Year of turmoil proves resilience of agriculture assets

Following fires and drought, the covid-19 pandemic presented a new challenge for Australia’s farmers, but financial returns for investors have remained steady and attractive.

This has been a challenging year for everyone, including Australia’s farmers.

Many, particularly in the eastern states, would have welcomed the relief of some good rainfall at the start of the year following many months, or even years, of drought conditions. Coupled with the horror bushfire season that the same region suffered in late 2019 and early 2020, many would have been looking ahead to the rest of the year in February with a belief that things would surely only get better.

We all know what happened next.

The coronavirus pandemic took hold and swiftly led to some short-term supply chain disruption, the closing of international and domestic state borders and a need to ensure that business continuity plans were robust in case of outbreaks in processing facilities or on farms themselves – many of which are located far from urban centers where healthcare is difficult to access.

Australia, thankfully, has so far escaped the worst of the pandemic that has been seen in other countries (not forgetting Victoria’s extended lockdown, of course). This surely helped the country’s agriculture sector stay on its feet this year.

Regardless, the world needs food and fiber just as much during a pandemic as at any other time. So 2020 does seem to have borne out the long-held thesis of agricultural investment that the asset class is uncorrelated to other investments.

As stock markets tumbled (before recovering) and even some types of real assets previously thought to be relatively resilient, like airports, proved to be more exposed to risk than some would have thought, agriculture has continued to generate steady returns for investors.

The latest iteration of the Australian Farmland Index, now compiled by the Asian Association for Investors in Non-Listed Real Estate Vehicles after years of administration by NCREIF, showed that the total annualized return for Australian farmland at the end of Q3 2020 stood at 12.35 percent.

While this was admittedly lower than 2019’s Q3 figure of 14.37 percent, it is still a very healthy result in what has been a year of turmoil for many asset classes.

The fact that returns have only varied by around 2 percent also supports statements we have heard from investors that the volatility of agricultural assets is often overstated. Yes, you do get fluctuations in commodity prices and land values, but over a long period of time, returns are steady.

While the world, and Australia, is not yet out of the woods when it comes to covid-19, and there are other headwinds building for certain commodities thanks to the seemingly intractable trade dispute between Australia and China, 2020 has shown how resilient agricultural assets are.

It should prove a salient lesson for investors that farmland and other food-related assets can be useful, even necessary, parts of a diversified portfolio, helping to pick up the slack when other asset types suffer.

Everyone hopes that 2021 proves to be a bit smoother, but investors, fund managers and farm operators should take heart from the sector’s performance in 2020.