Investing in Australian agriculture An introduction

Investing in Australian agriculture An introduction

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Contents Contents Executive Summary 4 Australia as an investment destination 6 Trends in productivity growth in Australian agriculture 10 Farm income and profitability 13 The importance of farm size and economies of scale 17 Capital returns and trends in Australian farmland values 20 Factors affecting farm values in the Australian Wheatbelt 23 Australian farm debt and equity levels 27 Foreign investment in Australian agriculture 28 References and data sources 31

Executive Summary 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). The agriculture sector in particular is attracting growing investor attention, offering a high level of ownership security coupled with low farmland prices and a reliably profitable agricultural sector. This section summarises some of the key attractions for agricultural investors. Highly transparent and secure real estate market Strong, stable democracy with an efficient legal system and very low level of sovereign risk (Moody s sovereign rating of Aaa and S&P and Fitch rating of AAA). Rated amongst the top three most secure markets in the world to buy and own real estate (Jones Lang LaSalle Global Real Estate Transparency Index, 2012). Foreigners afforded exactly the same freehold ownership rights as Australians. No government approval required for private sector farmland investments below AU$231 million. Very strong economy 21 consecutive years of uninterrupted GDP growth. Highest GPD per capita of any large economy (US$69,000, 2012 forecast). Ranked the most resilient economy in the world during the financial crisis (Institute for Management Development, World Competitiveness Yearbook 2008). Lowest government debt of any large western economy (net government debt of 9.5% of GDP, 2012 forecast). Soundest banking sector of any large economy (ranked fourth in the world by the World Economic Forum, 2011-12). Low rate of unemployment (5.1%, mid-2012). Rich in natural resources with lowest population density of any large economy. Major agricultural producer and exporter Diverse climate, rainfall patterns and soil types allowing for a wide range of agribusiness enterprises. Well developed supply chain and export infrastructure. Highly skilled agricultural labour force. National gross farm income of AU$53 billion (2011-12) with agricultural output more than doubling since the 80s. Vast grain growing area covering 46 million hectares (three times the total land area of England). Grain production up by 69% and exports up by 176% in last five years (2007-08 to 2011-12). Food self sufficient, exporting two thirds of its agricultural production. Third largest exporter of wheat after USA and the European Union (15.9% of global exports, 2011-12). Ideally located to capitalise on the rapid rise in demand and changing diets in emerging markets, with grain exports to China up by more than 200% in five years (2007-08 to 2011-12). Australian farmland is attractive to investors because it combines the benefits of first world governance and stability with the scale and prices of developing nations. Citi Private Bank, Wealth Report, 2011

Compelling investment fundamentals Large farm sizes facilitate greater economies of scale and higher farm income. High level of farm income without government subsidies producing reliable annual rental returns of 5%+. Strong and consistent record of land value appreciation, averaging 9% annually over the last 10 years. Lower farmland prices than any other large agricultural exporter (measured on a land price per unit of production basis, under half the price of United States, New Zealand, United Kingdom and Brazil). R&D and cutting edge management practices driving ongoing increases in farm income and productivity (agricultural labour productivity more than doubled in the last 20 years). Low levels of farm debt (less than 25% debt to equity ratio). No asset price bubble with almost all buyers still being local Australian farmers (98.5% of farm businesses 100% Australian owned). Socially responsible investment (world leaders in adoption of sustainable farming practices). Grain production up by 69% and exports up by 176% in last five years (2007-08 to 2011-12). Food self sufficient, exporting two thirds of its agricultural production. Third largest exporter of wheat after USA and the European Union (15.9% of global exports, 2011-12). Ideally located to capitalise on the rapid rise in demand and changing diets in emerging markets, with grain exports to China up by more than 200% in five years (2007-08 to 2011-12). Foreign investors are afforded exactly the same freehold ownership rights as Australians.

