Australian Agriculture
Agriculture has a material role in Australian economic activity, a significant role in management of rising carbon dioxide (CO2) and is a very large user of land. In assessing the future of agriculture in an investment portfolio of an institutional investor, review of the global demand and supply for food and sustainable asset and business management of agriculture has been undertaken.
Australia has a very large land mass. It provides a significant opportunity for Australian institutions becoming engaged in management of farmland in particular regenerative agriculture and CO2 management and potentially rewarding participation in the global food chain.
Sector in Australia and Capital Sources
Agriculture in Australia is the art and science of cultivating the soil, growing crops and raising livestock. It contribute a healthy, sustainable food supply which is critical to the world population. World population could grow by 1.7 billion to 9.7 billion by 2050 [1]).
A critical component of agriculture operations is as custodian of the land for future generations.
Size of the Australian land mass is 7.7 million square kilometres or 770 million hectares. Agriculture occupies over 55% of land mass or 427 million hectares. Grazing native vegetation occupies 344 million hectares being 45% of total, grazing modified pastures occupies 72 million hectares and cropping and horticulture occupies 29 million hectares. Urban land occupies only 1.8 million hectares or 0.2% of total land mass. Grazing of native vegetation is largely on arid land.
Approximately half of the total land mass is occupied by privately managed leasehold land. Much of this is through pastoral lease of government owned land under long term leases. Crown land makes up almost 25% of total land. Freehold land owned privately comprise almost 30% of land mass. Native title rights cover nearly 40% of Australia under exclusive rights or under coexistence.[2]
Estimated value of agricultural capital stock including land is $427 billion based on agriculture land of 427 million hectares and an assumed average price per hectare of $1,000[3]. In comparison, Australian residential property is valued at $10.3 trillion.[4].
Value of agricultural land ranges widely from $100 to $30,000 per hectare reflecting the extreme range of conditions from high rainfall zones to marginal pastoral grazing zones.
Capital in the sector is provided by families, international institutional investors, family offices and debt through banks. There is minimal capital from Australian superannuation funds or Australian companies listed on stock exchanges.
Contribution of agricultural production was $93 billion in 2021/22 or 2.4% of Australian GDP.
Approximately 72% of agriculture production is exported, representing 11.6% of total exports. Australia provides 1% of global agriculture production but 3% of global agriculture trade.[5]
As indicated. Australian institutional capital invested in agriculture and the supply chain is minimal. Private markets, which include agriculture, are under a broad heading of alternatives.
Limited investment reflects the low transparency of key information, illiquidity for both purchase and sale, execution challenges through opaque markets, opaque market prices, management risks and uncertainty about performance history and benchmarks. Also critical is the need of investors for knowledge and skills for assessment and management of private market investment propositions.
Global Demand and Supply of Food and Food Security
There are four main dimensions of food security which originate from the 1996 World Food Summit.[6] Food security is defined by World Bank as all people having physical and economic access to sufficient safe and nutritious food that meets their dietary needs and food preferences for an active and healthy life.
Four dimensions are:
Physical availability
Economic and physical access to food
Utilisation through high nutritious status of food
Stability of access over time.
Australia has a material role in the food security regime reflecting the significant participation in trade of agricultural commodities.
Growth in population drives demand for food. Changes in diets with increased meat and protein because of rising incomes in developing countries has been occurring and will continue.
Population growth and changing diets will generate increased demand for food of 59% - 90% by 2050.[7]
Global value chains (GVCs) are increasingly significant in agriculture and food. They are driven by demands of consumers. Consumers are seeking attributes greater than traditional products. Included are traceability, free range, hormone free, organic and CO2 neutral. Australian agriculture businesses provide primary production across the GVCs.
Australian participation requires enhanced productivity at farm gate. This will be driven by transport and logistics. Perishable products must be delivered safely to manufacturers and finally to consumers. Remote monitoring, image recognition, GPS tracking, suitable packaging, automation, supply continuity, weather and container conditions are all relevant between harvest and consumers.
Between harvest and consumer, it is estimated that 14% of food is lost due to late delivery and poor transit conditions.[8]
Australia provides high quality, safe and innovative processed food with expertise in the supply of quality products to domestic and export markets. Growing Asian demand for protein based processed food products can be met. High safety and quality standards apply, driven by robust regulation, governance and compliance frameworks.
Biosecurity requires effective management, prevention and research. Best defence against pests and disease is provided by sound biosecurity practices on farms. Monitoring of movement of plants and animals onto farms is best practice and is applied in Australia.
Labour skills which are required across the value chain are provided through education, training and experience. Research and development will provide enhancement of the current competitive advantage.
An increase of 11% in foliage cover over 30 years across parts of the arid areas of Australia has occurred [9]. This reflects increased levels of CO2 in the atmosphere. With a significant proportion of Australian land being arid this is material. This is supported by an international team using NASA data. Reporting in 2016, it indicates significant greening over the previous 35 years, generated 70% by CO2 fertilisation. It comes largely from China and India conserving forests and intensive cultivation.[10]
Regenerative agriculture involves land use management including avoiding tillage, cover crops, biodiversity and soil microbiology.
Innovation will flow from the GVC of agriculture and enhancements being introduced. It will encompass new methods of farming, enhanced animal biology/husbandry, enhanced seeds, changes in transportation, use of digital technologies and application of artificial intelligence. Infrastructure through the inland rail being constructed provides better links for farmers, producers, businesses and consumers with Australian and global markets.
