Income returns
Notwithstanding farm selection factors (soil, climate, enterprise type and proximity to market), the level and volatility of income received by a farmland investor will depend on whether the agricultural asset is leased to a tenant or operated by / on behalf its owner. (Click here for more detail on the different management options.)
Leases produce a fixed income with the tenant bearing all operational, climatic and commodity pricing risk. With operational management on the other hand these risks are born by the agricultural investor, so income is more volatile, however, averaged over the long term, incomes will also generally be higher (subject of course to selecting the right management team).
The table below provides a general guide to the different levels of income investors can expect on a range of Australian broadacre agricultural assets. Rates of income are stated on the basis of rainfall zone and management model, with farms in lower rainfall zones and those under operational management attracting higher rates of income.
Notes:
- Incomes are stated as a percentage of asset value.
- Figures stated are for larger scale rainfed farms (as opposed to irrigated) operating as arable or mixed arable-livestock enterprises.
- Under the fixed lease model the average stated is for Western Australia and the range is the fixed lease income which would apply in different parts of the Australian Wheatbelt. Generally the closer to urban areas and the smaller the farm size, the higher land prices and thus the lower lease income (as a percentage of asset value). Western Australian farms are on average larger and population density is very low, so the ratio of income to land prices is higher in Western Australia than any other state.
- The range of incomes stated under the operational model is the average that can be expected over a 10 year period, not the range from year to year. Poorer / better performing years could produce income below / above the stated range. Income will on average be less volatile in Western Australia due to the state’s more reliable climate.
Investment returns
Farming is like any other business: all other things being equal, income is dictated by the quality of the management team. Even enterprises with similar soil, climate and business model can show a high degree of variance. This means tenant / manager selection is a critical component of the agricultural investment process.
Investment style
Inefficiencies in the farmland pricing mechanism are one of least exploited opportunities to increase returns as a farmland investor. When it comes to buying agricultural assets, we are able to help our clients beat the market because of our unconventional approach to acquiring farms and the information advantage we have in the markets in which we specialise.
Investing in Australian agriculture
Australia’s robust economy, strategic location and investment friendly business environment have made the country one of the world’s top destinations for foreign investment, with FDI inflows of over twice the OECD average (% of GDP basis, 2011).
Geographic and sector focus
For investors, the choice of agricultural sector will be driven by your risk tolerance and overall investment objectives. As a general rule, arable agriculture (i.e. the cultivation of annual crops, in particular grain) is the least volatile farming sector.