Australia as an investment destination Beyond the excellent investment fundamentals of its agriculture sector, there are also a number of macroeconomic factors that make Australia an attractive investment destination. This should help to foster further foreign investment inflows and bodes well for the future of the Australian agricultural sector, both in terms of asset values and rates of income. The Australian economy continues to perform well off the back of 21 consecutive years of uninterrupted growth. In 2008 during the financial crisis Australia was rated as the world s most resilient economy in the rankings published annually by the Institute for Management Development (IMD). After 21 consecutive years of uninterrupted GDP growth Australia now has the highest GPD per capita of any large economy. Figure 1: Annual change in GDP for Australia, the US and the European Union, 2001 to 2010 6% Australia United States European Union 5% 4% 3% 2% Annual GDP growth 1% 0% -1% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-2% -3% -4% -5% The outlook for the Australian economy remains buoyant as it continues to benefit from emerging market demand and a substantial pipeline of investment in the natural resources sector. At 3 people per square kilometre, Australia has one of the lowest population densities and highest per capita natural resource reserves of any nation. With China (population density of 141 people / sqkm), India (population density of 372 people / sqkm) and a number of other emerging markets on its doorstep, Australia is well positioned to take advantage of rising demand from these economies.

Figure 2: Population density of selected Western and emerging market countries, 2011 Australia Canada Brazil USA France Thailand China Italy Germany UK Japan India 0.0 50.0 100.0 150.0 200.0 250.0 300.0 350.0 400.0 People / sq km Australia s government bonds are rated Aaa by Moody s and AAA by S&P and Fitch. At US$69,000 per capita, Australia has a higher GDP per capita than any other large economy, its government debt to GDP ratio is lower than any other large Western economy at under 10% (2012 forecast), and it has an unemployment rate of 5.1% (June 2012), also amongst the lowest of any Western economy. Figure 3: General government net debt as a % of GDP for selected large economies, 2012 forecast Australia Canada Brazil Germany France USA UK Italy Japan 0% 20% 40% 60% 80% 100% 120% 140%

Figure 4: Unemployment rate for selected large economies, June 2012 Japan Australia Brazil Germany Canada UK USA France Italy 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Figure 5: GDP per capita in US$ for selected large economies, 2012 forecast Australia Canada USA Japan France Germany UK Italy Brazil 0 10000 20000 30000 40000 50000 60000 70000 80000 US$ / capita Australia s banking system is rated as one of the soundest in the world (ranked 4th of 142 countries by the World Economic Forum) and the country is recognised as having has a higher quality of life and level of prosperity and economic freedom than almost any other Western economy. Looking forward, Australia has the economic strength and policy bullets to enable it to withstand future external shocks better than the great majority of the world s economies.

Global ranking index name Date in survey Economies Source Australia USA Canada UK Germany France Italy Japan Brazil Index of Economic Freedom Ranking 2012 183 Heritage 3 10 6 14 26 67 92 22 99 The Legatum Prosperity Index Ranking 2011 110 Legatum 3 10 6 13 15 18 30 21 42 Soundness of Banks Ranking 2011-12 142 WEF 4 90 1 111 87 27 45 72 16 Resilience of The Economy Ranking 2012 59 IMD 5 23 18 43 6 42 44 48 7 Quality of Life Ranking 2012 59 IMD 5 19 6 24 7 17 27 21 41 Real Estate Transparency Index 2012 2012 97 JLL 3 1 6 1 12 7 20 25 27 Position in ranking shortlist First Second Third Heritage = Heritage Foundation & Wall Street Journal; Legatum = The 2011 Legatum Prosperity Index Rankings; WEF = World Economic Forum, The Global Competitiveness Report 2011-12; IMD = Institute for Management Development, World Competitiveness Yearbook 2012; JLL = Jones Lang LaSalle, Global Real Estate Transparency Index 2012 Finally, Australia also ranks amongst the most secure countries in the world to own property, having consistently been ranked one of the top three most transparent property markets by the Jones Land LaSalle Global Real Estate Transparency Index (has held position 1, 2 or 3 of over 80 countries in the index since JLL first published the Transparency Index in 2004). Rated amongst the top three most secure markets in the world to buy and own real estate.