Increased CO2 is a challenge for the provision of the future of energy supply. Multiple governments have stated that emissions of CO2 must reduce. Parties with high emissions are seeking solutions and will pay. Current discussion of the price of CO2 is a tax imposed by governments not a price set by willing buyers and sellers.
Australian agriculture sector has potential as a participant and beneficiary in management of CO2. Farmers are stewards of the soil which is an underutilised defence against rising CO2.
CO2 is an essential component of growth of plants through photosynthesis. It leads to increased plant growth, greater and higher quality food production and more efficient use of water.
Studies show that soil removes about 25% of world CO2 emissions. This is through carbon sequestration. Soil takes in more CO2 from the atmosphere than it releases making it a carbon sink. This natural way of removing CO2 from the atmosphere has fewer impacts on land and water and less need for energy and lower costs.
Increasing the amount of CO2 in the soil makes it more productive. Management practices including reduced tillage, planting cover crops and using organic matter increases CO2 storage in the soil.[11]
Business in Agriculture
As stewards of the land, farmers are measuring and managing the impact of operations on soil and water systems. Restoration of native vegetation corridors are providing positive enhancements to business outcomes. Support of local plant and animal populations whilst preventing erosion or other degradation of soils is beneficial with profitable outcomes.
Regenerative farming is being applied increasingly in Australia by groups including Kilter Rural and AAM Investment Group.
A major issue in land management is dealing with feral animals. Feral animals include rabbits, feral pigs, feral cats, feral goats, foxes, feral cattle, feral horses, camels and buffalo.
Feral animals can cause serious soil erosion. It is difficult to keep feral animals out of degraded areas. Control programs which are humane and commercial can be established. Cost of invasive alien species including feral animals is estimate at $25 billion pa which compares with an agriculture sector generating approximately $93 billion pa. A business case for management of feral animals could be compelling.[12]
Investment Capital
Capital for the agriculture sector is provided by families, international companies and institutions, and bank debt. Capital required to meet a target of $100 billion farm gate output by 2030 is $8 billion pa. Full regeneration of degraded Australian land will require significant capital. In context the AEMO estimates new energy systems will require capital of at least $320 billion.[13]
Variability of returns from agriculture operations leads to concern about the adequacy of return on equity capital. Volatility reflects influences of weather and competition on prices for commodities.
Australia has a competitive advantage of clean, natural products through both the quality of output and regulatory structure regarding safety. It requires further development of a national brand. It is unlikely that Australia could excel in all primary products. It has 10 key primary commodities and would benefit from a focus on optimisation of value add in these commodities.
Capabilities required are primary production, trade knowledge, transport, logistics, finance and wider business services. Evolving demands from consumers requires continuing research.
Indigenous land management has an increasing involvement in natural resource management. Indigenous people are providers of land management services in remote and regional Australia.
Historical performance of the agriculture sector is provided through ANREV. It commenced in 2015. A total return of 11.57% pa has been recorded through to third quarter 2023 with an income return of 4.46% pa and capital growth of 5.23% pa[14]. A longer data series would be beneficial.
Managers and Performance
According to research by Nuveen, over two thirds of institutional investors are planning to increase allocations to infrastructure, natural resources investments and other alternative investments, as they seek to reduce climate-related financial risk exposure and align portfolios with the transition to a sustainable low-carbon economy[15].
In July 2019, the Croatan and Delta Institutes with support from the USDA Conservation Innovation grant published Soil Wealth: Investing in Regenerative Agriculture across Asset Classes. The authors estimate that some $US700 billion of investments in regenerative agriculture in the next 30 years in the US could not only return $US10 trillion, a return on investment of 14.3 times but could mitigate nearly 170 Gigatons of CO2 emissions[16]. In context IPCC estimates a need to remove between 100 and 1,000 gigatons of CO2 from the atmosphere.
Owners of land in Australia are governments, Australian and international private sector businesses, foundations and indigenous land councils through freehold and leasehold. Bringing together investment capital and landowners and lessees has been addressed successfully.
Participants may be asset rich including families and native title holders, which lack capital required for achievement of the regeneration of land and capturing benefits of higher output from rising CO2.
Key attributes of a third-party investment manager of Australian agriculture business assets follow:
Established credentials in management of primary production in the key commodities. It will need established resources of capital and people.
A clear understanding of the parties involved in ownership or lease of Australian agricultural land and intentions regarding commercial outcomes.
Engagement with native title landholders.
Clarity about the contribution that Australian agriculture through the land can provide for the future generations.
A process which will capture enhancements to the land and generate commercial returns through regenerative applications and CO2 management.
Skilled staff and advisers aligned with investors.
Provide track record data in agriculture, through regeneration, and performance benchmarks.
Risk management acknowledging ESG factors.
Experience in drawing resources of infrastructure and education from international experience and from Australian governments and education sectors.
Ken established Atchison Consultants in 2001. Prior to that he was a senior asset consultant with the global firm now Willis Tower Watson.
Ken’s consultancy expertise with his team, covers a broad range of areas within investment portfolio and business management. This includes advice on the setting up of investment management businesses in particular in real assets, setting of investment policy for superannuation and not for profit funds, capital market analysis and investment manager research and selection.
Ken can be reached at ken@kenatchison.com.au
[4] https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/total-value-dwellings/latest-release
[12]https://www.csiro.au/en/news/All/News/2021/November/Australias-native-wildlife-in-grip-of-unprecedented-
[13] https://www.deloitte.chttps://www.agriculture.gov.au/abares/products/insights/snapshot-of-australian-agricultureom/au/en/Industries/consumer-products/perspectives/investment-australian-agriculture-bridging-gap-between-status-quo-ambition.html