffith is turning into an investment hub, with players like Olam, Blue Sky, APG and Webster all having assets in the area, and so the visit made me think about a new reality in the Australian agricultural and water markets. It’s something that’s sure to come up at today’s Agri Investor Australia Forum, too: as foreign investors, including Chinese buyers willing to pay high premiums, put larger amounts of money into Australian agriculture, gaining assets for competitive prices is becoming increasingly difficult.

With Blue Sky’s Kim Morrison as my guide, my visit to Gundaline was a lesson in farmland conversion and expansion, and how these strategies can not only raise operational profits on a particular farm, but also improve opportunities in a wider area. In Blue Sky’s case, conversion to higher yielding and more profitable crops has not only been a direct investment opportunity in the form of its stake in Gundaline, which has been converted from rice to more profitable cotton production, but also in water titles around the area.

To begin with, Blue Sky’s success needs to be considered within the context of the local environment. In the case of cotton conversion, the firm was aware that in 2012 a group of local farmers had leveraged themselves substantially to build their own cotton ginning facility. It was controversial, said Morrison, with conventional banks unwilling to lend. But in this case, the risk came with reward and within a few years the farmers had paid back most of their debt.

Since then there have been two more cotton gins built in the region, so that farms surrounding Griffith could support production of up to 400 thousand bales. The region’s capacity could expand from an area of around 35,000 hectares to some 100,000 hectares, said Morrison.

Investment in cotton appears to be supported by a local growth story in infrastructure and processing that increases profits for the crops. Morrison said, in turn, this had helped push up the value of water leases to operators in the area, as were conversions to higher-profit permanent crops in the region.

Blue Sky is certainly not the only firm that see profit in farmland conversion and investment in the wider agricultural ecosystem, in this case water titles. Webster, which also has investments in high value crops like nut orchards, as well as cotton and water, stated in its 2015 end of year report: “In times of high allocations, water can trade as low as A$10/ML, versus the peak in recent years and current level of A$130/ML. So water needs to be partnered with high value per megalitre crops to ensure a decent return when water is abundant.”

Widening the play from just the investment on the ground is something that investors in Australia need to consider. As the country’s agriculture story grows – and it is growing fast – investors must consider supply chains, key inputs like water and soil quality, and the possibility that additional equity and risk may be necessary to get the best value out of Australian farmland investments.

How important is it to take a value-add approach? Get in touch: clare.p@peimedia.com