Australia Trends in as productivity an investment growth destination Australian agriculture After centuries of working in a relatively challenging environment Australian farmers are amongst the most efficient in the world measured on a factor productivity basis. The Australian mixed cropping-livestock production system has also helped to make Australians some of the world s most versatile farmers. Their achievements have in large part been facilitated by a long-term commitment to agricultural research and development by the Australian government. There has been a significant increase in real terms in Australian public investment in agricultural R&D over the past 50 years, from AU$131 million in 1952 53 (measured in 2006 07 dollars) to $778 million in 2006 07. The breakthroughs achieved as a result have allowed Australian farmers to enjoy significant ongoing gains in productivity and farm incomes. Figure 6: Labour productivity growth in Australian agriculture compared to other resource sectors (change in gross value added per hour worked, 1996-97 = 0) 100% Agriculture Mining Energy & water 80% 60% Change in GVA / hour worked 40% 20% 0% -20% -40% -60% Labour productivity (i.e. change in gross value added per hour worked) in the agricultural sector has been particularly impressive, with productivity having almost doubled in the last 15 years (1996-97 to 2010-11) compared to a drop of over a third in other resource sectors. This has been driven primarily by the adoption of mechanised farming technologies and the increasing size of farms allowing greater economies of scale (i.e. each farm worker is able to farm a larger area of land more efficiently). This is further evidenced by the fact that the ratio of operating surpluses to capital in the Australian agricultural sector has more than doubled in the last 20 years (1991-92 to 2010-11). Whilst non-land net capital (depreciated value of all capital stock within the agricultural sector including machinery, plant and equipment) has increased by only 33% from AU$83 billion to AU$110 billion over the last 20 years, the operating surplus of the agricultural sector has increased by 203% from AU$9.3 billion to AU$28 billion.

Figure 7: Change in the operating surplus to capital stock ratio of Australia s agriculture sector, 1991-92 to 2010-11 0.3 0.25 Ratio of operating surplus to capital stock 0.2 0.15 0.1 0.05 0 Over the past 30 years (1977-78 to 2007-08) the overall productivity (measured in terms of total factor productivity) of Australian broadacre farms has increased by an average of 1.6 % annually. This productivity gain reflects a long-term decline in input use, averaging 0.6% during the period, coupled with an increase in output averaging 0.8% a year (albeit with notable year to year variations due to fluctuating seasonal conditions). Figure 8: Annual total factor productivity growth for different farm types in the Australian Wheatbelt, 1977-78 to 2007-08 2.5% TFP growth Output growth Input growth 2.0% Average annual % change over period 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% Total broadacre Cropping specialists Mixed croppinglivestock Beef specialists Sheep specialists

Note: Total factor productivity (TFP) is the indicator most commonly used to measure long-term increases in productivity due to technological progress and improved management practices. TFP is the ratio of all production outputs to market (crops and livestock produce) to all the inputs used in the production of those outputs (land, labour, capital, materials and services). The broadacre agricultural sector encompasses all farms generating most of their income from dryland cropping, beef and sheep farming activities. Within the broadacre sector, productivity growth has been highest for cropping specialists (those farms with a strong emphasis on grain production) who have benefited most from new mechanised farming technologies and increased farm scale, averaging productivity growth of 1.9% a year. Despite reducing input use by an average of 1.7% a year, sheep specialists have been the worst performers because output also declined at an average annual rate of 1.5% over the same period. Due to its more reliable climate and larger average farm sizes Western Australia has achieved the highest rate of productivity growth of the Australian states. Western Australian output has increased by an average annual rate of 1.8% over the last 30 years whilst input use has reduced by an average of 0.5% annually, resulting in average annual productivity growth of 2.4%. This is three times the productivity growth rate of Queensland (0.8%), more than twice that of New South Wales (1.0%) and comfortably higher than South Australia (1.8%) and Victoria (1.3%). Figure: 9 Annual total factor productivity growth of all broadacre farms in different Australian states, 1977-78 to 2007-08 3.0% TFP growth Output growth Input growth 2.5% Average annual % change over period 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% WA SA VI NSW QLD Since the ability to effectively plan input use one of the most important determinants of total factor productivity and farm profits, rainfall reliability and extreme weather events have a major impact on investment returns. For a more detailed analysis on the relationship between yield variability and investment returns, please see some of the other reports available in the downloads section of the Land Commodities website.

