Agricultural investment has traditionally been seen as volatile, cyclical, capital-intensive and offering low returns. Yet in recent years this perception has changed. Today, agricultural investment is seen as offering the potential for high growth and higher long term stability. Why is this so?
Agricultural investment – the new black
Rich-list billionaires have splurged on agricultural property purchases in recent years. High profile individuals have spent large sums of money accumulating exposures to various forms of agricultural investment.
As an observer of all things financial, this trend has intrigued me in a number of ways.
Agricultural investment in a portfolio
Firstly, agricultural products should be a great diversifier in a broad-based portfolio. One of the big difficulties in constructing a robust investment portfolio is to identify investments that aren’t like the other. That is, investments that are ‘negatively correlated‘ which simply means that they act and react differently to each other in any given set of conditions.
The more traditional version of this can be found in shares versus bonds. It generally holds true that worry about economic conditions leads to reductions in share prices and increases in bond prices as investors seek lower risk areas. While the shares/bonds relativity generally holds true, in times of extreme stress (think the Global Financial Crisis “GFC” or the 1994 bond sell-off) shares and bonds can both fall in value.
In fact, the GFC created conditions in which MOST investments fell all at the same time. In other words, they were not really ‘negatively correlated’ when crunch-time came.. yet that is exactly when an investor would want negatively correlated investments to even each other out, isn’t it?
A direct investment into a business that is tied to base level consumption – food – can be expected to provide at least some level of certainty during such times. It’s not perfect and it’s not necessarily suited to a retail style portfolio but for a wealthy person with their own investment timeframe, it can make a lot of sense.
Agricultural investment and demographics
The second point is the old demographics story. Australia lays geographically close to the large Asian population growth areas, areas that are seeing generational changes in incomes and living standards.Food quality and food choice for billions of people has the potential to dramatically increase Australia’s agricultural export market or more important economically, it has the potential to dramatically increase the average prices received by Australian exporters.
In a world that some are describing as “low growth”, the potential for high growth is very alluring.
Agricultural investment and time horizons
The third point is an issue of time frames for investment. Agricultural investment is by definition a longer term investment, even if only because of seasonality and weather impacts. For many investors, it is too difficult to match their investment time horizons to the time horizons associated with agricultural investment.
I have attached an article from 2015 that highlights the number of Australia’s super-rich who have been building large exposures to agricultural investment (“Why Australia’s rich list is buying prime farmland“; news.com). Most are taking a very long term view of their agricultural investment and that increases the potential for those investments to be profitable. Yet much of Australia’s investment world is heavily focused on shorter time frames and is therefore not able to participate in much of the potential for agricultural investment.
Investment time horizons can be short
If you need any sort of backing for that observation, consider the ‘demise’ of Australia’s resource sector.
If you look at the early statements in the article, it is suggesting the move to agriculture is to offset a dying mining sector. Yet here we are a year or so later, and a high proportion of commentators are now suggesting resources as being ‘the place to be’ in the coming period. How quickly do the whims and fads of investment markets move?One of the difficulties for fund managers with agricultural investments is the inherently slow and cyclical nature of any growth. It’s just not quick enough for most investors and therefore for most fund managers. I’ve included below a link to a note from a fund manager who makes exactly this point in his recent newsletter – Hugh Dive of Aurora Funds Management. Hugh highlights the differences in outlook between Australian investors and overseas investors such as ‘sovereign wealth funds’ and pension funds.
Agricultural investment and “national interests”
I’ve covered the issue of ‘timing’ and ‘long-term’ and the divergence of definitions for just what these terms mean a number of times in my Musings. To my mind it remains one of the big ‘problem areas’ for Australian investors and for Australia as a nation. If too much of Australia’s agricultural sector is owned by foreign interests then a large chunk of the benefits of income and capital growth for the sector will simply flow overseas, exacerbating Australia’s existing difficulty in funding its national lifestyle.I’m not suggesting foreign investment is a bad thing (it’s not) but i am suggesting that Australian investors will generally prefer to put $800,000 into an investment property than $100,000 into Australia’s agricultural sector. Australia borrows massively from overseas investors every year (that’s where Australian banks turn for a large amount of the money they lend out each year for property investment), so more Australian money going into Australian export ventures would generally be a good thing.
Disclosures and Disclaimers
Firstly, let’s get it very clear that if I could purchase Kidman Station all on my own then I would. For a whole host of reasons, I love agricultural themes and the linkage to our basic human requirements. Having said that, “agricultural investment” means many things to many people, so that’s just my personal like.
Remember the Great Disclaimer –
Nothing in this post or on this site is to be interpreted to be financial advice. It is general advice only and is not a basis for personal financial decisions. In fact you’d be rather crazy to invest on the basis of almost any single piece of information you find on the internet! These are my observations and musings only and I have no way of tailoring what i say to the various ‘you’ who may read my musings.
Before considering investment into any area you should undertake or seek professional quality research and assess that against your own investment objectives, risk/return preferences, financial position and overall portfolio strategy.
Agricultural Investment covers a wide scope of areas
In this particular case, I am neither for nor against agricultural investment. It can be a great way to lose money but in certain circumstances you could do quite well. The term “agricultural investment” is far too broad to allow any rational conclusion on potential. A quick sample will highlight this point – timber and forestry; seafood and aquaculture; wheat, barley and soft grains; beef, pork and meat products or live animal exports; cotton; sugar; vegetables and fruits and nuts.
This short list doesn’t even include the range of “ways” in which you could invest into agricultural investment. Think of direct ownership (like the billionaires); partnerships; unlisted investment trusts; listed investment trusts; options; futures; derivatives of a more sophisticated nature. Some of these must by definition be longer term, while others can be traded within a single day.