Farm income and profitability Long-term trends in farm profitability are jointly determined by changes in farm productivity (i.e. output generated per unit of input) and farmers terms of trade (i.e. ratio of the price received by farmers for the outputs they produce to the prices paid for the inputs used in production). As is the case for farmers the world over, terms of trade for Australian farmers have been on a declining trend over the long term. By contrast, productivity in Australian agriculture has been on a long-term upward trend. Figure 10: Long-term trend in input and output costs and farmers terms of trade, 1991-92 to 2010-11 180 Index of prices received by farmers Index of prices paid by farmers Linear Farmers terms of trade 160 140 120 100 80 60 40 20 0 In the case of Australia the rate of productivity growth has exceeded the rate of decline in farmers terms of trade. As a result, the gross value of farm output has been on a long-term upward trend, increasing at a faster rate than farm costs. Thus, one of the key measures of farm financial performance, net value of farm production (i.e. the value of farm production less the variable cost of production), has also been on a long-term upward trend (notwithstanding short-term ups and downs along the way due to seasonal conditions and fluctuations in commodity prices). Grain production up by 69% and exports up by 176% in the last five years.

Figure 11: Long-term trend in farm finances, 1991-92 to 2010-11 60,000 Gross production value* Farm costs** Net production value 50,000 40,000 AU$m / year 30,000 20,000 10,000 0 * The gross value of production is the value placed on recorded production at the wholesale prices realised in the marketplace. ** Farm costs are the sum of payments made by the farm business for permanent and casual hired labour (excluding operator or manager, partner and family labour), materials, services, produce purchased for resale, livestock purchases and transfers onto the property, interest and payments to sharefarmers. Capital and household expenditures are excluded from total cash costs. Net production value is the gross value of farm production less the total farm cost High level of farm income producing reliable annual rental returns of 5%+ for landowners.

Gross farm income for the Australian agricultural sector in 2011-12 was AU$53.1 billion. With total farm costs of AU$37.6 billion, net pre-tax farm profit was AU$15.5 billion. This equates to an average gross margin on Australian farms in 2011-12 of 57% and a net pre-tax profit margin of 29%. Figure 12: Recent financial performance of the Australian agricultural sector, 2007-08 to 2011-12 60,000 Gross farm income* Total farm costs** Farm net pre-tax profit 50,000 40,000 AU$m / year 30,000 20,000 10,000 0 2007 08 2008 09 2009 10 2010 11 2011 12 * Gross farm income is the total of revenues received by the farm business during the survey year, including revenues from the sale of livestock, livestock products and crops, plus the value of livestock transfers off a property. It includes revenue received from agistment, royalties, rebates, refunds, plant hire, contracts, sharefarming, insurance claims and compensation, and government assistance payments. ** Total farm costs are the sum of payments made by the farm business for permanent and casual hired labour (including operator or manager, partner and family labour), materials, services, produce purchased for resale, livestock purchases and transfers onto the property, interest and payments to sharefarmers and depreciation. Farm net pre-tax profit is the gross farm income less the total farm costs

Figure 13: Recent profit margins in the Australian agricultural sector, 2007-08 to 2011-12 70% Farm gross margin Farm net pre-tax profit 60% 58% 57% 50% 51% 53% 40% 45% 30% 30% 29% 20% 23% 22% 10% 14% 0% 2007 08 2008 09 2009 10 2010 11 2011 12 Australian farmers have achieved this financial performance despite having one of the lowest levels of government subsidy support for agriculture of any major agricultural producer. Australian total producer support in 2010 was 2.65% (as a percentage of sector revenues) compared to the OECD country average of 19.87%. Figure 14: Comparison of agricultural producer support estimates for different regions, 2010 25% Producer support (% of sector revenue) 20% 15% 10% 5% 0% Australia Brazil Ukraine United States Canada China European Union OECD Russia

The importance of farm size and economies of scale Smaller farms achieve lower rates of return than larger farms. Thus, for the purpose of assessing the likely income and rate of return on investment in large commercial farms, data averaging the performance of all farms within a particular sector can be misleading. This is particularly true of the grains industry where larger farms with economies of scale are able to earn a higher return on capital. As such, there has been a trend towards consolidation in Australian agriculture as farmers buy out their neighbours to create larger individual land holdings. Over the last five years (2005-06 to 2009-10) the total number of agricultural enterprises in Australia has decreased by 13% from 154,000 to 134,000 as 20,000 smaller farms have been absorbed by their larger brethren. Figure 15: Consolidation trend within the Australian agricultural sector, 2005-06 to 2009-10 160,000 155,000 150,000 Number of farm businesses 145,000 140,000 135,000 130,000 125,000 120,000 2005-06 2006-07 2007-08 2008-09 2009-10 Despite the area sown to grains having increased, the number of farms in the Australian grains industry has fallen by over 40 % since 1975. This has resulted in a near doubling of the average area cropped per farm and an increase of approximately 140% in wheat production on a typical grain farm over that period. Larger broadacre farms generally also crop a higher proportion of their land area on an annual basis, with farms turning over in excess of AU$1 million cropping on average 27% of their land annually compared to only 10% for farms turning over AU$100,000. Australia s large farm sizes facilitate greater economies of scale and higher farm income.

Figure 16: Relationship between farm size and cropping intensity in broadacre farming, 1990 to 2010 (average over period) 30% % of land area cropped annually Total farm size (ha) 6,000 25% 5,000 20% 4,000 15% 3,000 10% 2,000 5% 1,000 0% Annual turnover AU$100,000 Annual turnover AU$200,000 Annual turnover AU$400,000 Annual turnover AU$1,000,000 0 Advances in modern commercial farming machinery in recent years, particularly with respect to power and size, now allow a single owner operator family to successfully manage a cropping enterprise of thousands of hectares, thus increasing the value of scale. Larger farms that can afford to invest in large machinery are able to respond to soil moisture opportunities better by undertaking tillage and planting operations in a timelier manner. Particularly in rainfed agriculture, this ability to more fully capitalise on (often fleeting) planting or weed control opportunities is a distinct agronomic and economic advantage. As a result, larger farms are able to achieve significantly higher grain yields, with farms in the AU$1 million annual turnover category having averaged annual wheat yields of 1.8 tonnes per hectare over the last twenty years (1990 to 2010) compared to only 1.0 tonnes per hectare for farms in the AU$100,000 annual turnover category. These larger farms also generate more than double the revenue per unit of land area, having averaged AU$217 per hectare compared to AU$91 per hectare over the period.

Figure 17: Relationship between farm size, yields and revenues in broadacre farming, 1990 to 2010 (average over period) Annual cropping yield (t/ha) Annual revenue per unit area (AU$/ha) 2.00 250 1.80 1.60 200 1.40 1.20 150 1.00 0.80 100 0.60 0.40 50 0.20 0.00 Annual turnover AU$100,000 Annual turnover AU$200,000 Annual turnover AU$400,000 Annual turnover AU$1,000,000 0 Due to the fact that scale allows arable farmers to increase income at a faster rate than costs, historical data very clearly shows that the investment performance of grain farms increases markedly with cropping intensity (degree of focus on cropping) and size (total area cropped). Over the past 20 years (1991-92 to 2010-11) the largest 20% of grain farms (measured in terms of cropped area) have consistently earned over twice the cash income of the smallest 20% of grain farms. 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

Capital returns and trends in Australian farmland values Because Australian farmland values vary so widely due to the country s diverse climate conditions and farm types, a national level analysis of Australian farmland prices should only ever be used as a rough indicator of price trends on a regional basis. Nevertheless, some generalisations can still be drawn: 1. Australian farmland has shown reasonably consistent value appreciation (and continues to do so) in most regions and agricultural sectors. 2. Australian farmland prices are very low by international standards, especially by comparison to other Western farmland markets. Looking at Australia as a whole, average rural land values have risen year on year in all but three of the last 20 years. Notwithstanding a notable fall in 2011, which was the first fall in values since 1993, average Australian rural land values had risen for 17 straight years. The 2011 fall was driven primarily by the extreme flooding of 2010-11 which negatively impacted land prices in some areas (in particular in Queensland where the cost to the agriculture sector was estimated at AU$1.6 billion). Figure 18: Aggregate value of Australian rural land assets, 1992 to 2011 350 300 Value of all rural land (AU$ billions) 250 200 150 100 50 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 The total value of Australian rural land assets in 2011 was AU$265 billion, up from AU$57 billion in 1992, equivalent to a 367% rise over 20 years. Over this period total land value appreciation was almost six times higher than the total rate of inflation of 64%.

Figure 19: Rural land value appreciation and Australian inflation,1991-92 to 2010-11 (1991-92 =0) Land value index Inflation index 500% 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% Although there are obviously wide variations in performance across different regions of the Australian Wheatbelt, the average compound annual price appreciation for Australian rural land over the last decade (2002-2011) was 8.8%, equating to a 133% rise in average prices over the period. Given the rise in the value of the Australian dollar against many other currencies during that period, returns were greater for many foreign investors in Australian agriculture. Ten year capital returns for US dollar investors were 254%, equating to a compound annual capital return of 13.5%, or 243% over the period and 13.1% annualised for sterling investors. Figure 20: Ten year capital return for rural land owners in a selection of currencies, 2002-2011 300% 250% Capital appreciation over 10 years 200% 150% 100% 50% 0% AUD EUR USD JPY GBP

Figure 21: Average annual compound capital return for rural land owners in a selection of currencies, 2002-2011 16% 14% Annual capital appreciation (compound) 12% 10% 8% 6% 4% 2% 0% AUD EUR USD JPY GBP Despite this impressive performance, Australian farmland still remains very reasonably priced compared to many other farmland markets. This is true of both of many Western farmland markets and some of the more popular emerging market investment destinations, implying significant scope for further growth in Australian farmland values. Measured on a land price per unit of production basis, at an average of US$950 per tonne of wheat produced annually, Australian land prices are less than half those of the United States (US$2,400 / tonne annual wheat), New Zealand (US$2,500 / tonne annual wheat), the United Kingdom (US$2,575 / tonne annual wheat) and even Brazil (US$2,400 / tonne annual wheat). Figure 22: Comparison of global farmland prices per tonne of wheat produced, 2011 $4,500 Land value per annual tonne of wheat production (US$) $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0

Factors affecting farm values in the Australian Wheatbelt Farm prices across Australia vary widely depending on a range of factors: 1. Factors dictating yield potential Soil quality, rainfall (extent, timing and reliability are all important), external water supply (of particular importance for livestock, perennial or horticultural enterprises), temperature (typical growing season temperatures and temperature extremes) and solar exposure. 2. Other factors affecting farm profitability On-farm infrastructure, proximity to input suppliers and market (given the large land area covered by the Wheatbelt, proximity to port is a key determinant of farmgate prices and production margins). 3. Other factors affecting price Farm size and proximity to urban areas. Of these variables, the two most important determinants of broadacre farm pricing are rainfall and farm size. Generally, the further from the coastal regions the lower rainfall, yield potential and farmland prices. However, within each rainfall zone, farm size becomes the dominant pricing variable with there being a very clear and consistent inverse relationship between per hectare land prices and farm size. Land Commodities maintains a constantly updated database of all commercial scale farms (with a price tag of AU$2 million and above) available for sale in the Australian broadacre sector. The following series of graphs show the relationship between price and size for farms available for sale in Western Australia in different rainfall zones in early 2012. Figure 23: Relationship between property size and price, 300mm to <400mm rainfall zone of Western Australia The average compound annual price appreciation for Australian rural land over the last decade was 8.8%, equating to a 133% rise in prices over the period.

Figure 24: Relationship between property size and price, 400mm to <500mm rainfall zone of Western Australia Figure 25: Relationship between property size and price, 500mm to <600mm rainfall zone of Western Australia

Figure 26: Relationship between property size and price, >600mm rainfall zone of Western Australia Farmland prices are also higher closer to urban areas. In very close proximity to urban areas the potential for permitted use rezoning and real estate development obviously influences value. However, even within an hour s drive of major urban areas where there is little potential for future development, farmland prices will generally be higher. This is due primarily to the fact that farms are a lot smaller within commuting distance of cities. In these areas prices are driven primarily by hobby or lifestyle farmers as opposed to professional farmers or investors. For these types of lifestyle buyers farm investment fundamentals are not the primary purchasing consideration, so they tend to pay higher prices on a per hectare basis. Having only one major city (Perth with a population of 1.8 million), Western Australia has the lowest population density to farmland area of any Australian state, with only 5 people per thousand hectares of wheat growing land. New South Wales, with a larger urban areas (Sydney: 4.6 million people) has a population to wheat land density nearly four times higher at 19 people per thousand hectares. Victoria, a small state with a large urban population (Melbourne: 4.2 million people) has an even higher population to wheat land density of 38 people per thousand hectares. Australia has lower farmland prices than any other large agricultural exporter.

Figure 27: Population to wheat land density for different Australian states, 2011 70 60 Popuation per sq km of wheat sown 50 40 30 20 10 0 New South Wales Victoria Queensland South Australia Western Australia Unsurprisingly, of these states farm sizes in Western Australia are highest and land prices lowest. In New South Wales where farm sizes are roughly a third of the size of Western Australia, farm prices are higher and in Victoria where farm sizes are around a quarter of those in Western Australia, land prices are even higher still. Capital returns for US dollar investors over the last decade were 254%, equating to a compound annual land value appreciation of 13.5%.

Australian farm debt and equity levels Farm equity levels in Australia are high by international standards with debt to equity ratios being on a declining trend over the long term. The average level of debt as a percentage of total farm equity (i.e. land value plus the net value of capital stock) of Australian farms has remained below 25% for the last decade (since 2001-02). Figure 28: Debt as a percentage of total farm equity, 1991-92 to 2010-11 35% 30% 25% Debt as % of equity 20% 15% 10% 5% 0% As of 2010-11 total farm debt as a percentage of total farm equity stood at 24%. Total farm debt for the Australian agriculture sector was AU$64 billion against total farm equity of AU$375 billion (being the sum of AU$265 billion of land value and AU$110 billion net capital stock).

Foreign investment in Australian agriculture Foreign ownership of rural property is effectively unrestricted for all but the very largest investors. For non-government investors, any investment below a threshold of AU$231 million doesn t require the approval of the Australian authorities. Furthermore, foreign landowners can own land freehold with exactly the same ownership rights as a local Australian landowner. For investments above the AU$231 million threshold or for investments of any size by a government / sovereign controlled investment entity, the approval of the Australian Foreign Investment Review Board (FIRB) is required. Despite the lack of investment barriers and the recent surge of interest in Australian agricultural assets, the actual proportion of transactions involving foreign or investment buyers still remains at very low levels. Although there is no official data on transactions, based on Land Commodities own records of major farmland transaction (any sale above AU$2 million) that have taken place in Australia since late 2010, we estimate the proportion of transactions involving non-local farming buyers to be comfortably below 5%. What this shows is that farm prices in Australia are still being set by real commercial farming buyers and any meaningful upward price pressure on valuations from speculators and investment buyers is yet to materialise. Unlike some other more mature farmland markets, this is good news for investors who are still relatively early to the Australian market. In 2011 the Australian Bureau of Statistics published the results of the Agricultural Land and Water Ownership Survey, the most comprehensive survey of foreign ownership to date. According to the survey 98.5% of all agricultural businesses are 100% Australian owned, with only 1.0% of agricultural businesses being 100% foreign owned. Figure 29: Percentage of agricultural businesses with more than 50% foreign ownership, 2010 Australia South Australia Western Australia Queensland Victoria New South Wales 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6%

When measured on the basis of land area the foreign ownership figure is higher, with 11.3% of Australian agricultural land being 100% foreign owned, indicating that foreign ownership has almost doubled since 1984 (the last time a similar survey was conducted) when foreign land ownership stood at 5.9%. Foreign ownership of rural property is effectively unrestricted for all but the very largest investors. Figure 30: Percentage of agricultural land under foreign ownership, 2010 Australia South Australia Western Australia Queensland Victoria New South Wales 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%

The fact that foreigners own only 1% of businesses but 11.3% of land area is an indication that there is a strong focus on large scale farms amongst investors. This is consistent with the fact that the most popular enterprise type amongst foreign investors are mixed livestock-arable farms, the sector in which farm sizes are the largest. Foreign ownership currently stands at 11.7% of the mixed arablelivestock agricultural land area in Australia. Almost all farm sales are between local Australian farmers and 98.5% of all agricultural businesses are still 100% Australian owned. Figure 31: Percentage of agricultural land under foreign ownership for different enterprise types, 2010 Mixed Livestock-Arable Farming Fruit and Tree Nut Growing Other Crop Growing Dairy Cattle Farming Beef Cattle Feedlots (Specialised) Grape Growing Poultry Farming Deer and Other Livestock Nursery and Floriculture Production Mushroom and Vegetable Growing 0% 2% 4% 6% 8% 10% 12% 14% There is a strong focus amongst investors on large scale Wheatbelt farms.

References and data sources

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